Post-Keynesian Economics

1. Overview

Post-Keynesian Economics (PKE) is a school of economic thought that originated in the work of John Maynard Keynes, particularly his 1936 book, The General Theory of Employment, Interest and Money. It has since been developed by a number of economists, including Michał Kalecki, Joan Robinson, Nicholas Kaldor, and Hyman Minsky. PKE stands in contrast to the mainstream, neoclassical synthesis of Keynes’s work, arguing that it misinterprets and dilutes the revolutionary aspects of his original ideas. The core of PKE is the principle of effective demand, which states that the level of employment and economic output is determined by the level of aggregate demand in the economy, not by the price of labor. This principle has profound implications for our understanding of how economies function and what role government policy can play in managing them.

PKE is a heterodox approach to economics, meaning that it falls outside of the mainstream. It is characterized by its emphasis on realism, its rejection of the axiomatic, deductive method of neoclassical economics, and its focus on the role of institutions, history, and social context in shaping economic outcomes. Post-Keynesians argue that economies are complex, dynamic systems that are subject to fundamental uncertainty, and that they do not naturally tend toward a state of full employment. This stands in stark contrast to the neoclassical view, which sees the economy as a self-regulating system that will always return to equilibrium if left to its own devices.

2. Core Principles

Post-Keynesian Economics is built on a set of core principles that distinguish it from other schools of economic thought. These principles are not a rigid set of axioms, but rather a framework for understanding the complexities of modern capitalist economies. They include:

• The Principle of Effective Demand: This is the cornerstone of Post-Keynesian thought. It posits that the level of economic activity is determined by the aggregate demand for goods and services. In other words, production adjusts to demand, not the other way around. This is in direct opposition to Say’s Law, a central tenet of classical economics, which states that supply creates its own demand. For Post-Keynesians, insufficient effective demand is the primary cause of unemployment. [1]

• Fundamental Uncertainty: Post-Keynesians emphasize the importance of fundamental uncertainty in economic decision-making. This is not the same as risk, which can be calculated and assigned probabilities. Fundamental uncertainty, in contrast, is the unknowability of the future. This uncertainty has a profound impact on investment decisions, which are often driven by what Keynes called “animal spirits” – a spontaneous urge to action rather than a rational calculation of expected returns. [2]

• Historical and Dynamic Time: Post-Keynesian economics sees time as a dynamic and irreversible process. The past influences the present, and the future is not predetermined. This is in contrast to the static, equilibrium-based models of neoclassical economics, which often treat time as a reversible and inconsequential variable. For Post-Keynesians, the economy is a path-dependent system, meaning that its future trajectory is shaped by its past. [1]

• The Endogenous Nature of Money: In the Post-Keynesian view, the money supply is not exogenously controlled by the central bank. Instead, it is endogenously created by the banking system in response to the demand for credit. When a bank makes a loan, it creates a new deposit, which adds to the money supply. This means that the central bank’s role is not to control the quantity of money, but to manage the interest rate and ensure the stability of the financial system. [2]

• Rejection of the Natural Rate of Unemployment: Post-Keynesians reject the concept of a “natural” rate of unemployment, which is the idea that there is a certain level of unemployment that is unavoidable due to structural factors in the economy. Instead, they argue that unemployment is primarily a result of insufficient aggregate demand. Therefore, it is possible to achieve full employment through appropriate government policies, such as fiscal stimulus and direct job creation. [2]

• The Importance of Income Distribution: Post-Keynesians place a strong emphasis on the role of income distribution in the economy. They argue that a more equal distribution of income can lead to higher levels of aggregate demand, as lower-income households tend to have a higher propensity to consume than higher-income households. Therefore, policies that reduce income inequality, such as progressive taxation and minimum wage laws, can be beneficial for economic growth and stability. [2]

3. Key Practices

Post-Keynesian economics gives rise to a number of distinct policy recommendations that differ significantly from those of mainstream economics. These practices are designed to address the inherent instability of capitalist economies and to promote full employment and a more equitable distribution of income.

