Post-Keynesianism versus Heterodox Economics
We now need to tackle the characteristics that truly distinguish post-Keynesian economics from the other heterodox schools. We shall identify two sets of characteristics. The most important feature is the principle of effective demand, as recognized by all recent accounts of post-Keynesianism.
The principle of effective demand says that aggregate demand is the main force that determines output and employment (except for some temporary situations where productive capacity is the barrier to expansion). However, while most economists would agree or concede that the economy is demand led in the short run, few would agree with the claim that the economy is demand-led even in the long run, and thus the assertion that the economy is demand-led both in the short and the long run is most likely the most crucial feature of post-Keynesian economists, one upon which all strands agree. More concretely, this means that post-Keynesians believe that the actual demand-led path taken by the economy has an impact on the supply-side determinants of long-run growth, a point made by Kaldor, Robinson, and Cornwall. Another way to state the principle of effective demand is to claim the autonomy of investment from the intertemporal saving decisions of households, and hence to underline the causality running from investment to saving.Giuseppe Fontana (2009: 2) sums this up by saying that post-Keynesian economists believe in three concrete propositions, which, in contrast to some other heterodox schools and neoclassical Keynesians, are assumed to be valid both in the short and the long run: the principle of effective demand, the possibility of involuntary unemployment, and the principle of policy effectiveness, according to which judicious fiscal and monetary policies are effective in improving employment and growth.
The second key characteristic of post-Keynesianism is the importance accorded to the notion of historical time.
Post-Keynesians emphasize its irreversibility, as the long run is essentially the result of a sequence of short-run positions. Indeed, in their debates with their critiques, post-Keynesians have been adamant in forcing them to consider and describe the transition from one position to another, recognizing that the conditions under which this transition occurs may affect the final position of equilibrium. Thus post-Keynesians consider path-dependence and hysteresis as being typical of their vision of economic phenomena set in historical time, rather than being exceptions.Some authors prefer to say that fundamental uncertainty a la Shackle is the second most important characteristic of post-Keynesianism, often linking it to the notion of non-ergodicity put forth by Davidson (1982-83), meaning that time and space averages may not coincide, implying that we cannot rely on current or past information to discover what ought to happen in the future. There is some link also with the previously mentioned notion of reasonable rationality, although many post-Keynesians would argue that reasonable rationality only implies some kind of epistemological uncertainty whereas true uncertainty refers to ontological uncertainty - the world and its future are themselves uncertain, being subjected to the free will of economic agents.
Some other post-Keynesians say the concern with a monetized production economy is the second key feature of post-Keynesianism. It is not easy to disentangle the notions of historical time, fundamental uncertainty, non-ergodicity, and monetized production economy. This latter concept could also be associated with the principle of effective demand since it is difficult to imagine an investment function independent from saving without a monetized economy. In orthodox state-of-the-art macro models, such as the dynamic general equilibrium approach, there are no nominal magnitudes nor is there any need for money. Some commodity acts as a numeraire or unit of account.
As in neo- Walrasian models, everything is known until the end of time, with some probabilistic degree. Time in such models is an artificial construct, since all decisions are taken on day zero and money plays no useful role. In post-Keynesian models fundamental uncertainty is assumed from the start, by considering that contracts, debts, and assets are denominated in money terms, and by rejecting the possibility of proceeding to the maximization of intertemporal utility. Indeed, it could be claimed that any model that rejects these state-of-the-art constructs integrates in some manner the concepts of fundamental uncertainty in a monetized economy. Minsky (1996: 73) is particularly keen in emphasizing the relevance of a monetized economy, arguing that “the salient contention that makes a thesis Keynesian is that the behaviour and structure of financial (and money) markets and of product (and labor) markets are integral to the determination of the path of the economy through time”.It would be proper to finish this assessment by recalling that the Holy Grail of postKeynesian economics has been, for a long time, the search for a way to integrate real and monetary analyses - tangible and financial capital - as well as to proceed to the coherent integration of stocks and flows. While a number of post-Keynesian authors - Davidson, Minsky, Eichner, Arestis, Skott, Dalziel - have tackled these or similar issues, the most persistent attempts have arisen from Godley over the past 30 years. His efforts have given rise to the stock-flow consistent (SFC) approach, described in Godley and Lavoie (2007). The book exemplifies the views of Minsky (1996: 77), according to whom one ought to look “at a capitalist economy as a set of interrelated balance sheets and income statements, recognizing that items in balance sheets set up cash flows through time”.
Marc Lavoie
See also:
Cambridge School of economics (II); Institutionalism (II); Richard Ferdinand Kahn (I); Nicholas Kaldor (I); Michal Kalecki (I); John Maynard Keynes (I); Keynesianism (II); Hyman Philip Minsky (I); Neo-Ricardian economics (II); Joan Violet Robinson (I); Piero Sraffa (I).