The State of Post-Keynesian Economics and its connections with other heterodox perspectives

Matías Vernengo

1. Post Keynesian (PK) economics traces its origins to the 1970s, with the founding of the Journal of Post Keynesian Economics (JPKE). Of course, it does build on traditions that are much older, and that go back to the 1920s, and the origins of Keynesian economics itself (King, 2002). But before the 1970s it was difficult to talk about of Post Keynesianism as clearly separated from the mainstream, since the very idea of heterodoxy was not yet fully developed.

The ideas that eventually coalesced around what we today call PK economics where developed between the 1920s and 1930s, during the inter-war crisis, a period referred to by G.L.S. Shackle (1967) as ‘the years of high theory,’ and the capital debates of the 1960s. These ideas were a reaction to the Great Depression, and suggested that the dominant marginalist school in the United Kingdom, was incapable of explaining the nature of the crisis of capitalism. In particular, the idea that unemployment did not result from real wage rigidities, or imperfections, and that something more fundamental was wrong with economics and its interpretation of the capitalist mode of production.

John Maynard Keynes was for public works in the mid-1920s, before he developed the principle of effective demand, as were many of his neoclassical peers, like his teacher and bête noir in The General Theory of Employment, Interest and Money, Arthur Cecil Pigou. In that sense, public works, or expansionary fiscal policy is not necessarily the revolutionary part of Keynes’ work. Keynes and Michal Kalecki’s notion of effective demand was the key theoretical concept, a response to the dominant Say’s Law view, around which PK theory was built around. PK economics starts from a different theoretical conception of the working of capitalism, and not from a policy proposition, one that suggests that in the long run the system might fluctuate around suboptimal levels of output and employment.

It is only after the capital debates, heavily influenced by Piero Sraffa’s Production of Commodities by Means of Commodities, which showed some fundamental contradictions of mainstream neoclassical economics, and the return of pre-Keynesian conceptions in policy circles with the rise of Milton Friedman’s Monetarist views and Neoliberal policies, that PKs and other heterodox groups were marginalized in the profession, building their own departments, and creating their own journals.

In that sense, PK economics was not only a set of ideas derived from Keynes and his close followers in Cambridge, but also a reaction to mainstream marginalist ideas. In particular, the capital debates undermined the marginalist explanation for long-term prices, and the efficiency of markets in allocating resources, and emerging PKs authors provided alternative understating about the determination of prices, and the stability of the market system. Most theories derived from the 1930s and 1940 work by Kalecki and the Oxford Economists’ Research Group around Roy Harrod and Philip Andrews, associated with full cost pricing theories (Lee, 1999). Sraffa provided an alternative interpretation of long-term prices, and his system was compatible with ideas of effective demand in the long run.

Perhaps the three books that mark the modern birth of PK economics are Paul Davidson’s Money and the Real World and Hyman Minsky’s John Maynard Keynes, and Alfred Eichner’s A Guide to Post Keynesian Economics. All these books emphasize the fundamental instability of capitalism, associated to the fundamental uncertainty related to the investment process, and the increasingly fragile financial structures that are built in the process of investment. The 1970s, a period of significant macroeconomic instability lend itself to the revival of ideas about the instability of capitalism. These ideas were complemented by responses to Monetarism, in particular the notion that the inflation acceleration was not due to excessive demand beyond some natural output rate, but cost-push based, with money being endogenous. Nicholas Kaldor’s The Scourge of Monetarism represents that strand of PK thought, but the work by Basil Moore was also essential.

Growth models, which were somewhat neglected by the mainstream in this period, were developed by PK authors and by the 1980s these models have become a distinctive feature of heterodox economics. One strand of models built on Joan Robinson’s classical The Accumulation of Capital, while another built on Kaldor’s work on growth and technical progress, culminating in the Balance of Payments Constraint model of growth (Thirlwall, 1979). The first strand, often referred to as neo-Kaleckian (Rowthorn, 1981) emphasized the impact of income distribution leading to models of wage-led versus profit-led growth (Bhaduri and Marglin, 1990), while the Kaldorian models emphasized the idea of the supermultiplier and autonomous spending, and, hence, the State in the process of accumulation (Bortis, 1996).

