Misconceptions about Heterodox Economics in general and Sraffian in particular

I had discussed before the meaning of heterodox economics. I suggested a definition based on positive contributions (rather than as a critique of the mainstream) and based on concepts rather than schools of thought. In my view the two principles that were central for defining heterodoxy were the Principle of Effective Demand (PED), based on Keynes and Kalecki's ideas, and the idea that distribution is the result of class conflict, which in my view is best expressed in Sraffa's recovery of the surplus approach. And I suggested that several authors within various schools of thought (Post Keynesians, Marxists, Institutionalists, Sraffians, Feminists, Ecological economists, Structuralists, and even some Evolutionary or Schumpeterian economists) could probably accept both propositions (not Austrians, which are a fringe version of Marginalism, and as a result not an heterodox school per se). In that sense, there could be a view of heterodoxy as not necessarily fragmented set of Schools of Thought.

However, it is a different proposition to suggest that something like a consensus between heterodox schools is really emerging. That I actually doubt. John King suggests that this would be Fred Lee's position in his new book Advanced Introduction to Post Keynesian Economics (there is no direct quote, but I always interpreted Fred as suggesting that a more cohesive heterodox approach was possible rather than it was actually taking place in reality, but I might be wrong).

In fact, it is my view that, in general, not only heterodox groups, which by definition tend to be small and often concerned with specific topics, but the mainstream is quite fragmented. On macro issues, even with the New Neoclassical Synthesis, there is a lot of disagreement between New Keynesians and RBC types, particularly on policy issues. So it should not be surprising that heterodox groups are quite fragmented too. Sometimes the fragmentation within the mainstream gives the false impression that some groups are breaking away, or on the edge (see my view on that here). And it is not just fragmentation, but also confusion. Even in the mainstream there is lack of understanding about the meaning of the mainstream (see here for example).

So it should not be surprising that, given the fragmentation of the heterodoxy, several misconceptions arise. Sraffians are particularly vulnerable to this since Sraffa wrote so little, and even though his Production of Commodities is not a difficult book to read, it is one that has been often misunderstood. Marc Lavoie has responded, from a Post Keynesian and friendly standpoint, to some of these misconceptions (the fact that some people consider Austrians heterodox, but are not certain about Sraffians speaks volumes about confusion among heterodox groups too).

Yet, I was a bit surprised by some of the misconceptions in John King's book. He says that: "There is no role in Sraffian models for fundamental uncertainty, money or the principle of effective demand." In the quote he suggests that this is the position of Hart and Kriesler (2014), but if he disagrees he does not say anything. So it is safe to assume that he concurs. He complements this by arguing that: "since the relationship between the wage rate and the rate of profit in Sraffian models is monotonically declining, it is difficult (if not impossible) for the their models to incorporate a 'wage-led' growth regime." Hm, were to start.

So Garegnani pointed out long ago (in the 1960s, but the English publication was in the late 1970s; links to the English versions of both the 1960s and 1970s papers here) that not only Sraffians believe in effective demand, but that a coherent presentation of the Principle of Effective Demand requires the abandonment of marginalism (particularly the marginal efficiency of capital argument). Not only that, Garegnani is very clear in his 1960s papers that (from link above):

"As regards consumption, increases in real wages lead to a rise in consumption and hence, provided the economy has accumulation capacity that is not fully utilized, to an expansion of the productive system and to an increase in employment. Given the level of productivity in the economy, the increase in real wages will in fact cause a redistribution of income in favour of a class that consumes a major portion of its income, and with that an increase in the first component of final demand... 

a steady and continuous rise in real wages along with the consequent steady and continuous increase in consumption can serve to instil in entrepreneurs a confidence in the continuous expansion of the market for their products, inducing them to undertake investments and increases in employment and output that will in turn help to raise final demand."

So yeah the economy is wage-led. Actually, in Garegnani's debates with Marxists, with Joan Robinson and other authors on the causes of long run growth, he could be seen exactly as taking the position that profit-led regimes are not possible, in the sense that he understood that firms would not invest because of a higher rate of profit. Firms are interested in adjusting capacity to demand, and to maintain a normal level of capacity utilization. Also, one should note that Garegnani wrote his paper in the 1960s under the direct influence of Sraffa, who might also have understood the idea of the accelerator. That is why Franklin Serrano is correct in suggesting the supermultiplier is Sraffian. Not only Sraffians have effective demand, they do in the long run (not in the short run as a result of imperfections).

