Heterodox Macroeconomics

Jonathan P. Goldstein, Michael G. Hillard

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781135968601
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Heterodox Macroeconomics offers a detailed understanding of the foundations of the recent global financial crisis. The chapters, from a selection of leading academics in the field of heterodox macroeconomics, carry out a synthesis of heterodox ideas that place financial instability, macroeconomic crisis, rising global inequality and a grasp of the perverse and pernicious qualities of global and domestic macroeconomic policy making since 1980 into a coherent perspective. It familiarizes the reader with the emerging unified theory of heterodox macroeconomics and its applications.

The book is divided into four key sections: I) Heterodox Macroeconomics and the Keynes-Marx synthesis; II) Accumulation, Crisis and Instability; III) The Macrodynamics of the Neoliberal Regime; and IV) Heterodox Macroeconomic Policy. The essays include theoretical, international, historical, and country perspectives on financial fragility and macroeconomic instability.

Part I
Heterodox macroeconomics and the Keynes—Marx synthesis

1 Introduction

A second-generation synthesis of heterodox macroeconomic principles

Jonathan P. Goldstein and Michael G. Hillard

Over the years, both internal and external challenges to heterodox macroeconomic theory have pushed that theory in new directions. A subset of these developments, in response to some of the more serious challenges, has resulted in a much improved integrated heterodox approach based on the original contributions of Keynes, Marx and early institutionalists. The result is an integrated theory that is more coherent, logically consistent, realistic, flexible and capable of explaining modern macrodynamics in historical time. This new integrated approach is the subject matter of this book.

We call this unification of alternative macro perspectives the “second-generation integration.” The first integration occurred shortly after Keynes’ seminal work and lasted into the early 1970s. Since the end of that period, a richer and more complete integration has gradually emerged with many important innovations not appearing until the 1990s and later. Given these recent extensions and the lack of a volume that reflects on those innovations, the purpose of the original papers in this book is to familiarize the reader with the emerging unified theory of heterodox macroeconomics and its applications.

The second-generation integration overcomes the stagnation that occurred in the unification of heterodox perspectives as a direct result of divisions that emerged from the first integration (internal challenge). In retrospect, the earlier integration merely generated a set of core heterodox general principles (Sawyer (Chapter 2)) and a critique of mainstream theory, but was incapable of gendering consensus concerning key behavioral relations that explain macroeconomic evolution.

While the goal of this book has not been to develop a fully agreed upon model, the chapters within reconsider core principles and make some important progress on developing core behavioral micro and macro relations. The fundamental distinction between this second integration and the earlier one is the transition from common core principles to common behavioral relations.

It is often and understandably stated that it is easier to know what heterodox macroeconomics is not than to know what that doctrine is. This book helps to resolve this problem by overcoming previous impediments to an identifiable unified body of heterodox macroeconomics and by further branding/extending that unified theory.

The macro theory developed also responds to external challenges, particularly the long dominance of macroeconomics by New Classical economics, the effective demise of viable orthodox alternatives and the failure/crises associated with Neoliberal development strategies/policies.

In the remainder of this introduction, we briefly address the well-known external challenges, focus more on the lesser-known internal challenges and in so doing, briefly introduce the reader to second-generation ideas. We consider different variants of an integrated analysis and finally, we assess how the chapters in this volume contribute to the overall theme of a unified heterodox approach.

External challenges

As stated, it is well known what heterodox economics is not. Thus, what is external to alternative approaches is well defined. Additionally, the heterodoxy has advanced, early on, well-developed critiques of mainstream economics (Davidson (1983, 1992, 2001), Harcourt (2001), Robinson (1962, 1971), Taylor (2004a: Chapter 7, 2004b), McLeod (1997), Lee and Keen (2004), Cohn (2007), Pasinetti (2000) and Seidman (2005) to mention a few). The goal of this book is to highlight and unify the positive/alternative aspects of heterodox thought and is not to harp on criticism. Yet, the failures of traditional theory and policy partially underlie the direction in which heterodox theory evolves.

In particular, there is the current Neoliberal stage of capitalist development where free market economics/ideology and the associated doctrines of free trade and financial liberalization have guided the economic development of an integrated world economy. Here, the challenge is to explain the failures of that guidance—increasing inequality, financial crises, slow demand growth, destructive competition, and a tendency to global excess capacity and unemployment—and to offer alternatives. These failures cry out for a viable and unified alternative perspective, particularly one that can understand the macrodynamics of the Neoliberal regime and provide sound policy recommendations (both sub-themes of this book).

On the theoretical plane, the dominance of New Classical economics within the profession and the convergence of the neoclassical synthesis in its New Keynesian form to be virtually indistinguishable from New Classical analysis have made the orthodoxy less receptive to alternative ideas. These shifts in theory and lack of tolerance respectively require an extended critique (Crotty (1996), Davidson (1992), and Rotheim (1998)) and a renewed strengthening of alternative perspectives.

Challenges from within

The origins of modern-day challenges to orthodox macroeconomic theory (monetarism, New Classical and New Keynesian economics) are rooted in classical economics, particularly the works of Marx and Ricardo, early institutionalist perspectives such as the treatises of Veblen, Mitchell, Means and Schumpeter, and Keynes’ pioneering contributions. The seminal ideas in these three traditions were synthesized into a coherent alternative. This first generation synthesis of heterodox ideas, also referred to as the reconstruction of political economy (Kregel (1973)), has dominated the development of heterodox macroeconomics for around 50 years. Yet, this particular synthesis now faces a crisis of practical, political and theoretical proportions.

