1
Introduction
The Post Keynesian system dwells in historical time; it is designed to analyze the consequences that may be expected to follow a change taking place at a particular date in particular circumstances.
Joan Robinson (1977, p. 1327)
For many Post Keynesianism represents a loose association of ignorant and incoherent idiot savants who know what they are against but do not know what they are for. Unable to do the sophisticated maths and formalism employed by the mainstream Post Keynesians carp from the sidelines, engaging in ritualistic debunking, without seeking to make any positive contribution to the economic theory or the study of economic phenomena. The heart of the problem is that many Post Keynesian economists are the slaves of a cadre of defunct economists. And while earlier generations of Post Keynesian economists posed interesting questions, the interesting features of their work have now been internalised and superseded by recent advances in formal theory, reducing contemporary Post Keynesianism to the status of a degenerating research programme (cf. King, 2002).
The degeneracy of Post Keynesianism is exemplified, its critics argue, by its lack of coherence. What exactly is Post Keynesian economics? And does it have any discernable foundations? Does it have a consistent approach or a coherent contribution to make? Such questions pervade this book, which seeks to examine the foundational nexus between Post Keynesian economics and its conceptualisation of uncertainty. The purpose is to identify a coherent foundational core that can characterise a confident Post Keynesian economics. This should further contribute to the coherent evolution of the Post Keynesian research programme that overcomes recent criticism.
But before we proceed with the principal argument of this book â that Post Keynesiansim should be characterised through its approach to uncertainty and the principle of effective demand â we must introduce the reader to Post Keynesian economics and the debates that surround its claim to represent a distinctive school of thought. We begin by considering the genesis of Post Keynesianism, proceeding later in this book to examine in more detail its characteristics and methodological foundations. In doing so we introduce the reader to the three strands that Post Keynesianism has historically been associated with: the Keynesian, Kaleckian and Sraffian approaches.1
THE GENESIS OF POST KEYNESIANISM
John King (2002) has recently dated the origins of Post Keynesian economics with the publication of The General Theory of Employment, Interest and Money (Keynes, 1936). Nevertheless the term Post Keynesianism is a relatively new one that emerged in the early 1970s (Lee, 2000a,b). It has generally been viewed as synonymous with the vision and ideas of the heterodox Cambridge economists such as, among others, Kaldor and Robinson who formed the vanguard of the Keynesian revolution. These non-orthodox economists, while making several positive contributions in the development of alternative theories, were generally associated with a critique of orthodox economic theorising, with the unintended consequence that the sole unifying characteristic of Post Keynesianism was originally seen by the economics establishment as negative, i.e. in terms of its unified opposition to neoclassical economics (Hahn, 1982, 1989; Solow in Klamer, 1984; Dow, 1990a). However, since its inception Post Keynesian economics has always been conceived, by its practitioners at least, as a positive programme with the aim of developing theoretical structures that incorporate categories which reflect such generalised features of capitalist experience as money, effective demand, cost-plus pricing, stagnation and unemployment (see Lee, 2000a,b). Indeed, Eichner and Kregel (1975, p. 1294, italics added) by the mid-1970s felt confident enough to claim that a diverse set of ideas, broadly subsumed under the label Post Keynesianism, contained the âpotential for becoming a comprehensive, positive alternative to the prevailing neoclassical paradigmâ.
Since this modest start Post Keynesian economists have made far-reaching contributions to economic theory, the history of economic thought and the methodology of economics.2 A number of review articles and volumes have been published on the subject of Post Keynesian economics (see for example Hamouda and Harcourt, 1988; Chick, 1995; Arestis, 1990, 1996a) and the Journal of Post Keynesian Economics has been established and continues to thrive (see Davidson and Weintraub, 1978; Galbraith, 1978; Davidson, 1998a). Recently, Post Keynesians have felt confident to proclaim that it represents a distinctive approach whose positive contribution has an impressive heritage reaching back to the classical economists (Arestis, 1990, 1996a; Chick, 1995; Arestis et al., 1999a; see also Holt and Pressman, 2001). A history of Post Keynesian economics has now been written and a handbook compiled (see King, 2002, 2003).
