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8/12/2019 Marc Lavoie_Intro to Heterodox Economics
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Essentials of Heterodox
and Post-Keynesian
Economics
Marc Lavoie
University of Ottawa
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The global financial crisis has had an
impact on Students of economics
Some reporters
Trade unions
Central bankers
The IMF
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But little impact on
The European Commission
Most academic economists and their
economics departments
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Where could it go?
Stop the growing hegemony of neoclassical
economics in economics departments"
Stop repressing dissent" Change the curriculum"
Less emphasis on techniues, more emphasis on
history and institutions Introduce more competition in the field of economic
ideas bring in heterodo. schools of thought
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Outline
1" /eterodo. economics versusorthodo. economics
'" *ost-0eynesian economics " %ho1s afraid of neoclassical
economics2
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PARTI
/eterodo. economics versus
orthodo. economics
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Heterodox vs Orthodox economics
HETERODOX ECONOMICS
NON-O3T/O4O5 ECONOMICS
*OST-CLASSICAL ECONOMICS
3A4ICAL *OLITICAL
ECONOM6
3EAL-%O3L4 ECONOMICS
NE% *A3A4I7MECONOMICS
ORTHODOX ECONOMICS
4OMINANT*A3A4I7M
NEOCLASSICALECONOMICS
T/E MAINST3EAM
MA37INALISM
OL4 *A3A4I7MECONOMICS
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Heterodox schools in economics
*ost-0eynesians
Sraffians )Neo-3icardians+ Old Institutionalists
Mar.ists, 3adicals
4evelopment Structuralists )Latin-American school, Furtado,
*rebisch+ French3egulation School, Social Structure of Accumulation )SSA+
Neo-Schumpeterians
Circuitists
Social economics and /umanistic economics Anti-Utilitarism )MAUSS+
Economists of 8 conventions 9
Feminist economics
7reen economics )Ecological Economics+ Old behavioural economics
And no doubt many others )7handi economics, /enry 7eorge,7esell, *olanyi, system dynamics, agent-based, Neo-Austrians)2+"""
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Dissenters in economics
Heterodoxy Orthodoxy
Dissenters Mainstream
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Examples of orthodox dissenters
Milton Friedman
Amartya Sen
7eorge Akerlof
*aul 0rugman
JosephStiglit:
Oliver %illiamson
3onald Coase
%illiam ;ickrey 2
/erbert Simon 2
0eynes 2
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What do all these heterodox
sch
oolsh
ave in common? 4ifferences between schools of thought and their
relative ranking have a lot to do withthe sociology of
the profession" Some of the discrepancies are due to speciali:ation
in certain fields )cf" T" Lawson+"
Still, in my opinion there are broad features thatcharacteri:e heterodo. and orthodo. schools"
These are called thepresuppositions of research
programmes by ph
ilosoph
ers of science th
ey arethings that cannot be uestioned
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*aradigm
Presupposition Heterodox schools Orthodox schools
Epistemology/Ontology Realism Instrumentalism
Method Holism, organicism Individualism, atomicism
Rationality Reasonable rationality Hyper rationality
Optimizing agent
Economic core Production, growth,
income effects
Exchange, scarcity,
substitution effect
Political core Regulated, tamed,marets !nfettered maretoptimism
Presuppositions of the heterodox
programme vs those of the mainstream
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Instrumentalism vs realism
Friedman1s as if doctrine
8 7ood models have to necessarily be artificial, abstract,
patently unreal 9 )Lucas, 1(+
8 It is better to be precisely wrong rather than roughly right 9
E." The use of the 7aussian copula function to price C4O)collateri:ed debt obligations+ was based on an inde. of C4S
)credit default swaps+ market prices instead of looking at true
default rates"
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Rationality
Orthodo. macroeconomists came to conflate being
rationalwiththinking like an orthodo. economist"
%hat this implied was that agents knew the one andonly true modelof the economy )whichconveniently
was stipulated as identical withneoclassical
microeconomics+#" )*hilip Mirowski, '!11+
A systematic deviation from an insane# standard
should not automatically be called a ?udgmental error1
)7erd 7igeren:er, '!!