Two things are important in this context. First, in Sraffa's price equations, which uses the method of given quantities developed by classical political economy authors, imply that there is class conflict, and an inverse relation between the real wage and the rate of profit. However, in a theory of the determination of output in the long run, output by definition is not given and the effects of income distribution on output might be ambiguous, even if the demand regime is wage-led (for example, higher wages might lead to loss of external competitiveness, and lower exports than more than compensate the increase in consumption associated to higher wages). Second, as I noted on my previous post on Garegnani's 1960s paper, the Sraffian project was the revival of the classical theory of distribution, concomitantly with the extension of the Keynesian Principle of Effective Demand to the long run.

On the absence of money in the Sraffian system also a lot of ink has been wasted. In his Production of Commodities Sraffa famously suggests that it is the rate of interest, as determined by the monetary authority, which is the exogenous variable. So prices and real wages are determined for given technical conditions of production and the long term interest rate as set by the monetary authority. Pivetti referred to this as the monetary theory of distribution. So monetary policy has important distributive implications, and this view is perfectly compatible with Keynes' views on a normal, conventional and not psychological, rate of interest. It is also compatible with endogenous money views, that hark back to Tooke and other Banking School authors. There is money, and not in the sort of Monetarist way in which the central bank controls its quantity.

Finally, on uncertainty. True for Sraffians uncertainty is not central for unemployment (one in three), yet that does not mean is completely irrelevant or that it does not play any role. Here it is important to note that any good discussion of uncertainty suggests that the one that is central is the uncertainty about future demand. See for example Davidson in this example. So the problem is lack of demand. Autonomous demand that is. And that works, as it should, with the supermultiplier.

Garegnani on Long Run Effective Demand

The famous Italian report, or parts of it, written in the early 1960s, which preceded the English papers published in the Cambridge Journal of Economics (CJE) in the late 1970s (here and here; subscription required), has been translated and published by the Review of Political Economy (ROPE) and is available here.

Some excerpts that are particularly relevant given recent debates on growth within heterodox schools. Garegnani says:

"it follows that the effect of increases in real wages on the absorption of unemployment will depend in large measure on how they affect final demand. 

It is necessary then to distinguish between the two components of final demand: consumption and exports."

 On the effects of real wage changes on consumption he argues that:

"As regards consumption, increases in real wages lead to a rise in consumption and hence, provided the economy has accumulation capacity that is not fully utilized, to an expansion of the productive system and to an increase in employment. Given the level of productivity in the economy, the increase in real wages will in fact cause a redistribution of income in favour of a class that consumes a major portion of its income, and with that an increase in the first component of final demand... 

a steady and continuous rise in real wages along with the consequent steady and continuous increase in consumption can serve to instil in entrepreneurs a confidence in the continuous expansion of the market for their products, inducing them to undertake investments and increases in employment and output that will in turn help to raise final demand."

Then the question is what is the effect of real wage changes on exports:

"But how far can this increase in consumption due to the rise in real wages continue before its effect on final demand is offset by a reduction in the other element of final demand, net exports? ...  

The discussion of the effects of a change in real wages on exports is much more complicated than the discussion of how real wages affect consumption. Exports do not in fact depend in a straightforward way on the movement of wages in the same way that consumption does. Variations in net exports depend upon the money prices of goods, and unless additional assumptions are introduced, no necessary connection exists between the movement of real wages and the behaviour of prices. If real wages were to rise via a fall in prices with constant money wages, the situation with regard to exports would be improved. If real wages were to increase via an increase in money wages with prices remaining constant, the exports situation would be neither improved nor harmed. If however the increase in real wages were to lead to increases in the level of prices, exports would be harmed in a regime of fixed exchange rates."

And that is before bringing the question of productivity into the analysis.

