Contributions to Economic Theory, Policy, Development and Finance

Essays in Honor of Jan A. Kregel

D. Papadimitriou

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137450968
• Topic: Social Sciences
• Subtopic: Global Development Studies
• Index: Social Sciences

This study combines lessons drawn from events and experiences of developing countries and examines them in relation to Jan Kregel's ideas on economics and development. The contributors provide in-depth analysis on: financial stability and crises, monetary systems, banking, global governance, employment, inflation and political economy

1

Jan Kregel’s Economics

Dimitri B. Papadimitriou

I first met Jan Kregel in the early 1980s at the annual summer Trieste International School that he had organized along with Pierangelo Garegnani and Sergio Parrinello on various topics of Post-Keynesian Economics. I had read his work, which was included in most PhD syllabi classes at The New School. My next encounter with Kregel was through Hyman P. Minsky at the Levy Economics Institute in New York when he became a frequent speaker, panelist and discussant at conferences, workshops and other institute events. He would regularly contribute his writings to the institute’s publications; the first one was on ‘Globalization, Capital Flows and International Regulation.’

Jan Allen Kregel was born in Dallas, Texas in 1944. He is currently senior scholar directing the monetary policy and financial structure research program of the Levy Economics Institute and the director of Bard College’s Master degree in Economic Theory and Policy. In addition, he holds the appointment of professor of development finance at Tallinn University of Technology in Estonia. He holds a BA degree from Beloit College in Wisconsin and received his PhD from Rutgers University (Paul Davidson was the chairman of his dissertation committee); he also studied under the tutelage of Joan Robinson and Nicholas Kaldor at the University of Cambridge. He has held professorial appointments in Europe at the University of Bristol, Université Catholique de Louvain, University of Southampton, Rijksuniversiteit Groningen, Universität Bremen, Università di Firenze, Università degli Studi di Roma-La Sapienza, Università di Pavia, Université d’Orléans, Université de Nice, Johns Hopkins University School of Advanced International Studies-Bologna Center, Università di Bologna; in the US at Livingston College at Rutgers University, The New School for Social Research, University of Tennessee, University of Missouri-Kansas City; and in Mexico at Universidad Nacional Autónoma de Mexico.

Furthermore, for some years, Kregel was a high-level expert in international finance at United Nations Conference on Trade and Development (UNCTAD), directed the Policy Analysis and Development Branch of the UN Financing for Development Office and was deputy secretary of the UN Committee of Experts on International Cooperation in Tax Matters. In 2009, he served as Rapporteur of the President of the UN Assembly’s Commission on Reform of the International Financial System.

In 2011, Kregel was elected to the Accademia Nazionale dei Lincei, also known as the Lincean Academy, the oldest honorific scientific organization in the world. Founded in 1603, the academy counts Galileo Galilei among its original members. It has remained an elite organization of only 540 members, with only 180 of those from outside Italy. Although the academy covers all scientific and literary fields, Kregel is a member of the division for moral, historical and philological sciences, specifically, the social and political sciences. Robert Solow, Amartya Sen and the late Paul Samuelson are among the other American economists who have been elected foreign members of the academy. He is a life fellow of the Royal Economic Society (UK) and an elected member of the Società Italiana degli Economisti. In 2010, he was awarded the prestigious Veblen-Commons Award by the Association for Evolutionary Economics for his many contributions to the economics field.

Just as Kregel’s faculty appointments have been geographically diverse and the content wide ranging, so have his intellectual endeavors. His voluminous contributions – more than 200 articles in edited volumes and scholarly journals (the Economic Journal, American Economic Review, Journal of Economic Literature and the Journal of Post Keynesian Economics among them) and a roster of highly acclaimed books – show his deep understanding of the economics of Keynes. He was strongly influenced by the teachings and writings of Davidson and Sidney Weintraub in the US while his move to the UK exposed him to the Anglo-Italians – Robinson, Kaldor, Sraffa and Pasinetti, who became the impetus for his concentration on ‘synthesis, integration and delineation of a Post-Keynesian methodology and paradigm’ (Wray 2013). Interested in the controversies surrounding capital and distribution theories and their implications for models of long-run economic growth, he argued that a theory of distribution is necessary for a proper theoretical analysis of growth; and, by extension, a proper growth theory aimed at determining the rate of profit, in its turn, will determine a distribution theory consistent with a capital theory, thus closing the theoretical circle. In his attempt to delineate theoretical cohesiveness, Kregel suggested some generalized formulations to deal with the controversies by examining and contrasting models that represented the classical, neoclassical and Keynesian traditions. The examination included the von Neumann and Sraffa models compared with Samuelson’s ‘Surrogate Production Function’ that in its attempt to rescue the neoclassical model from Sraffa’s Critique of the ‘impossibility of determining the rate of profit by the marginal net product of capital’ (Kregel 1971, p. 39) ‘utilised a malleable capital input [assuming] a smooth substitution in the production function between capital and labour’, thus arguing that the same results can be obtained using either the Sraffa system or the neoclassical marginal productivity approach (Kregel 1971, p. 40). To show how a consistent theoretical framework can be developed, Kregel compared a representative group of marginal theory-based neoclassical models (Meade, Tobin, Solow and Samuelson-Modigliani) with models belonging in the Keynesian-Kaleckian tradition (exemplified by those bearing the signature of Harrod, Kaldor, Pasinetti and Joan Robinson), whose method and overall approach in determining the rate of profit and distribution was grounded on the assumption that investment decisions were independent of savings decisions.

