Post-Keynesian Economics.

Post-Keynesian Economics: Buckle Up, It’s Gonna Be a Bumpy Ride! 🎢

(Disclaimer: This lecture assumes a basic understanding of introductory Keynesian economics. If you think "IS-LM" is a type of yogurt, you might want to brush up first! 📚)

Alright, class! Welcome to the fascinating, often frustrating, and perpetually misunderstood world of Post-Keynesian Economics! 🧠 Forget everything you thought you knew about rational actors and perfectly efficient markets. We’re throwing that stuff out the window! 💨

Today, we’re diving deep into a perspective that takes Keynes’s original insights and runs with them – not in a straight line, mind you, but more like a drunken squirrel trying to find its buried nuts. 🐿️

Why Post-Keynesian?

Think of Keynesian economics as the original Star Wars trilogy. It was groundbreaking, changed the game, and everybody loved it (well, almost). But then came the prequels and sequels… things got complicated. 💫

Mainstream (Neoclassical Synthesis) Keynesianism, which dominated after WWII, tried to shoehorn Keynes’ ideas into a framework of general equilibrium and rational expectations. Post-Keynesians, on the other hand, argued that this watered down the core message. They felt the "synthesized" version lost sight of:

• Fundamental Uncertainty: The future is unknowable, not just risky! We can’t assign probabilities to everything.
• The Importance of History (Path Dependency): Where you start matters! You can’t just erase the past and start with a clean slate.
• Power Dynamics: Labor unions, corporations, and government have real power and influence, which affects outcomes.
• Money Matters (Seriously!): Money is not just a veil over real economic activity. It plays a crucial role in investment decisions and economic fluctuations.
• Effective Demand is King (or Queen!): Demand drives the bus! Supply doesn’t automatically create its own demand (Say’s Law is a myth!).

Think of it this way: Mainstream Keynesianism is like a well-behaved golden retriever, while Post-Keynesianism is a rambunctious terrier digging up the garden. Both are dogs, but their personalities are vastly different. 🐶

I. The Core Principles: Ditching the Neoclassical Baggage 🧳

Let’s unpack some key tenets of Post-Keynesian thought. Prepare for some brain gymnastics! 💪

A. Fundamental Uncertainty and Animal Spirits:

• Forget perfectly rational actors! Humans are driven by "animal spirits" – instincts, emotions, and gut feelings. These "spirits" heavily influence investment decisions. 👻
• Key Concept: Radical Uncertainty. We can’t calculate the probabilities of future events. We simply don’t know what’s going to happen. This leads to volatile investment and boom-bust cycles.
• Example: Imagine trying to predict the next hot meme. You can analyze past trends, but ultimately, it’s a crapshoot! Economic forecasts are often just as unreliable. 🎲
• Contrast: Neoclassical economics assumes perfect information and rational expectations. Post-Keynesians laugh in the face of such assumptions. 😂

B. Effective Demand and the Principle of Cumulative Causation:

• Demand creates its own supply (more or less!). If people aren’t buying stuff, businesses won’t produce it. 🛒
• Multiplier Effect: Changes in investment or government spending have a multiplied impact on overall economic activity. 💸
• Key Concept: Cumulative Causation. Small initial changes can have large and lasting effects, creating virtuous or vicious cycles.
• Example: A small increase in government spending can lead to higher incomes, which lead to more spending, which leads to more production, and so on. This is the virtuous cycle. Conversely, a small drop in investment can trigger a recession. 📉
• Contrast: Neoclassical economics emphasizes supply-side factors. Post-Keynesians put demand firmly in the driver’s seat. 🚗

C. Endogenous Money and Credit:

• Banks create money! They don’t just lend out existing deposits. When a bank makes a loan, it creates a new deposit. 🏦
• Money Supply is Endogenous: The money supply is determined by the demand for credit, not by some exogenous force controlled by the central bank (although the central bank does play a role in setting interest rates). 💸
• Key Concept: Financial Instability Hypothesis (Hyman Minsky). Periods of stability lead to excessive risk-taking and eventually to financial crises. Stability breeds instability! 💥
• Example: During the housing boom, banks were eager to lend, and people were eager to borrow. This created a bubble that eventually burst, leading to the 2008 financial crisis. 🏠➡️💥
• Contrast: Traditional monetarism assumes the money supply is exogenously controlled by the central bank. Post-Keynesians argue that the central bank can influence the price of money (interest rates) but not the quantity of money directly.

D. Income Distribution and Class Conflict:

• Income is not determined by marginal productivity! Factors like bargaining power, social norms, and institutions play a significant role. ✊
• Class Conflict: There is an inherent conflict between workers and capitalists over the distribution of income. ⚔️
• Key Concept: Profit-Led vs. Wage-Led Demand. In a profit-led economy, higher profits lead to higher investment and economic growth. In a wage-led economy, higher wages lead to higher consumption and economic growth.
• Example: If wages are suppressed, workers may not have enough money to buy the goods and services that businesses produce, leading to a slowdown in economic growth. 📉
• Contrast: Neoclassical economics assumes that income is distributed according to marginal productivity. Post-Keynesians see this as a convenient fiction. 🎭

E. The Importance of Institutions and History:

• Institutions matter! Laws, regulations, social norms, and power structures shape economic outcomes. 🏛️
• Path Dependency: The past influences the present and the future. You can’t just erase history and start over. 📜
• Key Concept: Social Structure of Accumulation. The institutional and political environment that supports capital accumulation.
• Example: The decline of labor unions has contributed to the rise in income inequality. 📉
• Contrast: Neoclassical economics often ignores the role of institutions and history, focusing on universal principles and abstract models. 🤖