From a more historical point of view, the significance of this report is that it was written right after the publication of Sraffa's Production of Commodities by Means of Commodities, and of Garegnani's own doctoral dissertation, published as Il Capitale nelle teorie della distribuzione. This should make clear that part of the Sraffian project was the revival of the classical theory of distribution, concomitantly with the extension of the Keynesian Principle of Effective Demand to the long run.

Keynes and the abandonment of the Quantity Theory of Money

I've been reading Peter Temin and David Vines new book Keynes: Useful Economics for the World Economy (see also this). It is a very introductory and conventional reading of Keynes, with the distinctive characteristic that describes the development of Keynes' ideas in the proper historical context. This is good, since Temin is an illustrious economic historian. But he is not a history of economic thought scholar, and that has important implications in this case.

If there is any doubt about the conventional reading of Keynes, one is reminded by them that Keynes theoretical innovation is that: "he abandoned the assumption that prices are flexible which had been made by almost all previous economists—including by him in his Treatise on Money—for the more appropriate assumption for the 1930s: sticky prices.” No notice that the whole chapter 19 of the General Theory (GT) is about wage and price flexibility to show that it does not solve the unemployment problem, and it actually makes it worse.

But that is not the the main problem with the book. That is, in fact, the common reading among both Old and New Keynesians, with the latter providing microfoundations for rigidities. The authors claim that: “in order to free the analysis from the assumption of full employment, Keynes had to free himself from the Quantity Theory too.” Actually that is incorrect, since one can have endogenous money, and abandon the Quantity Theory of Money (QTM), without getting rid of Say's Law, or the neoclassical version of it which implies full employment, as indeed Keynes had done in the Treatise on Money (TM), his Wicksellian book.

The view of the Keynesian Revolution as a movement from price flexibility to price rigidity is well documented, and even if it has no basis in Keynes, it might acceptable to some authors. Krugman, who is not a historian of thought, explicitly says he does not care what Keynes actually said, for example. Note that saying that Keynesian policies are necessary as a result of price rigidities is not the same that saying that Keynes actually said that. And for historians of economic thought the difference is important.

More problematic is the idea of the Keynesian Revolution as a movement away from the QTM. There is a lot of scholarship in this direction, including some from Keynes' own disciples, like Richard Kahn in his The Making of the Keynesian Revolution. Actually in the GT Keynes goes back to an exogenous money approach, and in that sense is closer to the QTM than in the TM, which had endogenous money. The important thing in the GT is that Keynes noted that the natural rate of interest in his TM should be abandoned. That is, the idea that the interest rate brings investment into equilibrium with full employment savings had to be substituted by the notion of changes in income bringing savings into equilibrium with autonomous investment. The theory of interest or monetary theory comes later as a result of the abandonment of the Loanable Funds Theory. This is not to say that the abandonment of the Quantity Theory of Money is not important, but clearly it is not sufficient to lead to a theory of effective demand. 

The book also tries to show that there is a continuity in thinking between The Economic Consequences of the Peace and the discussions about the reorganization of the world economy at Bretton Woods. This is hard to defend, in particular since the book itself shows that Keynes' theoretical views changed as a result of the economic policy events, like the return to the Gold Standard at the pre-war parity, and the Great Depression. One of the important things about Keynes is exactly that, as stated in the phrase often attributed to him, when he was proven wrong, he changed his mind.

Book Review of Foster & McChesney's "The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China"

The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China. John Bellamy Foster & Robert W. McChesney Hardcover: 224 pages. Publisher: Monthly Review Press (September 1, 2012). Language: English. ISBN-13: 978-1583673133

By David Fields

Over-accumulation stemming from the so-called golden age of global capitalism has ensued an era of underconsumption as exemplified by low profit rates and chronic excess capacity. As such, what has taken place is an historical transformation towards the process of financialization. With an inability to absorb effectively economic surpluses, concerning the promotion of rising wages along with productivity, NFCs, or non-financial corporations, are coerced to paying a larger share of their internal funds, specifically via debt leveraging (including consumers), to financial institutions. These financial institutions, which are increasingly concentrated in the hands of fewer and fewer people, have become some of the most powerful actors. Increasing concentration of control within the financial sector lends credence to Marx's (1894: 544-45) argument that what Foster & McChesney call the age of monopoly finance capital is one in which

[t]he credit system, which as its focus in the so-called national banks and the big money lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it.