However confusion in the mainstream over what constitutes a Post Keynesian approach to economics still persists (see for example the puzzlement expressed by neoclassical proponents such as Hahn, 1982, 1984, 1989; Solow in Klamer, 1984; Backhouse, 1988).3 Even a leading Post Keynesian such as Dow (1990a, p. 346) acknowledged that there âis a sense of confusion, even among post-Keynesians, as to what post-Keynesianism isâ. What exactly is Post Keynesianism?
THE BROAD CHURCH
The reason for this confusion stems from the stormy marriage and fusion of three approaches that are viewed by many as competing for the attention of self-styled Post Keynesians. The first strand of Post Keynesianism concerns the economics of John Maynard Keynes. This strand attempts to build on Keynesâ revolutionary insight that the operation of a monetary economy existing in historical time is radically different to an exchange economy (Davidson, 1972; Minsky, 1975; Chick, 1983; Moore, 1988; Henry and Wray, 1998). As the future is unknowable in advance of its creation, the future expectations and actions of economic agents will substantially affect the future path of any (monetary) economy (Davidson, 1981, 1993a). In this perspective it is money, and money-denominated contracts, that are pivotal institutions which allow the effects of an uncertain future to be mitigated (Davidson, 1972, 1994).
The second strand of Post Keynesianism is essentially Kaleckian. Drawing on a Marxist heritage, Kalecki (1954, 1968, 1971) and his followers (Sawyer, 1985b, 2000; Sardoni, 1987; Kriesler, 1987; Reynolds, 1987; Arestis, 1990; Lavoie, 1992; cf. Trigg, 1994) present a macroeconomic analysis of aggregate demand (and its composition) in terms of social classes and oligopolistic competition. As with Keynes (see Sawyer, 1982, 1985b for a comparison), investment demand is viewed as driving the level of economic activity (of which the endogeneity of money is a central tenet).
The third strand historically identified with Post Keynesianism is that of Sraffa and his followers (Hamouda and Harcourt, 1988; Arestis, 1990). The Sraffian (or neo-Ricardian) school is the most contentious approach to be incorporated under the Post Keynesian umbrella.4 The Sraffian approach reasserts the classical emphasis on the production and use of surplus in the reproduction of the economic system. The salience of the Sraffian inputâoutput framework is that it emphasises the production and distribution of a surplus in the context of interdependency. Moreover, it provides an important internal critique of neo-classical economics and of itself provides the opportunity to create a viable coherent alternative to neo-classical economics based on closed-system reasoning (we shall elaborate upon this in more detail below). This project has chosen as its focus the long-run analysis of income and employment aiming to link âKeynesâ theory of effective demand, set in the short run and in a monetary economy, to that of the classical authors, who were concerned with income distribution and accumulation in the long periodâ (Lavoie, 1992, p. 2; see also Garegnani, 1978, 1979). The Sraffian school has generally been linked to the other Post Keynesian strands by its aim to place Keynesâ principle of effective demand in a long run setting (Kregel, 1973).5
A SHARED POINT OF DEPARTURE
There is an agreed research agenda that is shared by both the Keynesian and Kaleckian strands that reflects Davidsonâs (1982, pp. 9â18) characterisation of the Post Keynesian approach as underpinned by six key propositions:
1 The economy is a historical process.
2 In a world where uncertainty is undeniable, expectations have an unavoidable and significant effect on economic outcomes.
3 Economic and political institutions play a significant role in shaping economic events.
4 The distribution of income and power is relevant to the study of economic processes.
5 Real capital is non-malleable and embodies historical decisions and is conceptually distinct from financial capital.
6 Income effects are more dominant than substitution effects in creating and resolving economic problems.
This represents a unifying agenda which is acknowledged by those aligned with the Kaleckian wing (Reynolds, 1987; Sawyer, 1988a, 1989, 1991, 1995; Arestis, 1992, 1996a; Arestis and Sawyer, 1993; Downward, 1999, 2000). Moreover, the acceptance of this set of propositions also explains, to a degree, the different policy positions and analytical conclusions sometimes expressed by Post Keynesians. A focus on history, uncertainty and the socio-political and institutional context is likely to give rise to a diverse set of policy prescriptions, legal and socio-political arrangements, systems of industrial relations, fiscal systems, cultures, labour market institutions and so on across different countries over different epochs in time. Such an approach informs the discussion of the different, traditionally viewed as competing, Post Keynesian approaches to the pricing process discussed in chapter nine. An approach that deals with historical processes that are constantly in flux is unlikely to propose consistent and uniform policy prescriptions and/or reach similar theoretical conclusions. The heterogeneity and pluralism of Post Keynesian analysis is consistent with its commitment to realism and history (Dow, 1996a).