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Scarcity versus production
Economics is the study of scarcity )3obbins, 1('+
8 Neoclassical economics is the study of an upward-
sloping supply curve witha downward-slopingdemand curve 9
;s
8 Economics is the study of the process by whichsociety brings its available resources into production,
and the distribution of that production among its
members" 9 )Jo
hn %eeks, '!
1'+
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Distrust in unfettered markets
8 On the one side are those who believe that
the e.isting economic system is, in the long
run, a self-ad?usting system, th
ough
with
creaks and groans and ?erks and interrupted
by time lags, outside interference and
mistakes @ " On the other side of the gulf arethose that re?ect the idea that the e.isting
economic system is, in any significant sense,
self-ad?usting 9$ 0eynes, C%, .iii, p"
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Holism: Some crisis-related macro paradoxes
*arado. of thrift )0eynes 1(B+ /igher saving rates lead to reduced
output,*arado. of costs )0alecki 1(B(,
3owthorn 1(+ Stability is destabili:ing
*arado. of debt )I" Fisher 1(,
Steindl 1(>'+
Efforts to de-leverage might lead to
higher leverage ratios
*arado. of liuidity )4ow 1(
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Edard !ullbrook"#$%&': ne paradigm
Start from realdata
not apriorism
Real-world
rationality
Ho
lism
No market clearing
4iseuilibria
*luralism
Math-formalism
upside-down
3adical uncertainty
Economy is asubset of biosphere
Facts and values
are inseparable
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Summing up this part(
/eterodo. economics is distinct from orthodo.
economics"
The various heterodo. schools of thought have a lotin common, especially on the methodology side"
4ifferent schools of thought often focus on different
fields, so that their similarities are not alwaysobvious"
&ut ?ust as there are battles between New Classical
andN
ew 0eynesian economics, th
ere aredisagreements between various heterodo. schools"
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Part II
*ost-0eynesian economics
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Phases in the creation of PKE
1(!s-1(>!s The Beginnings
$ 0eynes 1(B 3obinson 1(>B
1(B!s-early 1(=!s The Capitalcontroversies, theresponse to monetarism
$ Sraffa, *asinetti, 7aregnani $ 0aldor, 4avidson
Mid 1(=!s-1(
$ 0regel-Eichner, syntheses, institutionali:ation
1((!s The Age of Uncertainty
$ Methodology
'!!!s The Age of Policy
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Specific post Keynesian
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Specific post-Keynesian
presuppostions
The relevance of the principle of effective demand)demand-led economies+
$ &oth in the short and the long run
$ The supply ad?usts to demand )inversed Say1s law+, butsee 0alecki and 3obinson on capacity constraints
$ The autonomy of investment from inter-temporal decisionsof households )investment causes saving+
The importance and irreversibility of time$ /istorical time
$ 4ynamics, the traverse
$ The long run is a conseuence of a series of short runs,
there is no independent long run trend$ *ath dependence, multiple euilibria
$ Tracking financial stocks through time
A ili t K i
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Auxiliary post-Keynesian
features
Fundamental or radical uncertainty
A monetaryproduction economy Alternative microeconomics )little reliance on
substitution effects+
4iversity of methods and theories Institutions make a difference )Monetary and fiscal
policies do have an impact on real uantities+
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qqfc qth
AVC" D!C" mc
#!C
mc
AVC
The shape of cost curves
Th i PK t d ) t l
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The various PK strands: )-ay typology
"undamentalist or "inancial Kenesians$
$ Money, finance, liuidity preference, uncertainty, methodology$ 4avidson, Minsky, 0regel, Chick, 4ow, Fontana
Kalec%ians$$ *ricing, growth, cycles, employment, income distribution
$ Sawyer, &haduri, 4utt, &lecker, Fa::ari Sra&&ians$
$ 3elative prices, technical choice, input-output models, capital theory
$ 7aregnani, 0ur:, *asinetti, Steedman
Institutionalists$$ Institutions )firms, banks+, pricing, behavioural economics
