HAL (Le Centre pour la Communication Scientifique Directe), 2013
The designations employed in ILO publications, which are in conformity with United Nations practi... more The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval.
European Journal of Economics and Economic Policies: Intervention, Apr 1, 2015
This book is the new version of the Carlin/Soskice 2006 textbook that popularized and simplified ... more This book is the new version of the Carlin/Soskice 2006 textbook that popularized and simplified the 3-equation model that arose from the incomprehensible neo-Wicksellian work of Michael Woodford (2003) and which is used nowadays by central bankers. The model has for some time been called the New Consensus model or the New Neoclassical Synthesis. The book is targeted at intermediate and advanced undergraduate students, but as the authors say and as I would argue, it can also benefit graduate students and professional economists. The book is endorsed by well-known economists, such as Aghion, Shin, Blanchard, Goodhart, Haldane and Gertlera rather uncommon feature for a textbookso it must somehow be a good representation of the macroeconomic views being entertained by an important segment of the economics profession. The 3-equation model has attracted the attention of a number of post-Keynesian authors, if only because the model has embedded into it an implicit endogenous money supply with an interest rate determined by the central bank. The model has been described and criticized in many papers by Philip Arestis and Malcolm Sawyer (2002), and it has given rise to a book edited by Giuseppe Fontana and Mark Setterfield (2009), which contains a chapter by Carlin and Soskice as well as a number of chapters by post-Keynesian authors that modify or extend the 3-equation model. This edited book has generated a controversy that filled the pages of this journal, as Sebastian Dullien (2010) expressed his surprise at the fact that post-Keynesians would find New Consensus models appealing. He claimed that the New Consensus model as found in its sophisticated versionsthe dynamic stochastic general equilibrium (DSGE) modelshas little relationship with either the 3-equation model described by Carlin and Soskice or with post-Keynesian economics. He contended that, at best, DSGE models were real business cycle models with price rigiditiesthe New Keynesian Consensus modelwhere changes in output and employment were driven by the decisions of workers to enjoy more or less leisure, as real wages decreased or rose temporarily, with the labour market always being in equilibrium. Thus, for instance, a cut in interest rates leads to higher activity, not because it pushes up investment demand, but because it ends up inducing workers to consume and work more today relative to tomorrow. Thus 'the central variation in output in DSGE models … is caused by variation of the labour supply of households, not labour demand as in the traditional Keynesian story' (Dullien 2010: 268).
Fears of deflation and long-term stagnation have become more commonplace since the Great Recessio... more Fears of deflation and long-term stagnation have become more commonplace since the Great Recession. Yet, within the mainstream, economists are divided into two camps: those who see the benefits of downward wage and price adjustment, as a private sector stabilizer, and those who fear deflationary pressures because of their destabilizing consequences. This paper reviews this theoretical literature using a simple "New Consensus" framework of analysis and it also
European Journal of Economics and Economic Policies: Intervention, May 1, 2006
Th e paper questions the wide-spread assertion that non-orthodox schools of thought in economics ... more Th e paper questions the wide-spread assertion that non-orthodox schools of thought in economics have only one thing in common -their rejection of mainstream (neoclassical) economics. Th e author shows by contrast that heterodox currents share some fundamental analytical insights. Th e paper focuses on a comparison of modern Marxist conceptions with those of Post-Keynesian economists, including the works of Kaleckians and Sraffi ans. Th is is shown by examining four fi elds: the issue of rationality (where the adjustment principle is explicitly accepted by important heterodox authors), price theory (with cost-plus pricing combined to some long-run adjustment), growth theory (where the Kaleckian model has been adopted by authors from all schools), and fi nally monetary theory (where authors from all backgrounds are successfully integrating real and monetary analysis by taking into account fi nancial markets). Th e author concludes that mutual feedback between the various heterodox currents has been benefi cial to all, despite an unavoidable hyper-specialisation.
European Journal of Economics and Economic Policies: Intervention, Nov 1, 2008
Th is paper presents a stock-fl ow consistent growth model which is set in the Post-Keynesian tra... more Th is paper presents a stock-fl ow consistent growth model which is set in the Post-Keynesian tradition. A key feature of the model, however, is that real government expenditures grow at a rate which is compatible over the long period with a constant rate of unemployment (at the »natural rate of growth«). Th e model incorporates a detailed description of the household, production, banking and government sectors. Th is paper focuses on changes in parameters that are tied with fi nancialization. Th e eff ects on the following changes are examined: the target proportion of retained earnings to investment, the proportion of profi ts distributed as dividends, the propensity of households to hold equities, and the propensity of households to take new loans as a proportion of their personal income. Th ere is also a short analysis of the impact of a change in the loan repayment ratio and in the loan default ratio.
presents research in progress by Levy Institute scholars and conference participants. The purpose... more presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. The Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad.
