Coming To Grips With Neoclassical Views On Inflation And The Cycle

The role of prices and inflation in neo-classical ("mainstream") economic theory is awkward for us non-mainstream inclined. The price level is simultaneously of critical important for explaining activity as well as being an outcome of other parts of the economy. This makes the subject of inflation extremely awkward for my planned book on business cycles -- as I am pushing the subject of inflation to a later book. Instead, I only aim to have a short chapter explaining the absence of inflation analysis. This article are some preliminary comments that I hope to work into that chapter.

Productivity And The Cycle

I am resuming work on pondering the business cycle, and just wanted to give some initial comments about the notion of productivity. This article just describes some basic concepts taken from a generic post-Keynesian perspective (plus some of my own views, which may or may not be eccentric). As work progresses on my book, I should address the neo-classical approach, as well as empirical results.

Bear Market Meditations

The bear market in Treasurys is ongoing, which I do not view as particularly surprising. The usual way to generate excitement about the bond market is to claim that there will be horrific consequences if some technical level on the 10-year benchmark (or sometimes the 30-year benchmark) is reached. Although attention-seeking behaviour would probably get me more page views, I call them the way I see them. There is absolutely no reason for equity investors to care about what is happening in the Treasury market right now, and it would take something really big for that to change.

Primer: Post-Keynesian Inflation Theory Basics

This article is an introduction to the post-Keynesian approach to inflation. It is largely based on Section 8.1.1 of Professor Marc Lavoie's Post-Keynesian Economics: New Foundations (link to my review). Similar to the work on stock-flow consistent models, we start out with what is essentially an accounting identity: a statement that is true by definition. We need to understand the implications of the accounting identity before we worry about the behavioural aspects (which are not pinned down with accounting).

(The approach here is quite distinct from conventional approaches; I discussed why post-Keynesians reject conventional inflation theory in an earlier article.)

Liability Matching Versus Return Maximisation And Bonds

Before we discuss investment strategies, we first need to decide what our ultimate objectives are. When we are investing, the two usual objectives is that we are either attempting to achieve maximum returns, or we are matching against liabilities, using a broad sense of liabilities. A boring non-levered bond portfolio is a reasonable choice for liability matching, but it is much harder to see how it fits within a pure returns maximisation view.

Inflation And Income Shares

This article is a small interlude in my my discussion of post-Keynesian inflation theories. The first article was unfortunately theoretically negative - it discussed the reasoning behind the post-Keynesian rejection of mainstream inflation theories. The next article in this series (not guaranteed to be my next article) will be more constructive, as it will outline the inflation theory discussed in Marc Lavoie's Post-Keynesian Economics: New Foundations.However, I realised that there are some apparently simple concepts that can trip us up before we get to Lavoie's explanation: it is a somewhat advanced textbook (senior undergraduate/post-graduate level) and it does not cover points that someone without a economics background might trip up on.

Primer: Understanding The Post-Keynesian Rejection Of Mainstream Inflation Theory

From the perspective of conventional economic analysis, the post-Keynesian approach to inflation is mystifying. If we focus on the Modern Monetary Theory (MMT) school of thought in particular, it is very easy to either find claims that "MMT has no theory of inflation," or non-MMTers "explain" the MMT inflation theory is some random trivial relationship that they just made up. The key to understanding post-Keynesian approaches is that it takes a completely different approach to understanding inflation, and outcomes are seen as very difficult to forecast.

This article is based on Section 8.1.1 ("The Rejection of the Acceleratoinist Thesis") of Professor Marc Lavoie's excellent Post-Keynesian Economics: New Foundations (link to my review). From the perspective of a non-academic, a significant portion of the book would likely be found as arcane, and could easily be confusing to a non-specialist. However, Section 8.1.1 is extremely straightforward, and the most difficult part of my writing task here is staying within "fair use" copyright limitations when describing it...