One of the most important policy levers in the Post-Keynesian toolkit is fiscal policy. Post-Keynesians advocate for the active use of government spending and taxation to manage aggregate demand. In times of economic downturn, they argue for increased government spending and tax cuts to stimulate demand and create jobs. Conversely, in times of high inflation, they recommend reduced government spending and tax increases to cool down the economy. This is in contrast to the mainstream view, which often emphasizes the importance of balanced budgets and fiscal austerity.

Monetary policy also plays a crucial role in Post-Keynesian economics, but its focus is different from that of mainstream economics. Instead of targeting the money supply, Post-Keynesians argue that central banks should focus on managing the interest rate to ensure financial stability and support economic growth. They also advocate for the use of credit controls and other macroprudential regulations to prevent the buildup of excessive debt and financial bubbles.

Another key practice of Post-Keynesian economics is income policy. This refers to a range of measures designed to influence the distribution of income, such as minimum wage laws, progressive taxation, and social welfare programs. Post-Keynesians argue that a more equitable distribution of income can lead to higher levels of aggregate demand and a more stable economy. They also advocate for the use of incomes policies to control inflation, by linking wage growth to productivity growth.

Finally, Post-Keynesians are generally more open to the use of capital controls than mainstream economists. They argue that free capital mobility can be destabilizing, leading to volatile exchange rates and financial crises. Therefore, they advocate for the use of taxes and regulations to manage the flow of capital across borders.

9. Resources & References

[1] Post-Keynesian economics - Wikipedia. (n.d.). Retrieved from https://en.wikipedia.org/wiki/Post-Keynesian_economics [2] Post-Keynesian Economics | PKES. (n.d.). Retrieved from https://www.postkeynesian.net/post-keynesian-economics/

4. Application Context

Post-Keynesian economics is particularly relevant in contexts where the assumptions of mainstream economics do not hold. This includes situations of high unemployment, financial instability, and unequal income distribution. PKE provides a framework for understanding these problems and for developing policies to address them. For example, in the aftermath of the 2008 global financial crisis, many of the insights of Post-Keynesian economists, particularly those of Hyman Minsky on financial fragility, gained renewed attention. [3]

PKE is also highly relevant for developing countries, which often face challenges such as a lack of effective demand, a dependence on foreign capital, and a high degree of income inequality. Post-Keynesian policies, such as the use of capital controls and the promotion of a more equal distribution of income, can be particularly effective in these contexts.

Furthermore, PKE has important implications for the study of environmental issues. Post-Keynesian models can be used to analyze the economic impacts of climate change and to design policies to promote a transition to a more sustainable economy. For example, Post-Keynesian economists have advocated for the use of green fiscal policy, such as public investment in renewable energy and energy efficiency, to stimulate demand and create jobs while also reducing carbon emissions.

5. Implementation

Implementing Post-Keynesian economics requires a fundamental shift in the way we think about and manage the economy. It involves a move away from the hands-off approach of mainstream economics and toward a more active and interventionist role for government. The specific policies that are implemented will depend on the particular context, but they will generally be guided by the core principles of PKE.

One of the key challenges in implementing PKE is the need to coordinate fiscal and monetary policy. As the Levy Economics Institute paper argues, these two policy levers should not be seen as independent, but rather as two parts of a single, integrated strategy for managing the economy. This requires a high degree of cooperation between the central bank and the government, which can be difficult to achieve in practice. [4]

Another challenge is the need to overcome the political resistance to Post-Keynesian policies. Many of the policies advocated by Post-Keynesians, such as higher taxes on the wealthy and increased government spending, are often politically unpopular. Therefore, it is important to build a broad base of support for these policies by educating the public about the benefits of a more equitable and stable economy.

Despite these challenges, there have been a number of successful examples of Post-Keynesian policies in practice. For example, the New Deal in the United States, which was implemented in response to the Great Depression, included a number of Post-Keynesian elements, such as large-scale public works programs and a more progressive tax system. More recently, the response to the 2008 global financial crisis in many countries included a number of Post-Keynesian measures, such as fiscal stimulus packages and unconventional monetary policies.

6. Evidence & Impact

There is a growing body of empirical evidence that supports the key tenets of Post-Keynesian economics. For example, a 2013 study published in Procedia Economics and Finance used panel data from 177 countries to test the Post-Keynesian theory of endogenous money. The study found that the money supply is indeed endogenous, as Post-Keynesian theorists have long argued. [5]

Another area where there is strong empirical support for PKE is in the relationship between income distribution and economic growth. A number of studies have found that a more equal distribution of income is associated with higher and more stable rates of economic growth. This provides support for the Post-Keynesian view that policies to reduce income inequality can be beneficial for the economy as a whole.