Read rest here.

Keynes is all you need

From BusinessWeek:

Is there a doctor in the house? The global economy is failing to thrive, and its caretakers are fumbling. Greece took its medicine as instructed and was rewarded with an unemployment rate of 26 percent. Portugal obeyed the budget rules; its citizens are looking for jobs in Angola and Mozambique because there are so few at home. Germans are feeling anemic despite their massive trade surplus. In the U.S., the income of a median household adjusted for inflation is 3 percent lower than at the worst point of the 2007-09 recession, according to Sentier Research. Whatever medicine is being doled out isn’t working. Citigroup (C) Chief Economist Willem Buiter recently described the Bank of England’s policy as “an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions, and half-developed insights.” And that, he said, is better than things countries are trying elsewhere.

Read rest here.

Paul Davidson on The Gross Substitution Axiom, Heart of Mainstream Economics

By Paul Davidson, [h/t] Lars P. Syll

The gross substitution axiom assumes that if the demand for good x goes up, its relative price will rise, inducing demand to spill over to the now relatively cheaper substitute good y. For an economist to deny this ‘universal truth’ of gross substitutability between objects of demand is revolutionary heresy – and as in the days of the Inquisition, the modern-day College of Cardinals of mainstream economics destroys all non-believers, if not by burning them at the stake, then by banishing them from the mainstream professional journals. Yet in Keynes’s (1936, ch. 17) analysis ‘The Essential Properties of Interest and Money’ require that:

1. The elasticity of production of liquid assets including money is approximately zero. This means that private entrepreneurs cannot produce more of these assets by hiring more workers if the demand for liquid assets increases. In other words, liquid assets are not producible by private entrepreneurs’ hiring of additional workers; this means that money (and other liquid assets) do not grow on trees.

2. The elasticity of substitution between all liquid assets, including money (which are not reproducible by labour in the private sector) and producibles (in the private sector), is zero or negligible. Accordingly, when the price of money increases, people will not substitute the purchase of the products of industry for their demand for money for liquidity (savings) purposes.

Read rest here.

A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley

The last issue of the Review of Keynesian Economics (ROKE) has a debate between Steve Keen with Brett Fiebiger, Marc Lavoie and Tom Palley. Two papers are available for download (Keen and Lavoie's). Tom's paper is available as a working paper here.

The basis for Steve's defense of endogenous money is based on the works of Schumpeter, as developed by the latter's student Hyman Minsky. In his words:

"The proposition that effective demand exceeds income is not a new one: it can be found in both Schumpeter and Minsky (and arguably in Keynes's writings after The General Theory, though not in as definitive a form – see Keynes 1937*, p. 247). A difference between income and expenditure, with the gap filled by the endogenous creation of money, was a foundation of Schumpeter's vision of the entrepreneurial role in capitalism. Minsky's attempt to reconcile endogenous money and sectoral balances is the closest antecedent to the argument I make, but I will start in chronological order with Schumpeter's analysis."

I have noted before that the idea of endogenous money is NOT central for heterodox approaches, since Wicksell and the whole modern New Keynesian consensus adopts it. And perfectly conventional authors like Irving Fisher had introduced debt in their models too. I also noted that Schumpeter is essentially a Real Business Cycle (innovations are nothing but exogenous productivity shocks) author, which thought that both short-run output and employment and long-run growth were determined by supply-side factors. So in general I'm not a great fan of having Schumpeter as a staring point, or the notion that to introduce debt and endogenous money is per se a critique of the mainstream.

In that respect, I tend to agree with Tom's point that it is the way in which endogenous money and debt are introduced in the model that matters. Keen's use of a variation of Fisher's equation of exchange, as pointed out by Tom, is troublesome. In Tom's words:

"The Fisher equation constitutes the monetarist framework for macroeconomics. Income-expenditure accounting constitutes the Keynesian framework and it offers an alternative approach to understanding the AD, credit, endogenous money nexus."