The main aim of the present paper is to advocate a methodology that Wynne Godley first proposed i... more The main aim of the present paper is to advocate a methodology that Wynne Godley first proposed in and then clearly formulated in recent papers (1996, 1999). Godley's methodology was itself inspired by the reading of a series of papers by Tobin and some of his associates (Tobin 1969, 1982. What both Tobin and Godley have emphasized is the need for a coherent macroeconomic framework, that links together the flow dimension of macroeconomics, as simple Keynesian analysis does, and the stock dimension of real capital, financial assets and debts, with their associated rates of return. 1 Godley's particular contribution is that he has a series of fully determined models, where the dynamic adjustments towards a possible steady-state are fully explicit, within an accounting framework from which no flow is omitted. These models incorporate historical time, inventories, capital gains, and inflation accounting. All the key variables are endogenous and are dependent on the adjustment behaviour of agents and institutions with respect to their flows, stocks, and norms. Except for financial markets, there is no market-clearing price mechanism. A key difference between Godley and Tobin is that Godley's contribution is clearly influenced by the Cambridge UK post-Keynesian school, à la Nicholas Kaldor, whereas Tobin's, notwithstanding his clear Keynesian stand when debating with New Classical colleagues, has a mainstream pedigree, with its standard neoclassical assumptions, such as exogenous money, market-clearing price mechanisms, profit maximization, a profit rate equal to the marginal productivity of capital, and banks acting as intermediaries, optimally allocating their deposits among loans and securities.
We tackle the issue of the possible instability of the Kaleckian distribution and growth model an... more We tackle the issue of the possible instability of the Kaleckian distribution and growth model and the consequences for the endogeneity of the equilibrium rate of capacity utilization and for the paradox of thrift and the paradox of costs. Distinguishing between Keynesian and Harrodian instability, we review various mechanisms that have been proposed to tame Harrodian instability while bringing back the rate of utilization to its normal rate. We find that the mechanisms that have been suggested are far from being convincing. We thus review some approaches arguing that the adjustment towards a predetermined normal rate should not be expected at all, either because the normal rate reacts to the actual rate, or because of other constraints on the behaviour of entrepreneurs. We conclude that Kaleckian models are more flexible than their Harrodian and Marxian critics suppose when attacking the simple textbook version.
This paper suggests a way to teach Keynes's principle of effective demand using a standard aggreg... more This paper suggests a way to teach Keynes's principle of effective demand using a standard aggregate labor market diagram that should be familiar to students taking an advanced undergraduate course in macroeconomics. The analysis incorporates Kalecki's version of the effective demand model to show Keynesian unemployment as a point on the aggregate labor demand curve inside the aggregate labor supply curve. The well-known Keynesian policy conclusions apply. In particular, workers and firms are unable to restore full employment by reducing real wages, underlining how important is the macroeconomic duty of the monetary and fiscal authorities to manage aggregate demand growth.
This paper introduces technical progress along the lines of the Kaldor-Verdoorn law within a neo-... more This paper introduces technical progress along the lines of the Kaldor-Verdoorn law within a neo-Kaleckian model of growth and distribution that incorporates the Sraffian supermultiplier mechanism. The key features of the model include the interactive effects of endogenous technical progress, the non-capacity-creating demand component that grows at an exogenous rate and, in its long-run version, a Harrodian adjustment mechanism. It turns out that, whereas the model converges towards the normal rate of capacity utilization, the main tenets of the Keynesian model are still valid in the long run as well as in the short run in the sense that all of the average rates of accumulation, capacity utilization, and technical progress are lower during the traverse after the propensity to save or the share of profits goes up. The conditions under which the productivity regime can be wage-led are examined, and the possible effects of an exogenous technical shift are also discussed.
This paper studies coordination between firms in a multi-sectoral macroeconomic model with endoge... more This paper studies coordination between firms in a multi-sectoral macroeconomic model with endogenous business cycles. Firms are both in competition and interdependent, and set their prices with a markup over unit costs. Markups are heterogeneous and evolve under market pressure. We observe a systematic coordination within firms in each sector, and between each sector. The resulting pattern of relative prices are consistent with the labor theory of value. Those emerging features are robust to technology shocks.