$ Fred Lee, *eter Earl, 7albraith'., MMT)%ray+
Kaldorians$$ 7rowth, money, international trade, productivity growth
$ 7odley, Thirlwall, McCombie, *alley
$ Some authors go across the strands Arestis, Nell@"
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Part III
%ho1s afraid of neoclassical
economics or why do neoclassical
theories always seem to be
supported by empirical evidence2
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Theoretical constructs re*ected by PK
economists
NAI3U or the natural rate of unemployment
The loanable funds theory and the natural rate of interest
Crowding-out effects )e.cept for possible psychological effects+
Say1s law
Inflation is a monetary phenomenon
Aggregate employment determined in the labour market
/igher saving leads to higher investment
The government debt constraint is similar to that of households
The efficient market hypothesis, in its various incarnations
That unemployment is only due to sticky prices &ank reserves cause bank loans and deposits
Unit cost curves have a U-shape
A th th ti l t t * t d
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Another theoretical construct re*ected
by PK economists
The !ell-beha'ed neoclassical (roduction &unction
For instance the Cobb-4ouglas production function
This was at the heart of the Cambridge capitalcontroversies of the 1(B!s and 1(=!s
It was shown that standard results of neoclassical
theory obtained with such aggregate productionfunctions did not hold in a model with two or more
sectors )say, two sectors producing investment and
consumption goods respectively+
Cambridge +K vs Cambridge ,assachusetts
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L/$ L/$
L/$
w/pw/p
w/p
LD
%a& %b&
%c&
LS LD
LD
Cambridge +K vs Cambridge ,assachusetts
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The counter of post-Keynesians
The coefficents of the regressions are supposed toyield the output elasticies of labour and capital, which
depend on technology"
In reality, because macro data must be deflated, whatis truly being computed by these regressions are the
wage and profit shares in national income"
This has been demonstrated by John McCombie)'!!1+ )see the recent book of Jesus Felipe and John
McCombie )Not Even Wrong, '!1+
This puts in *eopardy all of
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This puts in *eopardy all of
neoclassical economics because
8 The neoclassical production function is the cornerstone of
neoclassical theory and is used in virtually all applied analyses 9
)*rescott 1((
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!urther issue: publication bias
4ata fishing, data mining, data massaging
Now famous e.ample the 3einhart and 3ogoff
)'!1!+AERstudy on the negative impact of publicdebt ratios above (!D
/erndon, Ashand *ollin )'!1+ found there were
coding mistakes, omitted entries, unconventionalweighting"
8 3eviewers and editors of academic ?ournals may
be predisposed to accept papers consistent withthe
conventional view 9 )Tom Stanley, '!!>+
,eta-regression analysis: regression
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on regression results
, t i l i
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,eta-regression analysis
Shows that more than half of the fields of researchsuffer from se'ere publication bias"
Falsifies the claim that larger government deficits
lead to reduced household spending )3icardoeuivalence theorem+
Falsifies the claim that there e.ists a natural rate of
unemployment towards whichthe economyconverges" Also falsifies the claim that e.pected
inflation leads to a one-on-one increase in the rate of
inflation" Thus, the NAI3U, whichis at the heart of
current monetary policy, is falsified"
The role of post-Keynesian economists
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p y
"and young economists in general'
The crisis has clearly demonstrated, if sucha
demonstration was needed, that there is something
wrong withmainstream economics )Financial Times
The credit crunchhas destroyed faithin the freemarket ideology#+"
In view of these failures, it is our social duty to keep
developing an alternative view of the economicsystem"
It is our duty to sustain and clarify the heterodo.
traditions th
at uestion th
e efficiency of unfetteredmarkets"