perspectives for post- keynesians and heterodox economists marc lavoie

Perspectives for Post-Keynesians and Heterodox

Economists

Marc Lavoie

Brazilian Keynesian Association, Porto Alegre, September 2009

PERSPECTIVES FOR POST-KEYNESIAN THEORY

• Prolegomena: – Defining heterodoxy, orthodoxy, dissenters

• The future of post-Keynesian economics– Negative advice by methodologists and others– Positive advice by others and myself


Initial distinctions: Orthodox vs Heterodox economics

• Let us use a distinction proposed by Backhouse (2004).

• Dissent is a rejection of the mainstream (the accepted textbook view).

• But dissenters may arise from within the orthodoxy: they are orthodox dissenters;

• Or dissenters may come from outside the orthodoxy: they are heterodox dissenters. They are heretics.

• Colander argues that the best orthodox authors are dissenters: they are part of ‘the cutting edge’.


Dissenters and “the edge”

Heterodoxy Orthodoxy

Dissenters MainstreamColander’s Edge


Examples of orthodox dissenters

• J.M. Keynes 1936 ?• Milton Friedman in the 1950s (became mainstream in the late

1960s)• The New Consensus view (has become mainstream in central

banks)• Bénassy/Malinvaud (disequilibrium Keynesianism) in the 1970s• D. Rodrik, Shiller, H.A. Simon, R. Coase, Leontief, Vickrey,

Akerlof, Stiglitz, Sen, Krugman (getting a Nobel Prize helps to be a dissenter that is heard; some became heterodox!)

• New Institutionalism• Post-Walrasian economics (à la Colander), complex or chaos

economics, multi-agent modeling (note however that the Economics section of the Santa Fe Institute has now been closed down).


Orthodox vs heterodox dissenters

• The financial crisis may give more room for orthodox dissenters in macroeconomics

• But it is unlikely to improve the fate of heterodox dissenters, including post-Keynesians, within departments of economics

• However the standing of heterodox dissenters may improve in departments other than economics (social sciences, public administration, etc.)


What is the future of post-Keynesian economics (or heterodox economics)?• Over the last few years, there has been a flurry of articles

claiming that neoclassical economics has changed, or discussing the future of post-Keynesian economics or of heterodox dissenters:

• Colander 2000 2003 2008, Colander + Holt + Rosser 2004 2007-8, Davis 2006 2008, Garrett 2006, Fontana + Gerrard 2006, Dequech 2007-8, Davidson 2005, with responses by Dutt 2003, King 2008, Stockhammer+Ramskogler 2008, Lee 2009, Vernengo 2009

• I found some of these papers irritating. On many occasions I felt I should also get into the conversation, but thought I might be losing my time: It is better to do things than to focus on what should be done!


(Negative) Advice being given to PK or heterodox economists

• Colander 2008, Colander et al. 2007-8– Worry less about methodology

• Garnett 2006– Abandon “oppositional anti-mainstream stances”

• Colander et al. 2007-8, Fontana and Gerrard 2006– Move away from criticizing the neoclassical

strawman found in textbooks• Rutherford 2000

– Stop defending the ‘true faith’ as found in the works of founders


(Positive) Advice being given to PK economists (in relation to the mainstream)• Colander 2008

– If you don’t master techniques, get into pedagogy or policy advice.

• Fontana 2005– Follow more closely the latest developments in mainstream

theory• Fontana and Gerrard 2006

– “Engage in a more constructive dialogue with mainstream economics with the objective of encompassing relevant neoclassical models within a more general framework that incorporates PK alternatives”.

• Colander Holt Rosser 2004, 2007-8, 2008– Engage with the elite and cutting-edge portions of neoclassical

theory, by providing papers with new ideas and an understanding of recent orthodox theory.


(Technical) Advice being given to PK economists (in relation to the mainstream)

• Fontana and Gerrard 2006– “Produce theoretical models that provide testable

hypotheses sustained by empirical evidence”.• Colander Holt Rosser 2008

– “To make the transfer from the heterodox incubator to the mainstream, the ideas must be developed in a formal model and buttressed by technical empirical work.... “ with a modeling methodology acceptable to the mainstream”

– Heterodox economists should do joint work with mathematicians and statisticians to be able to enter the debate with the mainstream.


