Review of Keynesian Economics

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He considered capitalism as a transitory phase towards the complete eman- cipation of humanity. ... Lenin,s work, Imperialism: The Highest Stage of Capitalism.

Review of Keynesian Economics

Volume 4 No. 4 2016

Review of Keynesian Economics Print ISSN 2049-5323

Online ISSN 2049-5331

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Review of Keynesian Economics Volume 4, No. 4, Winter 2016

Contents Symposium: Wage- versus profit-led growth after 25 years Wage- versus profit-led growth after 25 years: an introduction Mark Setterfield


Wage-led versus profit-led demand regimes: the long and the short of it Robert A. Blecker


Distribution-led growth in the long run Michalis Nikiforos


Autonomous demand and the Marglin–Bhaduri model: a critical note Riccardo Pariboni


Growth and distribution in low-income economies: modifying post-Keynesian analysis in light of theory and history Arslan Razmi Can growth be wage-led in small open developing economies? Jaime Ros Wage- versus profit-led growth in the context of globalization and public spending: the political aspects of wage-led recovery Özlem Onaran




Articles What caused the great inflation moderation in the US? A post-Keynesian view Nathan Perry and Nathaniel Cline The theory of output in the modern classical approach: main principles and controversial issues Attilio Trezzini and Antonella Palumbo




Review of Keynesian Economics, Vol. 4 No. 4

Book Reviews Alvaro Cencini and Sergio Rossi, Economic and Financial Crises: A New Macroeconomic Analysis (Palgrave Macmillan, New York, NY, USA 2015) 296 pp. Reviewed by Edoardo Beretta John T. Harvey, Contending Perspectives in Economics: A Guide to Contemporary Schools of Thought (Edward Elgar, Cheltenham, UK and Northampton, MA, USA 2015) 168 pp. Reviewed by Paramjit Singh Eswar Prasad, The Dollar Trap: How the US Dollar Tightened its Grip on Global Finance (Princeton University Press, Princeton, NJ, USA 2014) 432 pp. Reviewed by Adrien Faudot




Review of Keynesian Economics, Vol. 4 No. 4, Winter 2016, pp. 527–531

Book review John T. Harvey, Contending Perspectives in Economics: A Guide to Contemporary Schools of Thought (Edward Elgar, Cheltenham, UK and Northampton, MA, USA 2015) 168 pp. Paramjit Singh Assistant Professor, Department of Economics, Panjab University, Chandigarh, India

In his discussion on ‘The scope and method of economics,’ Alfred Marshall quoted J.S. Mill’s perception of economists: ‘A person is not likely to be a good economist who is nothing else’ (Marshall 1890, p. 448). Nowadays, the scope of economics as a discipline has widened and it is dominated by many schools of thought. A person who is confined to one school of thought and has no knowledge of the others is not likely to be a good economist. In light of this, Harvey’s book is an attempt to enhance the pluralist movement within economics and introduce students to the many different schools of thought. The author covers seven approaches to economics: neoclassical, Marxist, Austrian, post-Keynesian, Institutionalist, New Institutionalist, and feminist. While all these subgroups have differences in their approaches to various economic issues as well as in the tools they use to understand these issues, Harvey nonetheless notes that they all share common elements in their respective scientific inquiries. He identifies the following three common characteristics: I. Formal Analytical Structure (a) World view: ideological and philosophical lens through which members of each school see the real world; (b) Axioms: unquestioned/unquestionable assumptions; (c) Method: how the economy should be studied; (d) Provisional explanations: theories and models. II. Recommended applications of their research and policies. III. Behavioral standards each member is expected to follow in order to remain in good standing. On the basis of the above analytical structure, economists perceive the real world according to their particular world view, which is not independent of social circumstances (religion, politics, corporate, and other forces active in the society). Rather, they are influenced by them, as well as by the paradigm in question. For example, different schools of thought may agree on the problem but disagree on the context or solution because their theories and models specify different lines of causation. The objective of this book is to go through the formal paradigm of each school of thought in order to provide insights and criticism to the readers, and the first two chapters provide an introduction and details of its methodology. Chapter 3 of the book deals with the neoclassical school of economic thought, which is the dominant school of thought in economics. The vast majority of