This paper presents an extensive, but non-formalized, critique of the concept of the non-accelera... more This paper presents an extensive, but non-formalized, critique of the concept of the non-accelerating inflation rate of unemployment (NAIRU) and all similar concepts such as the steady-inflation rate of capacity utilization (SIRCU) which are used by mainstream economists to argue that there is no alternative, and hence that labour markets must be made more flexible while governments must abstain from engaging in expansionary fiscal policies except under exceptional circumstances. This is followed by the presentation of an alternative approach of the labour market, based on a more realistic view of the shape of the unit costs of firms, which argues that employment is essentially determined by the extent of sales in the goods market rather than by some profit-maximization constraint, and that higher real wages will normally generate a rise in domestic aggregate demand and hence a rise in employment. The paper ends with a discussion of the implications of such a view for wage bargaining and macroeconomic policies. What is advocated here is a wage-led growth strategy.
My first encounter with post-Keynesian growth theory was during the 1975-76 Honours Seminar in Mo... more My first encounter with post-Keynesian growth theory was during the 1975-76 Honours Seminar in Modern Classics, which was a compulsory full-year undergraduate course in Economics at Carleton University, located in Ottawa, given by Thomas K. Rymes. The Seminar touched diverse fields in economics, ranging from Walrasian exchange and production theory, as well as neoclassical growth theory, and then moving on to the monetary framework with Keynes, Patinkin, Clower, Leijonhufvud and Friedman. Other professors also gave occasional lectures, for instance on the theory of the firm, the principal/agent distinction, shirking by workers and the theory of capital markets. Rymes had done his PhD at McGill University, in Montreal, which at the time and until the early 1980s was the main centre of Cambridge-style Keynesian economics, from which Canadian colleagues such as Mario Seccareccia, Louis-Philippe Rochon, Omar Hamouda, Gilles Dostaler and Morris Altman graduated at either the MA or PhD level. Rymes devoted two lectures to the Cambridge capital controversies (reswitching and capital reversals in two-sector models) and productivity accounting in December 1975. I only found out a year later, when browsing through shelves in a London bookstore, that he had written a whole book on the Cambridge controversies and its implications for productivity measurement, with a very favourable preface by none other than Joan Robinson . He started the 1976 lectures by tackling Harrod's growth model and the neo-Keynesian or neo-Cambridgian models as they were then called. These were the models proposed in the mid-1950s and early 1960s by Joan Robinson, Nicholas Kaldor and Luigi Pasinetti. Like many students, I suppose, I was fascinated and puzzled by Pasinetti's long-run solution to the macroeconomic determination of the profit rate, r = g/s c , which only depended on the growth rate of the economy and the propensity to save of capitalists, regardless of the propensity to save of workers. So much so that when I moved to the University of Paris 1 Panthéon-Sorbonne for my graduate studies in the Fall of 1976, my first major paper was devoted to 'L'introduction de la firme et de la finance dans le modèle de croissance et répartition de Pasinetti' (The introduction of the firm and of finance in Pasinetti's model of growth and distribution), which also discussed Kaldor's neo-Pasinetti theorem. I elected to write my doctoral dissertation on a topic closer to monetary economics, however, and so my main interest became the post-Keynesian theory of endogenous money. When I got a position at the University of Ottawa (first, as a temporary position in 1979, then a tenure-track one in 1981), I opted to teach the graduate course in growth economics, and my lecture notes gave rise to my 1987 book, Macroéconomie: Théories et controverses postkeynésiennes (Macroeconomics: Post-Keynesian Theories and Controversies), which dealt with the Cambridge controversies, in particular its implications for the measurement of technical progress and the national accounting identity problem when testing neoclassical production functions, a problem that had been underlined by Anwar Shaikh and Herbert Simon. 1 The rest
The goal of this anicle is to make a heuristic and comparative presentation of how the major post... more The goal of this anicle is to make a heuristic and comparative presentation of how the major post-Keynesian models of growth and distribution integrate money, more specifically interest rates, within their framework. Five variants will be considered, all constructed on the basis of the newer Kaleckian model. It will be shown that increases in real interest rates may have surprising effects on eflFective demand. It will also be shown that accumulation rates and leverage ratios need not move together. The latter finding reinforces a major hypothesis of the analysis, that is, real interest rates are an exogenous distributive variable.