In fact, in the equation of exchange framework the presumption is that demand would adjust (in Steve's approach with endogenous money) up to the point that it meets supply at the optimal level (also something that would be perfectly in line with  Schumpeter). The whole point of the income-expenditure framework is that it puts demand in charge of the level of activity.

At any rate, a good debate that it's worth checking out. Enjoy!

* J.M. Keynes (1937), "Alternative Theories of the Rate of Interest," 47, Economic Journal, pp. 241-252. Available here (subscription required).

John Eatwell on the theoretical lessons from the crisis

It's from 2012, but still very much relevant. Short and to the point about the limitations of the mainstream to understand the crisis. I would put less emphasis on the Sonnenschein–Mantel–Debreu theorem, and more on the Sraffa-Garegnani critique of General Equilibrium, but that's a detail. He is correct in pointing out to Keynes' Principle of Effective Demand (PED), and to the insidious role of finance.

The ‘Better Off Budget’: An EPI Analysis of The Congressional Progressive Caucus Proposal

By Joshua Smith

The Congressional Progressive Caucus (CPC) has unveiled its fiscal year 2015 (FY2015) budget, titled the “Better Off Budget.” It builds on recent CPC budget alternatives in prioritizing near-term job creation, financing public investments, strengthening the middle and working classes, raising adequate revenue to meet budgetary needs while restoring fairness to the tax code, protecting social insurance programs, and ensuring fiscal sustainability. The Better Off Budget aims to improve the economic well-being of the working and middle classes by focusing on ending the ongoing jobs crisis, and it provides substantial upfront economic stimulus for that purpose. This paper details the budget baseline assumptions, policy changes, and budgetary modeling used in developing and scoring the Better Off Budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.

Read rest here.

For Dean Baker's critique of Obama's platform, see here 

Dean Baker on Obama's High Unemployment Budget

By Dean Baker

President Barack Obama’s proposed federal budget for 2015, which he sent to Congress on March 4, pushes the debate in a positive direction in several areas. For that, he should be given credit. However, on the most important issue, a budget that would get us back to full employment, his proposals fall way short. Let’s start with the positives. President Obama proposes a four-year infrastructure program that would cost just over $300 billion. This comes to $75 billion a year, or roughly 0.4 percent of GDP. This idea could go far toward improving and upgrading our infrastructure and is much needed for this purpose. It would also provide a boost to the economy. Assuming the typical multiplier of 1.5 times the amount spent for the expected stimulus, the program would create more than 800,000 jobs. A second item on Obama’s agenda is universal pre-kindergarten. This idea would provide a boost to many children from low- and moderate-income families, whose lack of early education can stunt their prospects for social mobility, according to several important studies. It would also make it much easier for their parents to work, since arranging for quality child care is often difficult and expensive. The price tag for this proposal is surprisingly low: only $76 billion over the next decade. That amount comes to 0.18 percent of projected spending over the period. The relatively small price tag for this program would be more widely known if reporters covered the budget in a way that was intended to inform their audience by contextualizing numbers in terms of overall spending.

Read rest here.

For an analysis by the Economic Policy Institute on the budget proposed by the Congressional Progressive Caucus, see here

Josh Bivens: Nowhere Close: The Long March from Here to Full Employment

By Josh Bivens

The last official business cycle peak occurred in December 2007. After that, the economy entered 18 months of virtual freefall—with job losses averaging more than 750,000 per month for the worst six-month stretch. The official end of the recession was June 2009—and some have recently declared full recovery has been reached in the 54 months since, as 2013 per capita GDP finally exceed its pre-recession levels. However, for the very large majority of Americans who rely on paid employment for the vast majority of their income, recovery likely still feels very far off. And they’re right—by any reasonable definition the United States is far from having reached a full recovery. That’s because simply clawing back to the per capita income level that prevailed before the start of the Great Recession is far too low a bar to clear to declare mission accomplished on recovery. The reason for this is simple: Joblessness (and the sapping of bargaining power that accompanies its rise even for still-employed workers) rises whenever a gap develops between the economy’s underlying productive potential and aggregate demand for goods and services. The intuition here is simple: A given number of customers’ demands can be satisfied with fewer people as each incumbent worker becomes more productive, and each new potential worker (new graduates, for example) seeking to enter the workforce will only be employed if there is extra consumer demand for what he or she produces. So, demand has to rise in line with the economy’s productive potential in order to keep joblessness from rising.