II. Post-Keynesian Models: A Toolbox for Understanding the Real World 🛠️

Post-Keynesians don’t shy away from models, but their models tend to be more realistic and less reliant on unrealistic assumptions. Here are some key examples:

Model/Concept	Description	Key Assumptions	Focus
Kaleckian Growth Models	Focus on the role of effective demand, income distribution, and investment in determining long-run growth.	Mark-up pricing, excess capacity, investment depends on profitability and capacity utilization.	Understanding the determinants of long-run growth and the impact of income distribution on aggregate demand.
Goodwin Model	A cyclical model that shows the interaction between wages, employment, and the profit share.	Workers bargain for higher wages when employment is high, leading to lower profits and eventually to a slowdown in economic growth.	Explaining cyclical fluctuations in economic activity and the role of income distribution in driving these fluctuations.
Minsky Model	Focuses on the role of financial instability in generating boom-bust cycles.	Periods of stability lead to excessive risk-taking and eventually to financial crises.	Understanding the causes of financial crises and the role of government in preventing them.
Sraffian Economics	A critique of neoclassical price theory based on the work of Piero Sraffa.	Rejects the notion that prices are determined by supply and demand in a competitive market.	Understanding the role of power and institutions in shaping prices and the distribution of income.

III. Policy Implications: A Radical Agenda? 🤔

Post-Keynesian economics has profound implications for economic policy. Forget trickle-down economics and supply-side voodoo! Here are some key policy recommendations:

• Active Fiscal Policy: Governments should use spending and taxation to stabilize the economy and promote full employment. 💰
• Progressive Taxation: Tax the rich to fund public services and reduce income inequality. 💸
• Strong Labor Unions: Empower workers to bargain for higher wages and better working conditions. ✊
• Financial Regulation: Regulate the financial sector to prevent excessive risk-taking and financial crises. 🏦
• Capital Controls: Restrict the flow of capital across borders to prevent currency crises and maintain economic stability. 🛑
• Targeted Investment: Direct investment towards strategic sectors like green energy and infrastructure. 🌱
• Job Guarantee: Offer a public employment option to ensure full employment and provide a safety net for the unemployed. 👷‍♀️

In other words, Post-Keynesians advocate for a more activist role for government in managing the economy and promoting social justice. This often puts them at odds with mainstream economists who favor laissez-faire policies.

IV. Criticisms and Challenges: It’s Not All Sunshine and Rainbows 🌈

Post-Keynesian economics is not without its critics. Here are some common criticisms:

• Lack of Microfoundations: Some critics argue that Post-Keynesian models lack rigorous microfoundations (i.e., they don’t adequately explain how individual behavior leads to aggregate outcomes).
• Difficulty in Empirical Testing: Post-Keynesian theories can be difficult to test empirically due to the complexity of the real world and the limitations of data.
• Political Challenges: Implementing Post-Keynesian policies can be politically challenging, as they often require challenging powerful vested interests.
• Heterogeneity within the School: Post-Keynesian economics is not a monolithic school of thought. There is considerable disagreement among Post-Keynesians on various issues.

However, Post-Keynesians argue that these criticisms are often based on a misunderstanding of their approach. They emphasize that their models are intended to be stylized representations of the real world, not perfectly accurate depictions of individual behavior. They also argue that their theories are supported by a wealth of empirical evidence, albeit evidence that is often ignored by mainstream economists.

V. Why Post-Keynesianism Matters: A Wake-Up Call for Economists ⏰

Despite the criticisms, Post-Keynesian economics offers a valuable alternative to mainstream economic thinking. It provides a more realistic and nuanced understanding of how the economy works and offers a more effective set of policy tools for addressing pressing economic challenges.

Here’s why it matters:

• It challenges the dominant neoclassical paradigm: Post-Keynesianism offers a fundamental critique of the assumptions and methods of mainstream economics.
• It provides a more realistic understanding of financial markets: Post-Keynesian models of financial instability are more accurate than traditional models that assume efficient markets and rational expectations.
• It offers a more effective set of policy tools for addressing economic challenges: Post-Keynesian policies are more likely to promote full employment, reduce income inequality, and prevent financial crises.
• It provides a framework for understanding the role of power and institutions in shaping economic outcomes: Post-Keynesian economics recognizes that economic outcomes are not simply the result of individual choices in a free market. They are also shaped by power relations, social norms, and institutions.

In conclusion, Post-Keynesian economics is not just a quirky alternative to mainstream economics. It is a vital intellectual resource for understanding the complexities of the modern economy and for developing policies that promote economic justice and sustainability.

Final Thoughts:

Post-Keynesian economics can be a bit like trying to herd cats 🐱‍👤. It’s messy, it’s challenging, and it often seems to defy logic. But it’s also incredibly rewarding. It offers a powerful lens for understanding the real world and for developing policies that can make a real difference in people’s lives.

So, go forth and explore the fascinating world of Post-Keynesian economics! Just remember to bring your thinking cap and your sense of humor. You’ll need both! 😉

Further Reading:

• "General Theory of Employment, Interest and Money" by John Maynard Keynes: The OG.
• "Money and Credit in a Marxian Framework" by Suzanne de Brunhoff: A deep dive into the monetary circuit.
• "Stabilizing an Unstable Economy" by Hyman Minsky: The bible on financial instability.
• "Growth and Distribution" by Thomas Palley: A modern Post-Keynesian perspective.

(End of Lecture. Class Dismissed! Don’t forget your homework: Read chapter 1… just kidding! Go enjoy the sunshine… if the economy allows it!☀️)