A simple neo-Kaleckian open-economy model is presented and its implications for growth regimes ar... more A simple neo-Kaleckian open-economy model is presented and its implications for growth regimes are analyzed. The present model features long run-convergence to its normal rate of capacity utilization, which is conditionally achieved by incorporating the Harrodian principle of instability and autonomous growth in foreign demand. It is demonstrated that some aspects of the main Kaleckian results can be preserved not only in the short run but also in the long run, in the sense that both (i) a decrease in the propensity to save, and (ii) a change in income distribution favoring labor, bring about higher average rates of production growth and capital accumulation. However, the long-run impact of a change in the profit share is shown to be subjected to the condition that the responsiveness of the real exchange rate with respect to the profit share has to be bounded from above, confirming that the scope for wage-led demand or wage-led growth can be limited by open-economy considerations.
1. Essentials of heterodox and post-Keynesian economics* 1.1 THE NEED FOR AN ALTERNATIVE The Glob... more 1. Essentials of heterodox and post-Keynesian economics* 1.1 THE NEED FOR AN ALTERNATIVE The Global Financial Crisis has been a wake-up call for economists. The alarm should have rung much earlier, when Japan and then East Asia were struck by a huge financial crisis in the 1990s, but few economists in the Western world paid much attention to the difficulties of these far-flung countries. The Global Financial Crisis is sometimes said to have begun in the summer of 2006, when real-estate prices in the USA stopped rising and started to fall, but few of us thought that this local phenomenon would induce a world crisis. Surprisingly, and demonstrating the importance of globalization, the first signs of financial tension arose on the European interbank markets at the beginning of 2007, when European banks started to express anxiety over the value of their financial investments in the USA. A mini-crisis occurred during the summer of 2007, and despite the difficulties encountered by issuers of asset-backed commercial paper, most of us believed that central banks had played their role and had relaxed the tensions. This illusion persisted until September 2008, when the government-sponsored agencies Freddie Mac and Fanny Mae had to be rescued, when Wall Street banks tumbled one after the other, when two large banks -Washington Mutual and Wachovia -had to be acquired, and when the giant insurer AIG had to be bailed out by government, as was then a string of large European banks, including the whole Icelandic and Irish banking systems. The culmination of all this was that the US government decided to let go the Wall Street bank Lehman Brothers, sending a chilling message all over the banking world. Then, with the usual sources of finance cut off, as corporate paper markets started to collapse, and as banks became reluctant to grant lines of credit to new or returning customers, the real sector got into trouble, and even General Motors needed to be rescued by the American and the Canadian governments. The economic recession, caused by the imprudence of bankers and the incompetence or fraudulent behaviour of the rating agencies, led to large government deficits as tax revenues fell and some countries tried to counteract the slowdown with stimulus programmes, which achieved some success. But this was not the end of such troubles. In late December 2009, it was noted that a small country of the eurozone, Greece, had particularly bad economic indicators and had hidden from official statistics some of its debt, thus creating worries about its capacity to redeem it. Investors realized that the eurozone had a peculiar setup, designed for a world in which financial crises could not occur, as the European Central Bank, in contrast to most other central banks, did not normally purchase government bonds. This exacerbated the worries of investors about the capacity of (some) eurozone countries to redeem
Review of Evolutionary Political Economy, Mar 11, 2020
As the subprime financial crisis erupted in 2008, Wall Street analysts started talking of the Min... more As the subprime financial crisis erupted in 2008, Wall Street analysts started talking of the Minsky moment. Hyman Minsky's out-of-print 1986 book, Stabilizing an Unstable Economy, would then sell for hundreds of dollars on the internet, until it was reprinted. The paper recollects the main features of Minsky's financial instability hypothesis that became so popular in the aftermath of the failure of Lehman's Brothers despite having been totally ignored by mainstream economists until then. It also recalls other important contributions of Minsky to our understanding of a monetized production economy, some of which were quite premonitory. In the second part of the paper, the author mentions what can be considered as weaknesses of Minsky's theoretical framework, which should be avoided in future work. The third part deals with the controversial issue of whether or not Minsky was a post-Keynesian, or considered himself to be part of the post-Keynesian school of thought. The author concludes that indeed Minsky clearly stood in the post-Keynesian camp.
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Papers by Marc Lavoie