The first-generation synthesis is best represented by the contributions of Robinson, Sraffa, Kalecki,¹ Kaldor, Baran and Sweezy, and Steindl. These authors developed the general principles that underlie much of heterodox macroeconomic theory. Sawyer (Chapter 2) elaborates these central core propositions. These authors extended or integrated from the original works the concepts of monopolistic market structure, effective demand, under-consumption and even stagnation, the accumulation of capital, decision-making under true uncertainty, historical time, and the importance of social relations. In addition, much attention was given to extending macroeconomics to consider a long period analysis. For many contributors, Marx’s reproduction schemes along with the classical form of competition, expressed by the process of the equalization of profit rates, served as a departure point for discussions of growth and sometimes crisis. The long period analysis that developed consisted primarily of studies of balanced growth with a focus on the link between profit, the distribution of income and growth and innovation and its relation to growth.

Despite the best intentions of the early synthesizers, the initial integration treated many core elements of a unified heterodox framework in a superficial manner, focused on what turned out to be less useful/relevant aspects of the originating approaches and generated the conditions for a division in the future development of the heterodox agenda. After this seminal integration, heterodox macro theories—post Keynesian, institutionalist and Marxian—have developed in near isolation from one another with only minimal interaction and further integration.² As a result, the preliminary integration has stagnated. The isolated development of constituent traditions has further cemented existing divisions and impeded future integration. Thus, there is fertile ground to pursue a second unification in hopes of developing a more potent and realistic approach.

The problematic/controversial and/or less useful aspects of the first synthesis includes the concept of equilibrium and the simple concept of competition both embodied in reproduction schemes and the associated notion of balanced growth. The latter, discussed below, is most responsible for creating divergent paths in heterodox theoretical development.³

In addition, many elements of the first synthesis were superficially developed. The consideration of fundamental uncertainty has eluded a tractable treatment and the integration of real and financial sectors, in both Keynes’ and Marx’s work, was never effectively included in the early integration.⁴ The treatment of social relations has been restricted to the capital—labor relation and within that realm limited to a conflict theory of inflation and a justification of the classical assumption on savings and consumption. A richer analysis of this relation can be used to underpin cyclical fluctuations, both under-consumption and profit squeeze variants, by bringing the critical role of the profit rate to the fore in the theory of effective demand. This relation can also justify underemployment as a normal condition of capitalism.⁵ Additionally, other social relations such as the relation among industrial capitalists (competition) and the relation between industrial capitalists and finance capitalists, particularly during the current period of financial liberalization, have important implications for macroeconomic dynamics.

Second-generation integrationists have more centrally placed the profit rate in the theory of effective demand (Goldstein (1985 and Chapter 3), Crotty (2003, 2005) and Moseley (Chapter 10), have extended the Marxian concept of competition) and have analyzed the relationship between industrial and finance capitalists (Epstein (2005), Crotty (2005) and Orhangazi (Chapter 9)) in order to produce a better understanding of macrodynamics under the Neoliberal regime.

The development most responsible for the stagnation in the integration of heterodox economics, over the past quarter century or more, is the pursuit of theories of balanced growth by a significant subset of first-generation economists. This generated a split in the long period analysis between growth theorists and crisis theorists. Given Marx’s well-developed theory of economic crises, this division tended to run along Marxian and post-Keynesian lines.⁶ The crucial issue of whether a unified heterodox theory should incorporate a crisis theory is affirmatively addressed by Dymski (Chapter 5).

Coming off of Marx’s expanded reproduction schemes,⁷ the early integration economists such as Robinson and Kaldor developed growth models to establish the “rules of the game”/“tranquility assumptions” necessary to keep the system expanding. While methodologically, this was perceived as a first step for analyzing why balanced growth may not be attained (Kregel (1973:41)), most post-Keynesians following in this tradition never implemented the crucial second step.⁸ Thus, a theory of balanced growth emerges. Later followers, such as Eichner (1973, 1987), extend this approach by developing a microfounded theory of pricing consistent with balanced growth. In this approach, the mark-up and thus the profit rate are subservient to the dictates of accumulation. The mark-up rises to generate the internal funds necessary to finance new investment.⁹

This approach significantly deviates from heterodox fundamental principles (Sawyer (Chapter 2)). It establishes an a priori compatibility between micro decisions and macro stability, it implies that expectations are usually justified, it violates the fundamental uncertainty associated with both expectation formation and the determination of the profit rate, it diminishes/restricts the innovative integration of monopoly (mark-up) pricing particularly in an environment of class struggle over the distribution of income and it employs an equilibrium methodology.

These developments derailed the integration of the various strands of heterodox macroeconomics. The fundamental uncertainty of the profit rate and its impact on effective demand has long been a mainstay of heterodox economics including the historical determination of the relative strength of capital vis-à-vis labor with respect to wage bargaining.¹⁰ In addition, there is the need for a realistic microeconomic approach that considers the potentially contradictory nature of micro decisions on the macro level. This issue is addressed by Goldstein (1986, 2006, Chapter 3) and Gibson (Chapter 6). Finally, the pioneers of alternative macroeconomics, despite confusing indications to the contrary, rejected equilibrium analysis in favor of a dynamic non-equilibrium methodology.¹¹

Thus, it is time to follow through on the intentions of the founders and first-generation followers to analyze the impediments to balanced growth. Is it a necessary step to first refine the theory of balanced growth to achieve this goal? Probably not, analyses of crisis clearly identify the impediments to continued growth. In the unified framework advanced here (Goldstein (Chapter 3), Orhangazi (Chapter 9), Moseley (Chapter 10), Boddy (Cha...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of illustrations
• Notes on contributors
• Preface
• Acknowledgments
• PART I Heterodox macroeconomics and the Keynes—Marx synthesis
• PART II Accumulation, crisis and instability
• PART III The macrodynamics of the neoliberal regime
• PART IV Heterodox macroeoconomic policy
• PART V Conclusion