Post-Keynesianism versus Orthodox Economics

As pointed out in the introduction, it is not so easy to define post-Keynesian economics. Luigi Pasinetti (2007: 37, 200, 219) believes that this difficulty arose from the beginning, as the founding members of post-Keynesianism did not bother to discuss the fundamen­tals of the new paradigm.

Several authors have attempted to identify the key constructive characteristics of post-Keynesian economics, starting with Eichner and Kregel (1975). Although there is a substantial degree of overlap in the identified characteristics, about 15 different fea­tures could be listed (Lavoie 2014: 34). One problem arises from the fact that some lists contain methodological precepts while others entertain theoretical constructs and policy consequences. The problem is compounded by the fact that post-Keynesian economics is part of a larger group of heterodox schools of thought - dissidents who share common methodological principles that can be contrasted to those that are implicitly followed by neoclassical authors.

Some have argued that there are five key methodological beliefs, or presuppositions, which separate heterodox from orthodox economics. These presuppositions are very widely found in the writings of various well-known post-Keynesians who have attempted to define the field. For instance, one finds four of these five presuppositions in the list of Pasinetti (2007: 219-37). The heterodox presuppositions are realism, organicism, rea­sonable rationality, a concern with production and growth, and a belief in the need for tamed markets.

Tony Lawson (1994) has long been arguing that critical realism is the key meth­odological distinguishing feature, claiming that any other distinctive factor derives from taking a critical realist position. While others would tend to favour a more naive form of realism - empirical realism, as did Eichner and Kregel (1975) - there is an agreement that the analysis must start with first approximations of the real world, with Kaldor’s stylized facts or some empirical regularities, and not with a fictional abstraction that does not even attempt to represent reality. By contrast orthodox economists strive under instrumentalism, that is, the belief that an assumption need not be realistic provided it is conductive to predictions, preferably numerical ones, even if these predictions turn out to be mistaken and even misleading, as is the case with the measured elasticities of the aggregate neoclassical production function. Post-Keynesians prefer to develop accurate simplified versions of the real world instead of polished irrelevant models.

Perhaps related to realism is the kind of rationality which is assumed in our economic models. Following the rational expectations revolution, the only type of rationality admissible to mainstream economists is model-consistent hyper-rationality. Not only are economic agents assumed to know all contingencies, from now to infinity, they are assumed to know how the world operates.

The third presupposition of heterodox economics is organicism, by opposition to the orthodox use of methodological individualism, or holism versus atomicism. It is well known that heterodox schools of thought such as Marxism rely on class analysis, without starting from the optimizing individual. In post-Keynesian economics, this is often reflected by the concern for functional income distribution and the slogan that microeconomics needs macroeconomic foundations. What is really meant is that falla­cies of composition are ever present in economics, that the whole is more than the sum of its parts, and that attention must be paid to the possibility of macroeconomic para­doxes that contradict the pure aggregation of a representative agent. The most famous paradox is Keynes’s paradox of thrift, according to which higher saving rates lead to reduced output. However, there are many others, many of which were highly relevant during the subprime financial crisis. There is the paradox of public deficits, according to which higher government deficits raise private profits (Kalecki); the paradox of debt, where efforts to deleverage might lead to higher leverage ratios (Steindl); the paradox of liquidity, where new ways to create liquidity end up reducing it; or the paradox of risk, where the availability of individual risk cover leads to more risk overall.

About the fourth pair of presuppositions, it need only be pointed out that the most common definition of economics in orthodox textbooks is the study of the efficient allocation of scarce resources. Exchange of endowments and substitution effects here play a key role. By contrast, heterodox economists are mostly concerned with produc­tion, the (less than 100 per cent) degree of utilization of existing resources, the causes and the consequences of growth, and the ability of the economic system to create a surplus. They do not assume that resources are fully utilized and hence focus on income effects.

This leads us to the fifth and last of our key presuppositions, that of the role of markets relative to the role of the state. Mainstream economists exhibit great confi­dence in the ability of free markets to deliver stability and full employment. By contrast heterodox economists are very much distrustful of unfettered markets. They suspect their unfairness, their inability to self-regulate, their tendency for destabilizing paths, their squandering of resources. Post-Keynesians believe that markets must be tamed, as is especially obvious from Minsky’s financial fragility hypothesis, that is, the thesis that there are endogenous destabilizing forces at work. This fifth presupposition can be clearly brought back to Keynes, who argued that the main cleavage in economics was between those who believed in a self-adjusting system and those that did not.