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Sunday, February 15, 2015

Book Review: Post-Keynesian Economics (Lavoie)

Post-Keynesian Economics: New Foundations by Marc Lavoie is a masterful overview of post-Keynesian economic thought. It is an academic text, and it is aimed at readers with a good understanding of economics already under their belt. Within the text, he draws upon the different schools of thought that comprise post-Keynesian economics, and shows that they provide a coherent understanding of macroeconomics.It is an excellent resource for those who aim to have a detailed understanding of economic thought.

Book Description

The book was published in 2014 by Edward Elgar. The main text is 584 pages, and has 62 pages of references. The book's chapters are:

  1. Essentials of heterodox and post-Keynesian economics.
  2. Theory of choice.
  3. Theory of the firm.
  4. Credit, money and central banks.
  5. Effective demand and employment.
  6. Accumulation and capacity.
  7. Open-economy macroeconomics.
  8. Inflation theory.
  9. Concluding remarks.
This book is the second version of the text Foundations of Post-Keynesian Economic Analysis, which was published in 1992. Professor Lavoie has also written a shorter Introduction to Post-Keynesian Economics (2006). He describes the text as "targeted mainly at honours students and masters students, but I am sure that PhD students can also benefit from it." 

Marc Lavoie is a prolific author in post-Keynesian economics, and is a Professor of Economics at the University of Ottawa.

Scope Of This Review

The breadth of the topics within this book is so great that I will not attempt to address them here. I expect that I will cover different topics it raises during later articles. Instead, I will focus on why I recommend it, and who would benefit from reading it. Additionally, I do not have a strong grasp of the many schools of thought within post-Keynesian economics, so I cannot judge whether all of them are being treated fairly.

Why Study Post-Keynesian Economics?

The motivation for studying post-Keynesian economics is that it appears to offer the strongest description of macroeconomics. I worked as a senior quantitative interest rates analyst, and I had extensive experience with macro rates strategy. However, coming as an outsider to economics, I was troubled by the ad hoc nature of economic analysis used in the financial markets, and the limited usefulness of research that was churned out by official bodies, such as central banks,

At first, Hyman Minsky appeared to be one of the few economists whose writings offered useful insights. Later on, I became acquainted with Modern Monetary Theory (MMT). Both MMT and Minsky's views fit within the broad spectrum of post-Keynesian thought. It is only once I delved into this broader post-Keynesian literature it became clear why conventional economics was essentially useless for understanding developments in the macro economy.

The "Keynesian" portion of the term "post-Keynesian" may raise ideological hackles. I do not want to get involved in discussing the politics of post-Keynesian economics, but I would point out that it is distinct from the mainstream "Keynesian" economic consensus of the 1960s and 1970s.

The Target Audience Of This Book

If you wish to understand how economies evolve, you need to understand post-Keynesian economics. And if you are serious about following this line of study, this book (or one similar) is an invaluable resource. That said, the book is not particularly cheap, nor is it light reading. It is definitely not an introductory work.

(Update: The cost of the book came up on the discussions of this article when it was cross-posted to Seeking Alpha. There is a soft cover version of the text which is quite a bit cheaper, but that version seemed to be only available in the U.K now. It will hopefully be available elsewhere soon.)

I believe that this book is best suited for:
  • economics students;
  • readers with a good grounding in economics but not post-Keynesian economics;
  • readers with a grasp of some areas of post-Keynesian economics (such as Modern Monetary Theory), and want to dig deeper into the theory.
Since various sections are (partially) reprinted from other publications, readers with a strong background in post-Keynesian economics would have to judge for themselves about the novelty of the contents. 

I would view the book as a reference, and it may be best to read it in the order of your interest. In particular, I would suggest that someone new to post-Keynesian economics should read the first chapter last, or to skim over it. It discusses the various schools of thought, and it would be best to see how they dealt with various subjects before worrying about how to classify them

The difficulty level of the text varies depending on the subject. The discussions of money and banking in Chapter 4 are straightforward, as they correspond to a straightforward subject (at least if you approach the subject without blinkers). Conversely the discussion of "ontological versus epistemic uncertainty" in Chapter 2 is somewhat arcane. (Some readers may have the opposite preferences than the reviewer.) This disparity is an additional reason why I would recommend reading the subjects in the order of interest.

I view the text Monetary Economics by Wynne Godley and Marc Lavoie as representing a more introductory text to post-Keynesianism. The stock-flow consistent models they develop in that text form a coherent introduction to macroeconomics. The reviewed Post-Keynesian Economics provides a deeper background explaining the modelling choices that were taken in Monetary Economics

What Is It About?