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Journal compilation © 2016 Edward Elgar Publishing Ltd The Lypiatts, 15 Lansdown Road, Cheltenham, Glos GL50 2JA, UK and The William Pratt House, 9 Dewey Court, Northampton MA 01060-3815, USA


Review of Keynesian Economics, Vol. 4 No. 4

universities and the core faculty groups in economics are neoclassical. Neoclassicism is also of central importance because of its dominant role in policy. Almost every economic advisor of national and international institutions and governments of capitalist countries and even the emerging developing countries was educated in neoclassical economics. The neoclassical school developed with the Marginalist revolution in economic thought during the late nineteenth century, pioneered by William Stanley Jevons (1835–1882), Carl Menger (1842–1921), and Leon Walras (1834–1910). They made two major contributions to economic thought. First, they introduced mathematics in their analysis of economic issues, and second, they introduced the principle of ‘marginal’ into economic discussion. Harvey points out that ‘at the core of modern neoclassical theory are marginal analysis, the rationality assumption, general equilibrium modeling, and a priori-ism’ (Harvey 2015, p. 42). The neoclassical school tried to develop the general laws in economics, in particular with respect to the natural rather than the social behavior of individuals in society. They had a desire to develop economics as a natural or mechanical rather than human or social science. They claimed that the economic laws should be ‘time neutral,’ which is why they largely favored mathematical calculations and modeling in the study of economics. Harvey, in his analysis of the neoclassical school, largely criticizes the assumptions and method of neoclassicism. Due to unrealistic foundations, this school failed to understand the major crisis of the capitalist economic system during the twentieth century. Regarding the method of neoclassicism, Harvey argues that it viewed humans as individualistic. Religion, kinship patterns, language, and so on may vary from culture to culture, but economic behavior according to neoclassicism is universal (Harvey 2015, p. 52). This school was logically criticized by the Marxists on method, a priori-ism, unrealistic assumptions, mathematical modeling, abstract variables in study, and unrealistic conclusions. In the Marxian school of thought, which is the subject of chapter 4, Marx’s (1867 [1992]) Capital is considered the primary reference in the analysis of the working of the capitalist economic system. Capital is a classic work in political economy. As David Harvey (2010, pp. 4–5) points out, Marx’s Capital is a product of ruthless criticism of everything existing. As far as method of analysis is concerned, Marx wrote, ‘my dialectical method is, in its foundations, not only different from Hegelian but exactly opposite to it’ (Marx 1992, p. 102). He characterized his method as dialectical method/understanding, examining things in motion. Marx used this method in order to examine the historical movement of human civilization from primitive communal society to slavery, from slavery to feudalism, and from feudalism to capitalism. He considered capitalism as a transitory phase towards the complete emancipation of humanity. Contrary to the neoclassical school of thought, Marx on the basis of his analysis of the working of capitalism believed the cycle of expansion and recession to be an integral part of capitalism. Marx’s analysis was extended by V.I. Lenin, who, on the basis of Marx’s analysis of capitalism, characterized late nineteenth century and early twentieth century capitalism as Imperialism. Lenin’s work, Imperialism: The Highest Stage of Capitalism (1917 [2010]), is therefore an analysis of mature capitalism. According to Lenin, in order to maintain profitability, capitalists do not only rule over the means of production but also over governments. They force the government to go into war on their behalf in order to extend the market and open new profitable destinations. And as John Harvey (2015, p. 67) points out, ‘this is precisely how Lenin saw the first World War, that is, as a fight among imperialist powers each hoping to secure access to part of the globe from which surplus value could drained.’ © 2016 The Author