This line of research inquiry continued in which Kregel focused on the reconstruction of political economy drawing again from the work of Keynes, Kalecki and the classical economists in an attempt to develop a coherent framework for economic analysis. In so doing, he established the foundations of what has come to be known as the Post-Keynesian theory presenting it primarily ‘as a positive approach to economic analysis, showing along the way some similarities with what the classical economists called Political Economy’ but paying limited attention to criticizing the neoclassical theory (Kregel 1973, p. 205). A seminal and very influential article written subsequently together with another Post-Keynesian theorist, the late Alfred S. Eichner (1975), clarified the general theory of the new paradigm including its critique of neoclassical theory, especially for its reliance on the aggregate production function and general equilibrium approach. This article proclaimed the paradigm of Post-Keynesian Economics. The theories of profit and distribution that were debated in Cambridge, UK in the 1960s and 1970s led Kregel to examine the possibilities of whether Keynes’ method could integrate his theory of monetary production with the Cambridge theories of value and distribution (Kregel 1971, 1976c, 1978, 1980a), growth theory (1972, 1980b) and the capital debates (1976a).

Even though his books on growth (1972) and capital (1976a) were not ‘Modern Treatises’ that would settle the controversies once and for all, they dealt extensively with the controversial issues between the two Cambridge (US and the UK) approaches surrounding these topics. While growth and capital have many similar aspects, Kregel’s books avoided duplication and were complementary. Drawing from the work of Sraffa and Robinson, he showed the serious shortcomings of the neoclassical production function, and the crucial distinction that a quantity measure of capital could not be defined independently of the rate of profit (or price of capital) unlike the orthodox theory approach based on the two being independent of each other. Kregel’s many writings on Post-Keynesianism have established him as is one of the leading economists in this area, and his theoretical and policy work have inspired and guided many Post-Keynesian scholars.

As Wray points out in Chapter 4, Kregel shifted his attention from the Cambridge debates to issues of effective demand (1983a, 1984–85, 1987). He became interested in Keynesian methodology, contrasting Keynes’ method with that of the so-called bastard Keynesians (a la Robinson) and contending that when modeling expectations form under uncertainty, Keynes’ methodology relied on changing states of equilibrium (1976b, 1977, 1980c, 1982, 1983b). In a number of papers, he concentrated on asset price formation and Keynes’ analysis of ‘the essential properties of interest and money’ (Chapter 17 of The General Theory, 1988a, 1988b, 1992c) showing that ‘Keynes multiplier theory and own interest rate analysis were equivalent expressions of his theory of effective demand’ (Wray 2013, p. 355). Reading this later work, one can see the connection to his earlier work; it demonstrates the compatibility of Sraffa’s commodity rates of interest that in equilibrium produce Sraffa prices, and Keynes’ theory of money prices based on own rates of interest that, too, in equilibrium equal the money rate of interest in concert with the liquidity preference (1983a, pp. 60–61). He became intolerant of non-neoclassical writings that disregarded Keynes’ ideas regarding formation of expectations, criticizing equally the Cambridge and French circuitist approaches that interpreted Keynes’ analysis as ‘long run’ (1985, 1986).

Other research has focused on investigating the implicit use of derivatives (forward, futures, options) prices in Keynes’ analysis of production decisions. This has led Kregel to further investigate the relation between the pricing and use of financial derivatives and macroeconomic performance and, particularly, determining the relation, if it exists, between user costs and options prices in the specification of investment decisions and supply resources. He achieved this through a historical examination of the development and evolution of financial market institutions and behavior, as well as by exploring the linkages between the diverse versions of neoclassical price theory and particular equity market microstructures. Kregel identified clear linkages between different theories and institutional structures of financial markets and provided an explanation of the evolution of market forms and pricing that are dependent on the effects of technology, trading rules and government constraints. Examples of this abound, one of which was the case with the increasingly unwieldy and costly call options market, because of its size and complexity, which was ultimately transformed into a dealer market (1988c, 1992a, 1995).

