HETERODOX MACROECONOMICS: AN OVERVIEW Malcolm Sawyer University of Leeds

Introduction Heterodox macroeconomics includes what may be termed Post- Keynesian and Kaleckian macroeconomics Reading: M. Sawyer, ‘The central core of heterodox macroeconomics’ in J. Goldstein and M. Hillard (eds), Heterodox Macroeconomics: Keynes, Marx and globalization, London: Routledge E. Hein and E. Stockhammer (eds.), A Modern Guide to Keynesian Macroeconomics and Economic Policies (Edward Elgar) J.E. King (ed.) The Elgar Companion to Post Keynesian Economics, Edward Elgar, 2012 has around 100 entries on post Keynesian economics; particularly entries on business cycles, circuit theory, effective demand, inflation, investment, Kaleckian economics, microfoundations, uncertainty G.C. Harcourt and P. Kriesler (eds.) The Oxford Handbook of Post- Keynesian Economics, volumes 1 and 2, Oxford University Press, is a two volume coverage of post-Keynesian economics, particularly chapters on Money, Kaleckian Economics (in volume 1), uncertainty (in volume 2): each of the volumes contains an extensive introduction by the editors (same introduction in each volume)

Key elements It is macroeconomics! Microeconomic behaviour – but not based on utility maximisation Fundamental uncertainty and path dependency Role of money in a monetary production economy

Key elements Demand-driven economy, with investment as key component of demand Supply constraints and inflation barriers: a structuralist view Income distribution (wages: profits) important

Macroeconomics ‘not “macro-economic” in the sense of representing a first simplified rough step towards a more detailed and disaggregated analysis. … Only problems have been discussed which are of a macro-economic nature; an accurate investigation of them has nothing to do with disaggregation. They would remain the same – i.e. they would still arise at a macro-economic level – even if we were to break down the model into a disaggregated analysis’ (Pasinetti, 1974)

Microeconomic behaviour There is no single dominant view on behaviour and decision-making in heterodox macroeconomics akin to optimisation subject to constraints in mainstream economics Firms’ decisions depend on who is in effective control (managers, owners) and the structure and nature of competition: in macroeconomics the key decisions relate to investment and to pricing Household consumption decisions: importance of social norms and pressures Labour supply decisions: the imperative to work

Uncertainty and risk Mainstream macroeconomics based on RARE – representative agent, rational expectations A situation of risk: where the outcome of decision/action can be represented in terms of a probability distribution: the equivalent of rolling a dice A situation of (fundamental) uncertainty where the outcomes are unknown and/or unknowable.

Fundamental uncertainty and path dependency "By, uncertain knowledge, let me explain, I do not mean merely to distinguish what is known for certain what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed." (Keynes, 1937, pp ).

Fundamental uncertainty and path dependency Fundamental uncertainty affects: How human behaviour is approached; what are the coping mechanisms for dealing with uncertainty; Path dependency – the future is yet to be formed;

Nature of money Money is credit money, created by banking system (including central bank) through loan processes; The possession of money is required prior to spending: the ‘finance motive’ for holding money; The provision of loans by the banking system is highly significant element in the financing of investment and production, and in the generation of instabilities (‘financial fragility’).

Demand-driven economy The level of effective demand as the determinant of the level of economic activity – in both the short-run and the long-run Investment as a driver of effective demand. Investment as volatile and a generator of cyclical fluctuations

Supply constraints/structuralist Full employment of labour is rarely achieved, and supply constraints in terms of lack of productive capacity and its location. Inflation barriers arising from lack of productive capacity

A simple illustrative demand side model Investment: Undertaken by firms in pursuit of growth and profits; has to be financed; optimising calculations not possible Represent here by: I = a + bY + cP (a ‘animal spirits’; Y output; P profits) Then I = a + bY + cmY (where m = P/Y)

A simple illustrative demand side model Savings: Wages and profits have different roles and functions Differential savings out of wages and profits S = swW + spP (W: wages), Then S = sw(Y - P) + spP = (sp – sw)P + swY = [(sp - sw)m + sw] Y

A simple illustrative model Savings = Investment condition would give: Y[(sp – sw)m + sw –b – cm] = a Notice the role of m (profit share): the impact of rise in m can be positive on output (‘profit led’) or negative (‘wage led’). No reason to think that the level of output which would result from this would be consistent with full employment Introduce budget deficit

A simple illustrative model Now amend for government activity: the revised relationship becomes: Savings - Investment = Budget Deficit Put budget deficit = d Y[(sp – sw)m + sw –b – cm] = a + d The need for budget deficits to absorb the gap between savings and investment