The breadth of the topics covered makes it extremely difficult to summarise what this book is about. Even after reading it, I would not even hazard attempting to offer a summary of what post-Keynesian economics is.

The difficulty faced is that post-Keynesian economics consists of a number of schools of thought that have developed after the death of Keynes. These schools of thought had some disagreements, and one can debate whether particular economists are truly "post-Keynesian" or not. This has lead to the criticism that "post-Keynesian" economics is incoherent.

Marc Lavoie's objective is to show that these different schools of thought are close enough in world view to create a coherent body of economics. He gives a "broad tent" view of post-Keynesian economics; he describes himself as "a 'lumper' more than a 'splitter'" (page 44). An additional related objective is to show that this body of post-Keynesian economics stands alone, and is not defined solely by an opposition to "mainstream" economics. 

The earlier Monetary Economics did provide a more coherent story, as it developed a series of macroeconomic models within a single framework. (It did cover some of the various controversies in text sections at the end of chapters, but the bulk of text followed the development of the models.) Post-Keynesian Economics presents various important theoretical controversies. It is left more to the reader to decide how coherent the viewpoints are.

I am most familiar with the debates around money and banking. For example, there are disagreements between the views of those in the Modern Monetary Theory (MMT) camp and other post-Keynesians (including Marc Lavoie himself). But as he notes, these debates ended up largely being over semantic differences, and the operational gap between the two sides were actually quite small. 

On a related note, Lavoie discusses the hope of Wynne Godley that "the core accounting equations and the dynamic stock-flow equations actually constitute a framework that constrains the range of possible results" (page 273). But, as he notes, "Unfortunately, things are not so simple" (page 273). Since researchers can disagree about the behavioural rules to be followed by the various sectors, they can create stock-flow consistent models that behave quite differently. My argument is that by demonstrating these differences in semi-realistic mathematical models is much better than purely verbal arguments or attempting to draw conclusions from entirely unrealistic model frameworks. (For example, see the questionable debates about "debt burdens" which are based on OLG models.)

The Advantages Of The Post-Keynesian Approach

The advantage of the post-Keynesian approach to macroeconomics is that a great deal of mysterious events are not that hard to understand. Particular examples of interest include:

  • why is Japan able to borrow at low interest rates, despite having a high debt-to-GDP ratio?
  • why did euro area countries have debt crises, but no other developed countries?
  • why did Quantitative Easing have no impact on the rate of inflation?
  • why was the Financial Crisis almost entirely unexpected?
  • why is the United States economy not accelerating despite years of negative real rates?
Of course, after staring at predictive failures for years, other economists learned to patch their theories ("it's all the fault of the zero lower bound!"). However, almost all of these issues are the result of mainstream economists clinging to unjustified theoretical assumptions about the economy.

Unfortunately, post-Keynesian economics highlights the importance of uncertainty - the inability to even develop a probabilistic estimates for the future events. Additionally, the text is focussed on economic theory, and not building predictive models. That said, if your underlying theory is gibberish (for example, loanable funds), you stand little chance of building a useful economic model upon it. Therefore, reading this text will not make you into a star economic forecaster. The best it can offer is an increased chance of avoiding making the same errors as the consensus.

Concluding Remarks

Post-Keynesian Economics: New Foundations is an excellent resource for understanding the breadth of post-Keynesian economics. It provides a reliable, scholarly background on a wide range of topics, with a hefty set of references for further study. That said, it may be imposing for a new reader.

I should note that I did not necessarily agree with everything within the text; given the size of the text, that is not surprising. I expect that I will return to those topics later, and discuss them at greater length.

Finally, the book is available at Post-Keynesian Economics: New Foundations (affiliate link).

(c) Brian Romanchuk 2015


  1. It is indeed an excellent book (I'm lucky enough to have been able to buy the cheaper UK version). I get a bit fed up with some heterodox commentators whose views sometimes seem to be simply a reflection of their lack of understanding of mainstream economics; Lavoie reminds me why post-Keynesian economics really does offer so much valuable insight.

    1. I have found one section in the text (interest rate parity) where I think the presentation is more convoluted than it needs to be. And the issue is that it could be easily understood by mainstream finance; it may be that the mainstream economists are still looking at the topic incorrectly. This is one case within the text where it may have been best to drop the exclusive focus on post-Keynesianism. The concept is fairly easily understood using standard mathematical finance, but one can note that post-Keynesian authors came up with similar conclusions earlier.

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