Read rest here. 

Gerald Friedman - Whose Recovery?

By Gerald Friedman

There is a story that when the late union leader Walter Reuther was given a tour of a GM plant, a manager introduced him to a set of the company’s new robots.  The manager challenged Reuther to say how he would organize the robots into the UAW.  The union leader supposedly responded by asking: how will General Motors sell cars to the robots?  While American unions have failed to organize the workers in the new economy’s factories, its capitalists seem to have figured out a good answer to Reuther’s question. We shouldn’t be surprised that conservative politicians and orthodox economists are calling for the Federal Reserve to end its program of monetary ease and for the Federal government to end its program of extended unemployment insurance.  Believing in Say’s Law and the virtues of unregulated markets, they have never been comfortable with state action to help the unemployed; instead, they have long argued that the only proper role for government is to protect price stability and the integrity of banking system. What should surprise us is that so few in the business community are pushing back against these ideologues in support of policies to bolster economic growth and employment.  Robert Reich asks whether capitalists and managers have forgotten the basic Fordist compromise, in which businesses rely on affluent workers to consume their products? If a rising tide lifts all boats, don’t capitalists benefit when unemployment falls and workers have more to spend?  And shouldn’t they support policies that bring the tide in?

See rest here

Say's Law of Markets: Classical and Neoclassical versions

Teaching macroeconomics, and having to deal, as always with the confusion generated by all manuals (to a great extent Keynes' fault for using the term classical for everybody that came before him) between the old classical political economy tradition and the marginalist (or neoclassical, other misnomer, this one Veblen's fault) school.

Not all classical authors accepted Say's Law, to which Keynes' Principle of Effective Demand (PED) was contrasted, but all neoclassical authors do accept it (last week the Societies for the History of Economics, aka SHOE, had a very confusing discussion on Say's Law, in which this simple fact got completely lost by a few debaters). Marx certainly was critical of Say's Law.

Ricardo in chapter XXI of his Principles famously says:

"M. Say has, however, most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person. It is not to be supposed that he should, for any length of time, be ill-informed of the commodities which he can most advantageously produce, to attain the object which he has in view, namely, the possession of other goods; and, therefore, it is not probable that he will continually produce a commodity for which there is no demand."

The Ricardian notion is relatively simple. It suggests that the objective of production is consumption (what Marx would call later the "simplest form of the circulation of commodities," or simple exchange, where commodities are produced for exchange for commodities, with money being just an intermediary, C-M-C'). Further, Ricardo suggests that nobody would continue to produce something for which there is no demand over the long run. Yes there might be mistakes and excess production, but over time producers learn from their mistakes. In this simple story if a capitalist saves, it is by definition because he intends to invest and be able to produce more in the future. Think of the corn model; the corn not consumed, for wages (for the reproduction of the system), goes by definition into expanded reproduction.

The Ricardian model has no adjusting mechanism between investment and savings, which are by definition one and the same. Also, there is no guarantee that the system fully utilizes labor resources, or that the system would be at full employment. The rate of interest was regulated by the rate of profit, and adjusted to its level in the long run, but it did not adjust savings and investment.

This is, in fact, the main difference between the old classical version of Say's Law when compared to the marginalist or neoclassical one. In the neoclassical version the rate of interest (the natural rate of interest indeed) becomes the adjusting mechanism in what is often referred to as the Loanable Funds Theory (LFT) of the Rate of Interest (for a simple discussion of Wicksell's version of the LFT go here). Now an excess supply of funds (savings) for investment would be eliminated by the tendency of the monetary rate of interest to equilibrate with the natural rate, guaranteeing that investment is at the level of full employment savings. Investment can deviate from the equilibrium level of savings only in the short run, and neoclassical theory (including Wicksell of course; a few in the SHOE discussion seemed confused about this) would accept Say's Law in this new version in the long run. Note that in order for a rate of interest to lead to increasing investment demand, it must be the case that labor is fully utilized, and firms decide to substitute labor for capital. In the marginalist version Say's Law implies full employment in the labor market.