The impact of Post-Keynesian economics can also be seen in the real world. As mentioned earlier, the New Deal in the United States and the response to the 2008 global financial crisis in many countries both included a number of Post-Keynesian elements. These policies were successful in mitigating the worst effects of these crises and in laying the groundwork for a more stable and equitable economic future.

7. Cognitive Era Considerations

In the cognitive era, characterized by the rise of artificial intelligence, automation, and big data, the insights of Post-Keynesian economics are more relevant than ever. The cognitive era is likely to exacerbate many of the problems that PKE is designed to address, such as unemployment, inequality, and financial instability.

For example, the increasing use of AI and automation is likely to lead to significant job displacement, as machines become capable of performing tasks that were previously done by humans. This could lead to a sharp increase in unemployment and a further rise in income inequality. Post-Keynesian policies, such as a universal basic income and a job guarantee, could be essential for mitigating these effects and ensuring that the benefits of technological progress are shared by all.

Furthermore, the cognitive era is likely to lead to new forms of financial instability. The use of complex algorithms and high-frequency trading can create new risks in the financial system, and the rise of cryptocurrencies and other digital assets could lead to new speculative bubbles. Post-Keynesian policies, such as macroprudential regulation and capital controls, will be essential for managing these risks and preventing another financial crisis.

Finally, the cognitive era provides new opportunities for implementing Post-Keynesian policies. The availability of big data and advanced analytical tools can help policymakers to better understand the economy and to design more effective policies. For example, real-time data on economic activity can be used to fine-tune fiscal and monetary policy, and machine learning algorithms can be used to identify and mitigate financial risks.

8. Commons Alignment Assessment

This section provides an assessment of the Post-Keynesian Economics pattern against seven dimensions of commons alignment. The scoring is on a scale of 1 to 5, where 1 indicates low alignment and 5 indicates high alignment.

Dimension	Score	Rationale
1. Openness & Transparency	4	PKE principles and research are generally published in the open and are accessible to the public. However, some academic research may be behind paywalls, limiting full openness.
2. Equitability & Fairness	5	A core tenet of PKE is the promotion of a more equitable distribution of income and wealth. Its policies are explicitly designed to reduce inequality and promote fairness.
3. Subsidiarity & Decentralization	3	While PKE advocates for centralized government intervention in the economy, it does not preclude decentralized decision-making at the local level. However, the emphasis is on national-level policy.
4. Resilience & Adaptability	4	PKE is designed to create a more resilient and stable economy by mitigating the inherent instability of capitalism. Its focus on path dependency and historical time also allows for adaptation to changing circumstances.
5. Sustainability & Regeneration	3	While not a central focus of traditional PKE, modern interpretations are increasingly incorporating environmental sustainability into their frameworks. The emphasis on long-term planning and public investment can be leveraged for a green transition.
6. Inclusivity & Diversity	4	PKE’s focus on full employment and a more equitable distribution of income is inherently inclusive. By challenging the mainstream, it also promotes a greater diversity of economic thought.
7. Democratic & Participatory	3	PKE advocates for a more democratic and participatory economy, but the implementation of its policies often relies on centralized government action. There is a tension between its democratic ideals and its top-down policy approach.

Overall Commons Alignment Score: 3

[3] Exploring Economics. (n.d.). Post-Keynesian Economics. Retrieved from https://www.exploring-economics.org/en/orientation/post-keynesian-economics/ [4] Tcherneva, P. R. (2008). The Return of Fiscal Policy: Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View? (Working Paper No. 539). Levy Economics Institute. Retrieved from https://www.levyinstitute.org/pubs/wp_539.pdf [5] Nayan, S., Kadir, N., Abdullah, M. S., & Ahmad, M. (2013). Post Keynesian Endogeneity of Money Supply: Panel Evidence. Procedia Economics and Finance, 7, 48–54. Retrieved from https://www.sciencedirect.com/science/article/pii/S2212567113002177