Kregel, then, turned his research to various aspects of economic policy, institutional structure – mainly international financial institutions – and the international monetary system. This new focus culminated in a number of new papers focusing not only on the US and Europe (1994a, 1994b, 1994–45) but also the Eastern European economies in transition, strongly criticizing the mainstream ‘market shock’ doctrine (Kregel, Matzner and Grabher 1992). As many of the Post-Keynesian writers, Kregel is critical of restrictive monetary policy and the mainstream belief that budget deficits must be controlled with high interest rates. He has questioned the notion of fiscal responsibility that is equivalent to restrictive fiscal and monetary policy, which, if allowed to continue, generates financial market instability (2010a).

While continuing to publish papers on various aspects of Keynesian monetary theory and policy (1998a, 2004a, 2009a, 2010b, 2013a), Kregel developed an interest in issues of economic development at almost the same time he joined the UN. In a number of papers, he explored issues relating to obstacles in instituting and implementing options for development policy and strategy (2004b), the difficulties and challenges in creating a stable international environment and financial system fostering resource transfers to developing economies (1996a, 2004c), capital transfers that ensure financing development (1994c) and employment strategies toward mobilization of the usually plentiful unemployed labor in developing countries (2009b). Writing on development economics, various aspects of trade theory and policy become inescapable. Kregel has written a significant number of papers on trade policy and globalization issues (2008a, 2008b, 2009c) and co-edited two books on the economic contributions of one of the most prominent trade and development economists of our time, Ragnar Nurkse (2009a, b). The UN assignment created yet another fertile ground for Kregel to carry out research and write on issues affecting economic and financial stability in the emerging markets of Latin America and elsewhere, drawing from Minsky’s ‘financial instability hypothesis’ and the lessons of the Asian, Brazilian and Mexican financial crises (1998b, 1998c, 2000, 2009d).

Kregel’s razor-sharp mind and critical pen did not spare the European Union economies and, more specifically, the incomplete construction of the Economic and Monetary Union. In a series of papers (1996b, 1999a, 1999b), he foresaw the sovereign debt crisis coming, not only because of the flaws of the Maastricht Treaty, based on unrealistic and irrelevant supply-side assumptions of countries’ convergence on which the Euro project was structured, but also due to the absence of a banking union to ensure that deposits could not fly from the banks of the weakest economies to the banks of the strongest Eurozone member states. What he foresaw has come to pass (2011, 2012).

After retiring from the UN, his association with the Levy Institute was changed and he became senior scholar and director of the monetary policy and financial structure research program to continue and expand the program initiated and run by Minsky until his untimely death. It was particularly fitting for Kregel to continue Minsky’s research as the most knowledgeable follower of his work. Kregel’s own work embraced and extended the Minskyan canon as demonstrated in many of his published articles (1992b, 1997, 2000). Shortly thereafter, the US and the global financial system began to unravel and everyone came to Minsky searching for answers (Kregel 2010c). Kregel’s main research and writing at the Levy Institute has been both theory and policy specific, ranging from financial regulation and supervision, the role of the Federal Reserve, the short comings of ineffective legislative initiatives (such as the Dodd-Frank Reform Act in the US and others in Europe and elsewhere), public deficits and debt, the continuing crisis in the Eurozone and the emerging markets, particularly in Latin America, and critiquing the responses from the European Commission and the European Central Bank (ECB). Furthermore, articles on the enduring problem of high unemployment in Europe, the US and elsewhere promoted the macro and microeconomic benefits of Minsky’s Employer of Last Resort policy as a development and a stabilization program. He secured a very significant and multi-year financial grant from the Ford Foundation to undertake a Minskyan project to provide insights to crucial questions such as: How to re-regulate markets and financial institutions that would ensure financial system stability? How can shadow banking be controlled? How can the safety and soundness of the payments system be secured? Under what conditions can the ‘too-big-to-fail’ doctrine end? How can systemic risk be eliminated or dramatically reduced? What is the proper financial structure that will promote the capital development of the economy? Will the Dodd-Frank Reform Act, once it is put in place, prevent a financial collapse from happening again? Finally, in a globally inte...

Table of contents

• Cover
• Title
• 1 Jan Kregel’s Economics
• Part I Economic Theory
• Part II Employment Policy
• Part III Economic Development
• Part IV Financial Instability and Crises
• Part V Financial Regulation and Supervision
• Index