Keynes' Principle of Effective Demand, by suggesting that savings were simply a residual (income not spent), famously argued that, instead of supply creating its own demand, it was autonomous spending decisions (which Keynes associated with investment) generated income and, hence, made the supply effective. It was the variations of the level of income that made the adjustment of savings to investment possible, and there was no guarantee that autonomous spending would provide for the full utilization of resources.

For a thorough analysis of Keynes' PED, this book remains in my view one of the best around.

Polly Cleveland: What’s Crippling the Recovery–Lack of Investment Demand or Too-Big-to-Lend Banks?

By Polly Cleveland

Under incoming Federal Reserve Chair Janet Yellen, the United States Federal Reserve Bank will begin to “taper” its program of “Quantitative Easing” or “QE”. Under QE, the Fed every month buys billions of U.S. Treasury bonds and other Federal securities from the big banks. QE keeps down longer-term interest rates, which will, it is hoped, encourage investment and stimulate the economy. QE has indeed supplied the biggest banks with cheap money for profitable trading in the international financial markets, enabling them to recover from the 2008 crisis—and continue paying big bonuses. It has in fact kept interest rates near zero for big banks and corporations. By purchasing bonds from the “government-sponsored enterprises”, Fannie Mae and Freddie Mac, which buy high-quality mortgages, QE has kept mortgage rates down and hence values up for prime real estate. That’s nice if you qualify, or if you’re a bank holding real estate collateral. By keeping bond yields very low, QE has also sent investors piling into the stock market looking for better returns, creating a stock market boom—nice if you own or issue stocks. So QE has done quite well for big bank executives and other members of the One Percent.

Read the rest here

EPI: Raising the Federal Minimum Wage Would Lift Wages for Millions and Provide a Modest Economic Boost

At a briefing at the Economic Policy Institute on Tuesday, January 14, 2014, Jason Furman (Chairman of the White House Council of Economic Advisers), Sen. Tom Harkin (D-Iowa), Rep. George Miller (D-Calif.) and Lawrence Mishel of the EPI  discussed the economic case for raising the federal minimum wage and the path forward to enact the Fair Minimum Wage Act of 2013.

EPI research shows (see here) the Harkin-Miller bill would give a raise to 27.8 million workers, who would receive about $35 billion in additional wages. A $10.10 minimum wage would increase GDP by $22 billion, creating roughly 85,000 new jobs.

Mind you, raising the federal minimum wage to $10.10 is meager...should be at at least $20.00, which would provide more than just a 'modest boost' to the US economy.

New Book By Baker & Bernstein: Getting Back to Full Employment - A Better Bargain for Working People

By Dean Baker and Jared Bernstein

From the Introduction:

A strong labor market with full employment need not be a rare economic anomaly that returns roughly twice for every one appearance of Halley’s Comet. Full employment can be a regular feature of the policy landscape, with tremendous benefits for rising living standards, poverty reduction, the federal budget, and equitable economic growth. In this book we present the benefits and importance of full employment in ways that are particularly germane to the economy today, and we offer policies to begin moving to full employment now. Full employment can be defined as the level of employment at which additional demand in the economy will not create more employment. All workers who seek a job have one, they are working for as many hours as they want to or can, and they are receiving a wage that is broadly consistent with their productivity.

Full PDF here.

Cut Unemployment Benefits? A Bonehead Idea

By Heidi Shierholtz

New data released this morning by the Bureau of Labor Statistics show that 13.9 percent of the workforce was unemployed at some point in 2012, much higher than the official 2012 unemployment rate of 8.1 percent. How can this be? Each month, the official unemployment rate provides the share of the labor force unemployed in that month. But this understates the number of people who are unemployed at some point over a longer period, since someone who is employed in one month may become unemployed the next, and vice versa. So the official annual unemployment rate—which is actually the average monthly unemployment rate for the year—is much lower than the share of the workforce that experienced unemployment at some point during the year.

Read the rest here.