By the end of the 1980s PK economics had consolidated as an alternative to mainstream economics. It emphasized effective demand instead of Say’s Law, the notion that prices reflect the conditions for the reproduction of the economic system and that distribution is conflictive rather than a reflection of relative scarcity, that money is endogenous and inflation is more often than not caused by cost-push forces and conflict, and that growth demand-led rather than supply constrained. Exogenous interest rates affected by the central bank, and the absence of a natural rate of interest also imply that monetary and financial factors have real effects in the long run.

2. In the process many PK strands of thinking were developed. Lavoie (2014: 38) suggests that there are at least five PK strands, namely: Fundamentalists, Institutionalists, Kaldorians, Kaleckians, and Sraffians, besides some more eclectic authors hard to classify, where he includes this author (Ibid.: 42). He adds that the Broad Tent approach, or pluralistic, that encompasses all the different PK approaches is the one he favors, and notes that Paul Davidson, often seen as the founder of the PK school proper, would prefer to restrict the PK school to those that adhere to a more restrictive set of propositions, in fundamentalist fashion.

This kind of sectarianism could be, however, dangerous for PKs. This is not to say that there are no advantages to a single coherent set of propositions. But it is probably a mistake to think that PKs and other heterodox groups are uniquely fragmented. In fact, in general, not only heterodox groups, which by definition tend to be small and often concerned with specific topics, but the mainstream schools are often quite fragmented. On macroeconomics issues, for example, even with the New Neoclassical Synthesis, there is a lot of disagreement between New Keynesians and Real Business Cycles types, particularly on economic policy, but also on fundamental theoretical issues. It should not be surprising that heterodox groups are quite fragmented too. Sometimes the fragmentation within the mainstream gives the false impression that some groups are breaking away, or on the edge of becoming heterodox (Vernengo, 2013).

Organized hypocrisy implies that the mainstream can still maintain that markets are efficient, and that General Equilibrium models are a coherent proof of that, while at the same time say that there are more sophisticated models, with imperfections, and alternative patterns of behavior, that explain reality. Hence, as discussed in Vernengo (2013) the role of many cutting-edge authors in the mainstream, like Dani Rodrik, Paul Krugman, and Joseph Stiglitz, to cite a few, is to suggest reasonable things about the imperfections of markets, while to perpetuate the mainstream hold on the profession. They are there to make the mainstream sound reasonable without the need to rethink the foundations of the subject. In that sense, it can be said that the mainstream is eclectic, since it uses itself different kinds of models, but not pluralistic, since it always reaffirms the basic neoclassical model. Eclecticism is not a good feature of the mainstream, it reflects their lack of coherence and the inability to provide a theory that is both realistic and logically sound.

Eclecticism should not be confused with pluralism. One is the result of incoherence, the other of tolerance with different approaches to economics, and the belief that there is value in alternative perspectives about the economy. For example, Institutionalists take a different starting point than Sraffians, but say relevant and coherent things that add to understanding of the real world. A pluralistic approach that encompasses some of the contributions of both schools is, therefore, quite reasonable. The same could be said about other heterodox schools.

Heterodox economics can provide a coherent alternative to the mainstream, and what could be termed a minimal program could be seen as perfectly coherent, and open to many alternative interpretations. A minimal program would emphasize the agreement between heterodox approaches, without negating that there are significant differences in method, theory, and policy advice. That minimal program would include, in my view, the old surplus approach preoccupation with the reproduction of the economic system, in which distribution is exogenous and determined by a variety of social forces, and by the notion that what drives the growth of the economic system in the long run is autonomous demand, in other words, effective demand in the long run, not just the short run .

