"Greedflation" Debate

I have started writing a section for my book on the “greedflation” debate: are corporations jacking up prices to pad profit margins? Since I wanted my book to mainly focus on basic facts about inflation that are true, and not unresolved theoretical debates, it is not entirely a great fit. I was planning on publishing my draft today, but I decided to hold back and explain why that is.

On Central Banking, Monetary Policy And Inflation (Guest Post)

Brian: This is a guest post by Professor Louis-Philippe Rochon of Laurentian University, who was looking for a venue to publish this piece. I have seen his presentations at some Post-Keynesian conferences, and I am happy to pass this article along.

Fact: inflation around the world is on the rise.

And as predicted, so are the calls on central banks to quickly intervene in an attempt to wrestle inflation back to some agreed-upon target level. Indeed, there exist among mainstream economists a quasi-unanimity that this is the proper policy route to follow: several increases in the rate of interest should eventually have an impact on those interest-sensitive components of aggregate demand to finally slow down economic activity in the hope that inflation will somehow float back to its target of, say, two per cent, at a minimal cost to society as a whole.

Should We Care About Plucking Models?

Milton Friedman suggested a description of the business cycle in the 1960s: the "Plucking Model." The analogy is of a string stretched tight across a board: you can pluck the string away from the board, but tension will pull the string back quickly, and then slam into the board.

The State Of MMT?

I have been catching up after travelling to the Modern Monetary Theory (MMT) Conference in Stony Brook, and see that there was a full issue on MMT in the Real-World Economic Review. Since I referred to the relationship between MMT and Post-Keynesian Economics in my talk, I might as well update my comments based on that RWER issue.

Minsky Versus Steindl Debt Dynamics?

 In Marc Lavoie's Post-Keynesian Economics: New Foundations, he has an interesting discussion in Section 6.10.4, which is labelled "Minsky or Steindl Debt Dynamics?" The Minsky dynamics are the well-known Financial Instability Hypothesis (link to primer), while the Steindl dynamics refers to the discussion in Maturity and Stagnation in American Capitalism by Josef Steindl. Lavoie's discussion raises some issues with the limitations of aggregated analysis in this context. This is a brief comment on this topic.

Primer: Financial Instability Hypothesis (Part I)

The Financial Instability Hypothesis was associated with the economist Hyman Minsky, although it could be viewed as Minsky’s interpretation of Keynes. One summary of the concept is that stability is destabilising: economic stability leads to changes in behavioural changes that destabilise the economy.

How Can The Household Sector Cause Recessions?

This article offers an overview of the mechanisms by which the household sector alone could cause a recession. If we put aside the possibility of disruptions to the financial market (since that is external to the household sector), the main mechanism is probably via the housing market. If we look beyond housing, we can see the differences between the neoclassical ("mainstream") and post-Keynesian approaches. The neoclassicals emphasise the effects of interest rates on consumption, whereas the post-Keynesians are largely forced to look elsewhere for explanations for recessions.

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.

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.)

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...

Inventories And The Cycle

Inventory investment is one of the factors driving the business cycle. One of the characteristics of most of the post-1990 experience is lowered inventory investment volatility (in the developed countries), although that changed around the Financial Crisis. I have some doubts that we could use inventory trends to forecast the cycle, rather their importance is the tendency to magnify the effects of a recession.

Primer: The Kalecki Profit Equation (Part II)

This article continues the discussion of the Kalecki Profit Equation (link to Part I). The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables. The full equation is somewhat imposing, so the strategy employed here is to build up the equation by starting off with a simplified model economy that results in a brief equation, then adding new terms progressively. The previous article noted that investment creates a pro-cyclical self-reinforcing loop between it and profits. This article discusses two factors that normally act to moderate the business cycle: the fiscal deficit, and the external sector.

Primer: The Kalecki Profit Equation (Part I)

The Kalecki profit equation -- named after the economist Michal Kalecki -- describes how aggregated profits are determined by national accounting identities. (Note that Jerome Levy came up with a similar approach earlier; the equation is sometimes referred to as the Kalecki-Levy profit equation.) The results are perhaps not obvious if we look at profits from a bottom up perspective. From the perspective of business cycle analysis, the key point to note is that net investment is a source of profits. Meanwhile, since firms invest in order to grow profits, we get a self-reinforcing feedback loop. From a policy perspective, we see that governmental deficits also add to profits, which implies that increasing deficits add to profits in a recession, helping put a floor under activity.

Book Review: Prosperity For All

Professor Roger E. A. Farmer has written Prosperity For All: How to Prevent Financial Crises, in which he lays out the case for creating a sovereign wealth fund whose objective is to stabilise financial markets. If we can eliminate financial crises, we can avoid the rise in unemployment that results. Although that is an interesting concept, I was highly skeptical about the idea before I read the book -- and my skepticism remains after reading it. Instead, the discussion of macro theory within the book is why it is of interest.

Initial Comments On Zero Rate Policy And Inflation Stability

This article represents my initial comments on the question of the stability implications of locking interest rates at zero. Martin Watts, an Australian academic, had an interesting presentation at the first Modern Monetary Theory (MMT) conference (link to videos of presentations). Although MMT fits within a broad-tent definition of "post-Keynesian" economics, there are still sharp debates with other post-Keynesians. One topic of debate is the effect of permanently locking the policy interest rate at zero, which is a policy advocated by many MMT economists. In my view, this is a debate that is best approached by using stock-flow consistent (SFC) models.

Rigour And Macroeconomics

Much of my writing about macroeconomic theory is of the hand-wringing variety: it cannot be "scientific" because (useful) forecasting is essentially impossible to do. This is a negative (non-constructive) argument; but that does not mean that we cannot be rigorous.

Book Review: The Reformation In Economics

Philip Pilkington published "The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory" in 2016. It is an ambitious book, outlining the structural flaws of mainstream economic theory. He discusses the potential replacement theory, but this reconstruction is somewhat overshadowed by the deconstruction.

Book Review: Can We Avoid Another Financial Crisis?

Professor Steve Keen, the well-known critic of mainstream economics and professor at Kingston University, published Can We Avoid Another Financial Crisis? His argument that unsustainable private debt dynamics make a future crisis of some sort inevitable; and the biases of mainstream economics helps ensure that little useful will be done to prevent this outcome. The book offers an overview of his economic theories, which are somewhat distinct niche within the heterodox tradition. Although the book is interesting, I have some reservations about his strategy vis-à-vis mainstream economics within the book.

Misunderestimating MMT

My ex-colleague Gerard MacDonell wrote an article "The trouble with MMT" (Modern Monetary Theory). He offers a wide number of criticisms, however I believe that his substantive ones are unconvincing. I will note from the beginning that I cannot say that his arguments are wrong, they represent one side in a long debate in economics. Instead, I believe that we need to properly understand the debate, and that the MMT wing of post-Keynesian economics offers a lot of insight to that debate.

[Update: Gerard has a followup article here; I will respond to a couple of points in an upcoming short post.]