SRAFFIANS: THE UNCERTAIN ALLIANCE
Nevertheless, although there are common elements and characteristics across the Keynesian and Kaleckian strands it is their distinct differences that continue to fuel accusations of incoherence. Indeed the incoherence of Post Keynesian economics is one of the main criticisms levelled against it. This assertion is rejected throughout this book. A central proposition, maintained throughout, is that a coherent methodological vision that characterises Post Keynesianism can be discerned and can be expressed as a commitment to open systems theorising, i.e. taking historical processes and uncertainty seriously, which underpins the principle of effective demand, the Post Keynesiansâ recognition of the salience of a monetary economy and their analysis of the evolving industrial structure. It is this historical and evolutionary approach that provides for the uniting of Post Keynesians around a shared agenda.
Consistent with the shared vision noted in the previous section, all Post Keynesians concern themselves with the specific historical institutions, such as money, money-denominated contracts, national systems accounting, the institutions of the financial and labour markets, that inhabit historical transmutable economies.6 The position adopted and developed here more explicitly is that history and uncertainty should be viewed as being at the heart of Post Keynesianism â which spells the ejection of the Sraffian order from the Post Keynesian church. The argument sustained here is that if, in delineating the Post Keynesian programme, some reference needs to be made to the Sraffians âthen the project seeking coherence may have to be abandonedâ (Pratten, 1996a, p. 35). Rather than abandon this project, the argument here is that the programme should be further sustained and that Sraffians should no longer be automatically viewed as part of the core of the Post Keynesian programme.7 Accordingly any attempt to extend the comprehensiveness of Post Keynesianism into previously neglected domains must be consistent with this methodological framework.
It is the desire to align their approach within pre-Keynes economics that is a principal reason why the Sraffian approach, as conventionally expressed, is incompatible with a Post Keynesian approach. Keynes drew a sharp distinction between classical economics, which was defined to include Ricardo, James Mill, Marx and J.S. Mill, and, confusingly for many, neo-classical economists such as Marshall, Edgeworth and Pigou. This distinction is based primarily on the rejection of an approach, which Keynes labelled classical economics, which eschewed a concern for uncertainty, or more specifically, as we shall argue, nonergodic open processes (cf. the opening Shackle quote in the preface). Keynesâ system contained a revolutionary new analytical vision of the nature of capitalist economies (Shackle, 1972).8 However, this did not mean that classical theory had the wrong focus, rather that the diagnosis of the maladies of capitalism would be fundamentally different. This is why Keynes called his theory General and emphasised the importance of money and its link to the principle of effective demand (cf. Hodgson, 2001a).
AN OUTLINE OF THE ARGUMENT
The objective of this book is to explore the potential contribution that Post Keynesian economics can make to the study of economic processes. In doing so we reaffirm Eichner and Kregelâs (1975) proposition that Post Keynesian economics contains the potential to be a positive, coherent and comprehensive approach to the study of economic phenomena. The argument developed is that while Post Keynesianism, incorporating both the Keynesian and Kaleckian wings, can be considered coherent, it is still far from comprehensive and much foundational work is still to be done. In what follows we begin by making a positive contribution to the development of Post Keynesian economics by refuting allegations of incoherence and detailing some of the implications of this ontological vision more broadly.
The book is aimed at elaborating more fully the âuncertain foundationsâ of Post Keynesian economics. In doing so we argue that the Post Keynesian distinctive view of time, understood as a non-deterministic, nonergodic, open systems process, is a core and defining characteristic which is indissolubly linked to its theoretical discussion of the principle of effective demand and recognition of the salience of the institution of money. What is more, we arg...