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Book review


With the passage of time, new interpretations were developed by a number of Marxian scholars. For example, Baran and Sweezy (1966) referred to the capitalism of the modern phase as ‘Monopoly Capitalism,’ in which the share of profit rises and capitalism becomes more and more exploitative. Marxists also see other non-mainstream schools of economics as their allies in term of their opposition to the existing power structure in the economic discipline. Although other non-mainstreams agree with Marxists that capitalism is inherently unstable, and fraught with internal contradictions, their research is usually oriented towards finding the means of fixing capitalism, not replacing it (Harvey 2015, p. 72). However, the Marxist tradition saw capitalism as a transitory phase towards the emancipation of humanity from material boundaries and the building of a classless communist society. In chapter 5, John Harvey discusses the Austrian school of thought whose founder, Carl Menger (1840–1921), developed a small but famous group of followers such as Bohm-Bewark, Friedrich Von Wiser, Friedrich A. Hayek, and Ludwig Von Mises. To support his argument, Harvey relies on Peter Boettke’s (1994, p. 2) interpretation regarding the main features of Austrian economic thought. These are: (a) it was not mathematical; (b) it was often philosophical; (c) the dynamic nature of economic activities took central stage; and (d) it dealt with social and political issues beyond market exchange and production (Harvey 2015, p. 76). As far as the Austrian economists’ method of analysis is concerned, the starting point of the Austrian School was a tight focus on the individual. In this sense, they see social behavior as ultimately the behavior of individuals. They further believe that human decision-making is a dynamic phenomenon, which depends upon the free will of individuals. They criticize econometrics and mathematical models that assume a quantitative and constant relationship among individuals. Instead of mathematics, the Austrian School prefers verbal, theoretical construction. A more widely accepted aspect of their method is ‘subjectivism.’ The Austrian School believes that the essence of economic behavior is personal and therefore unobservable. On the basis of subjectivism, they reject government planning and consider the market as a superior solution. In this sense, they are pro-market and clearly opposed to Marxists. Their individual approach is against the Institutionalists who believe humans are social animals by nature and therefore are strongly influenced by culture and traditions. In chapter 6, Harvey discusses the post-Keynesian school of economics. PostKeynesians differentiate themselves from Keynesians, whom they accuse of misunderstanding and misrepresenting Keynes. For post-Keynesians, Keynesians are too embedded in the neoclassical school. As a consequence, Harvey argues that Keynesians adopted some superficial aspects of Keynes’s analysis. By contrast, post-Keynesians take as their starting point the core theory put forward by Keynes in his A Treatise on Money (1930) and The General Theory of Employment, Interest and Money (1936). PostKeynesians put emphasis largely on the theory and models that are directly applicable to real-world problems. One criticism of this chapter is that Harvey doesn’t discuss the three distinctive schools of post-Keynesian economics, which methodologically differ in exposition and elaboration from the fundamental principles of post-Keynesian economics. As King (2013, pp. 486–488) pointed out, the three distinct schools of post-Keynesianism are Paul Davidson’s fundamental Keynesianism, Michal Kalecki’s two-class model, and Hyman Minsky’s financial hypothesis. Post-Keynesians consider ‘uncertainty’ as one of the key concepts in the Keynesian framework. According to their interpretation of Keynes, uncertainty leads to two important changes in behavior: first, the future is uncertain, so people want to save to secure themselves against uncertainty and do © 2016 The Author

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Review of Keynesian Economics, Vol. 4 No. 4