Counter-advice !

• Lee 2009– Stop trying to reform mainstream economics– “Heterodox economics is not defined in oppositional terms or

as a dual to mainstream economics but as an alternative to it”– If neoclassical theory were to disappear, heterodox economics

would be unaffected

• Stockhammer Ramskogler 2008– Don’t try “to reformulate PK models such that they are easy to

understand for mainstream economists (if they care to listen)”– “The focus on the relation to mainstream economics is

misplaced…. The debate on how PKE relates to the mainstream is in fact, not an important issue for the future of PKE”.


It takes two to tango (King 2002)!

• Colander et al. would like PK economists to engage more with the mainstream.

• However, as pointed out by Vernengo (2009), “the acceptable critiques of orthodoxy must come from mainstream insiders”.

• A good example of this is the theory of endogenous money, endorsed by well-known post-Keynesian authors such as Kaldor since 1970. Despite this, PK authors are never mentioned in the New Consensus literature when it comes to acknowledge that the supply of money is demand-determined in their models.

• The same is likely to occur when Minskyan-like financial fragility will be embedded in neoclassical models of the future.


On pluralism

• Rutherford 2000– “Encourage diversity and pluralism”

• Lawson 2009 ROPE– “Draw on the best of heterodox traditions to try to develop

them”• Stockhammer Ramskogler 2008

– “Cooperate institutionally with other heterodox approaches and non-orthodox streams in the fight for a pluralistic economics”

– “There should be obvious potential gains from cooperation between PKs and other heterodox positions”.

• Lavoie 2005– “Encourage young researchers to be eclectic heterodox

authors”


Advice that I am in strong agreement with

• Stockhammer Ramskogler 2008– “Be politically relevant… Develop an analysis for new social

and economic problems… Be relevant in explaining real-world problems”

– Expand the research agenda of PKE, close crucial gaps in its analysis (environment, supply side, information and communication technology, delocalization, etc.)

• Vernengo 2009– Aim at “policy makers that are often more pragmatic and

clearly more relevant”– We must continue to pursue our own PK agenda

( trying to track the fads of the orthodox edge induces us to ignore relevant problems that may erupt in the future: unemployment, financial instability, etc.)


My own advice

• Stop wasting time on criticizing PK strawmen (e.g., forget about the horizontalists vs structuralists debate!)

• Study carefully the existing institutions, as they are likely to provide evidence that supports heterodox or PK theoretical positions (e.g., central bank and payment systems).

• Econometrics is a tool of the rhetoric of economics, and as such should be used by PKE, whatever their philosophical doubts about its validity.

• If you are interested in the SFC approach (with its budget constraints, sectoral accounting constraints and stock-flow constraints), there is a need to construct a relatively simple model, that could be used by central bankers or fiscal decision-makers, that would incorporate these constraints and the main real-financial interactions of PK theory.


What will be the final impact of the crisis on academia? Two possibilities

• Mainstream macroeconomics will become ever more entrenched in its models and assumptions : the New consensus model, which is a variant of the real business cycle model with some rigidities, will be slightly amended and all other approaches will still be dismissed.

• Or, but this is less likely, there will be more tolerance with respect to other theories, even if it does not incorporate the intertemporal utility maximizing representative agent with rational expectations, but only as long as the theories are formalized in some way.


What will be the impact of the financial crisis on economics at large?

• In the short-run, many more students should take economics, trying to understand what has happened.

• It is unlikely that economics students will be provided with any convincing answer. As a result, in the medium run, there should be even less students than before in (orthodox) economics department as students will be disillusioned.

• Government employers are themselves disillusioned with economics, as the financial crisis has demonstrated the futility of economic advice and theories.

• Economics departments may become like departments of philosophy, theology, or ancient greek.

• They might be supplanted by fields such as public policy, public affairs, international affairs, public administration, or others (C. Goodwin 2000).

perspectives for post- keynesians and heterodox economists marc lavoie

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