3.The Global Financial Crisis of 2008 discredited economics in many quarters, and led in some heterodox quarters to a somewhat naïve belief that mainstream marginalist economics would be superseded by alternative views. That was obviously simplistic and did not take into consideration the sociology of science or the specificity of economics as a profession close to the halls of power.

Revolutions in science, as noted by Thomas Kuhn, require paradigmatic shifts, and normal scientists have advantages in controlling the levers of power within the scientific community. The access to the prestigious universities, the sources of funding, the graduate programs that allow to reproduce the next generation of scientists, and the publications that determine what is deemed as acceptable or even dominant theory are in the hands of mainstream economists. Last time the mainstream of the profession was in crisis was when there was significant danger of the collapse of global capitalism during the Great Depression. But in the last crisis, the economic consequences were less serious with, for example, unemployment in the United States reaching a bit more than 10 percent, rather than 25 percent of the Depression era. Also, last time around the existence of the Soviet alternative created the conditions for a more serious rethinking of the role of economics in an alternative to capitalism.

Yet the mainstream has been affected by the crisis. The profession’s credibility was tarnished by the economic meltdown that mainstream economists failed to see coming, and more authors have noted the limitations of economists as policy advisors (Appelbaum, 2019). As an indication of the side effects of the crisis, Larry Summers has admitted in a recent op-ed that PKs might be correct about the nature of the functioning of capitalism. He says:
“… in moving toward the secular stagnation view, we have come to agree with the point long stressed by writers in the post-Keynesian (or, perhaps more accurately, original Keynesian) tradition: the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand” (Summers and Stansbury, 2019; emphasis added).
In other words, there is an understanding that effective demand, at least one of the two elements in our minimalist program for heterodox economics, has been understood by some in the mainstream. There is a debate, within heterodox groups including PKs, on whether to engage the mainstream or tear it down. While engagement is not necessary to advance the research agenda of heterodoxy, engagement allows for visibility and for some possible cross fertilization when relevant ideas arise in the mainstream. Note that PKs have always continued to study of the mainstream and reflect on the perceived limitations. In that respect, PKs, and heterodox economists in general, very often understand better the logic and meaning of the mainstream than neoclassical authors themselves, since they are forced to think critically about the limitations of conventional wisdom.

Meanwhile PK economics has forged ahead and many new areas of research have developed. A small and non-exhaustive sample of the relevant fields would include the growing literature on Stock-Flow Consistent models spearheaded by Godley and Lavoie (2007). The work on the rise and effects of financialization (e.g. Epstein, 2006; Palley, 2013) and more generally on the role of finance in the process of development (Epstein, 2007) has been important and helped create a connection with theories of development. In the same vein models that emphasize the role of center and periphery and the possibility of uneven development, the role of the external constraint and of financial dependency, influenced by the work of Latin American Structuralists, as often emphasized by Jan Kregel, have become more common (e.g. Dvoskin and Feldman, 2018).

But perhaps, more recently, the more visible group of PK economists would be the ones associated to the so-called Modern Money Theory (MMT) school, that can be seen as yet another strand of PK economics. MMT concentrates on issues that were related to Functional Finance and Chartal Money, originally developed by Abba Lerner, and a policy proposal, the Jobs Guarantee program, developed by Hyman Minsky (e.g. Wray, 2012). The combination of these ideas has had some visibility in the United States tied to the rise of progressive politicians bent of expanding the welfare state along New Deal lines. MMT and other progressive heterodox authors (e.g. Pollin, 2019) have been instrumental in pushing for a Green New Deal, an alternative to the degrowth literature that dominates in some progressive circles.

These developments often put PK economics in contact with the research of other heterodox economists. To the extent that PK economics follows a Broad Tent approach, as outlined in Lavoie (2014), PK economics has many areas of compatibility with other heterodox groups like Institutionalists, Marxists, Radical Feminists, and Structuralists, to name a few, and fruitful collaborations can be expected.


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