not spend the whole of their present income, which in turn causes a situation of lessthan-full employment. Moreover, savings are not always equal to investment; rather, claims Harvey, people prefer to keep one part of their savings in cash because it is the asset most easily used to meet obligations. On the basis of this understanding, Keynes rejected the loanable fund theory of interest and presented his liquidity preference theory. Harvey writes: ‘his rejection of the loanable fund theory of interest in favor of his own liquidity preference was the last nail in the coffin of the full employment assumption’ (Harvey 2015, p. 93). As far as method of analysis is concerned, Harvey points out that post-Keynesians do not consider the economy as a simple and reducible system of equations or a set of presumably law-like behavior and relationships. The fundamental assumption of neoclassicism, ceteris paribus, never holds true in the real world. Post-Keynesians argue that the model and theoretical framework based on this assumption have a limited applicability. The social nature of human economic behavior is absolutely central to the next school of thought which Harvey discusses, in chapter 7 (entitled ‘Institutionalism’). Institutionalists were one of the dominant paradigms in the United States. Their economic philosophy believes in social behavior as natural among human beings. The cultural centrality to their economic thought represented a fundamental departure of Institutionalists from the methodological individualism that dominates the mainstream economics. As Harvey points out, economics is not separate or distinct, but rather a function of, intimately connected to, and consistent with the larger culture. Where the culture is racist, the market is racist, because the market is simply one of the means by which the culture expresses its value (Harvey 2015, pp. 112–113). Institutionalists believe that culture is the prime determinant of wages, income, employment, prices, migration, industry, the educational system, and so on. In this sense, Institutionalists’ economic analysis is much broader and market economies are simply one particular set of rules. The New Institutionalists – with whom Harvey deals in chapter 10 – also stand in stark contrast to the individualistic approach of the neoclassical and the Austrian School of thought, and lead to an analysis that focuses on institutions and patterns of behavior rather than personal motivations and rationality. While it retains a neoclassical core, it includes a role for institutions. Their analysis and research largely focused upon the economic history because they believe that studies of the past are often lessons for the present. As far as their method is concerned, one side of it retains the neoclassical/Austrian focus on the individual, scarcity, and choice; but the other side believes that not only do institutions matter, but so do power, culture, ideology, and history. According to them, although markets are not perfect yet, they are the best solution to economic problems. In the last decades of the twentieth century and the beginning of the twenty-first century, feminism has become an important part of social science research and discussion, an approach Harvey discusses in chapter 9 (entitled ‘Feminist economics’). Here, Harvery relies on Barker (2005) to analyse the feminist approach. As Barker pointed out, ‘Feminist Economics draws from the scholars working in Neoclassical economics, Intuitionalist economics and Marxian political economy’ (Harvey 2015, p. 133). Feminists, contrary to the mainstream understanding of economics, believe that economics requires subjective interpretations of what we observe followed by normative recommendations of change, which they believe will improve people’s lives. A key starting point for feminist methodology is their contention that economics is not and cannot be value-free. Feminist economists argue that an integral part of pursuing economics is recommending policy to improve people’s lives. The feminist © 2016 The Author

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approach to economics therefore rejects a supposedly scientific justification for the under-representation of women (and other disadvantaged groups) in certain jobs, the existence of the wage differential, and the inferior status of home or caring work. They disagree with the inferior status assigned to femininity by society at large which is subsequently reflected in economics. The important element of feminism is that economics is necessarily value-laden and that a key part of our own understanding is to recommend policy to make people’s lives better. At the end, Harvey argues that pluralism in the economic discipline through open discussion would lead to greater understanding and mutual respect. Our job is to challenge the preconceptions about economics and lead students to understand the multiplicity of the economic discipline rather than training them only in one tradition, that is, neoclassicism. The historical understanding shows that neoclassicism and its sophisticated mathematical models have no direct relation with the workings of the real world. Pluralistic economics does not mean to undermine a particular school of economic thought but aims to build a balance by giving proper place to those schools that are directly addressing real-life issues. The tragedy of most economics departments in the world is that they have no such vision because most of their faculties belong to the neoclassical approach. Overall, Harvey has made a great contribution (and rightly so) to the defense of pluralism in economics. Although this is not a comprehensive attempt, it is a must-read book for the students of economics to get a real vision of the economics discipline. REFERENCES Baran, Paul and Paul M. Sweezy (1966), Monopoly Capital: An Essay on the American Economic and Social Order, New York: Monthly Review Press. Barker, K. Drucilla (2005), ‘Beyond woman and economics: rereading “woman’s work”,’ Signs, 30(4), 2189–2209. Boettke, P.J. (ed.) (1994), The Elgar Companion to Austrian Economics, Aldershot, UK and Brookfield, VT: Edward Elgar. Harvey, David (2010), A Companion to Marx’s Capital, London: Verso Books. Harvey, John T. (2015), Contending Perspectives in Economics: A Guide to Contemporary Schools of Thought, Cheltenham, UK and Northampton, MA: Edward Elgar. Keynes, J.M. (1930), A Treatise on Money, London: Macmillan. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan. King, J.E. (2013), ‘A brief introduction to post-Keynesian macroeconomics,’ Economy and Society, vol. 39, booklet 4. Lenin, V.I. (1917 [2010]), Imperialism: The Highest Stage of Capitalism, London: Penguin. Marshall, Alfred (1890), ‘The scope and method of economics,’ appendix C51 in Alfred Marshall, Principles of Economics, 8th edn, London: Macmillan, pp. 448–456. Marx, Karl (1867 [1992]), Capital: A Critique of Political Economy, vol. I, London: Penguin.

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