Gennaro Zezza: Fiscal and Debt Policies for Sustainable U.S. Growth

New paper by Gennaro Zezza

From the abstract:

In our interpretation, the Great Recession which started in the United States in 2007, and propagated to the rest of the world, was the inevitable outcome of a growth trajectory based on fragile pillars. The concentration of income and wealth, which started rising in the 1980s, along with the stagnation in real wages made it more difficult for the middle class to defend its standard of living, relative to the top decile of the income distribution. This process increased the demand for credit from the household sector, while deregulation of financial markets increased the supply, and the U.S. economy experienced a long period of debt-fueled growth, which broke down first in 2001 with a stock market crash, but at the time fiscal and monetary policy managed to sustain the economy, but without addressing the fundamentals problem, so that private (and foreign) debt kept increasing up to 2006, when a more serious recession started. At present, the long period of low household spending, along with personal bankruptcies, has been effective in reducing private debt relative to income, and, given that the problems we highlight have not been properly addressed yet, growth could start again on the same fragile basis as in the 1990-2006 period. In this paper, adopting the stock-flow consistent approach pioneered by Wynne Godley, we stress the need for fiscal policy to play an active role in (1) modifying the post-tax distribution of income, which along with new regulations of financial markets should reduce the risk of private debt getting out of control again; (2) stimulate environment-friendly investment and technological progress; (3) take action to reduce the U.S. external imbalance, and (4) provide stimulus for sufficient employment growth.

Read the rest here.

Prabhat Patnaik - Finance and Growth Under Capitalism

By Prabhat Patnaik

Once we reject Say’s Law and recognize that capitalism is prone to deficiency in aggregate demand, we have to accept that sustained growth in this system requires exogenous stimuli. By exogenous stimuli I mean a set of factors which raise aggregate demand but are not themselves dependent upon the fact that growth has been occurring in the system; that is, they operate irrespective of whether or not growth has been occurring in the system. Moreover, they raise aggregate demand by a magnitude that increases with the size of the economy, for instance with the size of the capital stock. They are in other words different from “erratic shocks” on the one hand, and “endogenous stimuli”, such as the multiplier‐accelerator mechanism, on the other: the latter can perpetuate or accelerate growth only if it has been occurring anyway.

Read rest here.

Despite Upshot in Employment, No Real Changes in Long-Run Trends

Source: EPI's analysis of Bureau of Economic Analysis National Income and Product Accounts (Table 1.1.1 and Table 1.4.1)

By Josh Bivens

The Bureau of Economic Analysis (BEA) reported today that gross domestic product (GDP)—the widest measure of overall economic activity—grew at a 2.8 percent (annualized) rate in the third quarter of 2013. This was a slight increase relative to the second quarter’s 2.5 percent growth rate. 

However, there is little reason to celebrate today’s GDP numbers. For one, they remain disappointingly weak for an economy with so much productive slack. Further, growth in final demand—GDP stripped of the contribution of volatile inventory investments—grew at just a 2.0 percent rate in the third quarter. This arguably better indicator of underlying economic strength indicates that growth in the second quarter is essentially on the same disappointing trend that has characterized most of the recovery phase since the official end of the Great Recession. Additional evidence that third quarter growth was insufficient to soak up the economy’s productive slack is the continuing very low rates of core inflation measures. All in all, this is a status quo GDP report, and it clearly remains the case that the economy needs further support from both fiscal and monetary policy to generate growth sufficient to spur real improvement in the U.S. labor market.

See rest here.

By Heidi Shierholz

The jobs report released this morning by the Bureau of Labor Statistics showed the labor market gained 204,000 jobs in October, along with an upward revision of 60,000 to prior months’ data, bringing the average growth rate of the last year to 194,000. There appears to be no discernible impact on the payroll numbers of the partial government shutdown in October; in the payroll survey federal employees on furlough during the partial government shutdown were still considered employed. Importantly, the labor force participation rate dropped 0.4 percentage points to its lowest point of the downturn, 62.8%. The unemployment rate was little changed in October, ticking up slightly to 7.3%. The partial government shutdown may have played a role in the unemployment numbers, since federal employees on furlough during the partial government shutdown should have been counted as unemployed on temporary layoff in the household survey.

See rest here.