Keynes’s view of deficits and functional finance: a Modern Monetary Theory perspective

Abstract

The immediate aftermath of the global financial crisis (GFC) was characterised by a resurgence of interest in the work of Keynes. Fiscal policy became at least temporarily acceptable again, in turn leading to government deficits and debt, as a proportion of GDP, reaching levels not seen since before the onset of the neoliberal period. Keynes’s own pronouncements on deficit financing generated renewed interest. Despite the strength of the neoclassical counterattack – which has been relatively successful in reassessing the crisis as a government failure – confidence in orthodox economics has not been fully restored, at least outside the confines of academia. Although the hopes of heterodox economists – that the GFC might mark the beginning of the end of the neoclassical hegemony – have not been realised, the upswing in interest in Keynes’s views has not entirely died away. This paper considers Keynes’s views of deficits and debt and then looks at the controversial area of Keynes’s position vis-à-vis functional finance. The paper concludes by considering how Modern Monetary Theory might increase our understanding of the nature of deficits and debt and thus provide valuable insights which might underpin the use of fiscal policy to pursue public purpose.     

Was Keynes a Realist?

Lawson (1989a) has interpreted Keynes as a philosophical realist, adhering to the view that the economy has a constant inner structure. Against this it is claimed below that, although Keynes speaks about realism, it is not in this sense, but in the common sense way of referring to actually observable entities of an economic model. In addition, it can be shown that Keynes's views can be interpreted as instrumentalist—he emphasises characteristics such as usefulness and convenience, besides and instead of truth. Thus, truth and truthlike concepts do not, in Keynes's thinking, have the paramount position that they have in realist philosophy.     

Eriksson on Critical Realism: a rejoinder

Abstract

In this response to Andrew Mearman I argue that his critique suffers from a series of misrepresentations of my paper. For example, Mearman generalizes my arguments about Keynes to be about Critical Realism (CR), and he challenges my criticism of Tony Lawson's arguments by claiming that I have misrepresented CR. In fact the text of my 1998 paper does not support Mearman's claims. Furthermore, since (i) the principal aim of my paper was to question the interpretation of Keynes as a realist, and (ii) Mearman does not present any arguments suggesting how CR in its current form would refute my conclusions, his criticism must be judged doubly misdirected.     

Keynes against Kalecki on economic method

In the past twenty years, there has been considerable debate on the “coherence” of post Keynesian economics, in view of post Keynesian economists’ ambitions to develop a paradigmatic alternative to neoclassical economics. Given the growing importance of methodological aspects in this discussion, this article addresses the differences of approach to economic theory between the fathers of the two most important strands in post Keynesian economics. We thus focus on Keynes’s criticism of Kalecki’s theory of the business cycle and the tensions between Keynes’s logical approach and Kaleki’s formal modeling. We show that in criticizing Kalecki’s theory, Keynes made use of the same methodological criticism (based on detecting logical fallacies in reasoning) he had employed to attack both the classical theory and contemporary “pseudo-mathematical” models. After illustrating these fundamental differences between Keynes and Kalecki about the proper way of doing economics, we draw some conclusions on the possible future evolution of post Keynesian economics.     

Current global imbalances and the Keynes Plan: A Keynesian approach for reforming the international monetary system

This paper proposes a “logical experiment”, illustrating how alternative international monetary systems may produce opposite results in the global economy. In the current organisation, “key currencies” work as international money. Keynes, by contrast, proposed that this role should be assigned to a supranational, “credit” money. While the world currently lives in an asymmetric regime, which lead to what has been defined as a “balance of financial terror”, Keynes tried to achieve a more peaceful type of “international balance”. I argue that the structural reform and the technical provisions proposed by the “Keynes Plan” may still – at least in principle – provide useful remedies for international disequilibria, by remedying the asymmetries of the current international payments architecture and helping to curb both inflationary and deflationary pressures on the world economy.     

The logic of Keynes' criticism of the Classical model

The Classics' remedy for unemployment was to lower money wages. Keynes opposes this remedy. Therefore, in The General Theory, he aims at building a model in which a fall in money wages may not cause an increase in employment. Most of the interpretations of Keynes identified this aim, but did not attach enough importance to it. Reading The General Theory in the light of this aim, we discover what Keynes' logic of elaboration is, then what Keynes' ideas about voluntary or involuntary unemployment are.     

Global capital markets,direct taxation and the redistribution of income

Standard fiscal theory suggests that taxation should be heaviest on the least mobile factors of production – for both efficiency and revenue reasons. A shift in tax burdens from capital to labour as economies become globally integrated is thus justified. This theoretical tradition (founded by Ramsay and continued by Mirrlees and Lucas) assumes by construction that profit taxes reduce investment and growth; and while sensitive to inter-generational equity, sidesteps the issue of income distribution within generations. In contrast, starting from Keynes’ critique of these assumptions and building on modern endogenous growth models, it can be shown that profit taxation is not necessarily injurious to productive investment. In practice, moreover, the effect of globalisation has not been to reduce tax rates on capital, but rather to erode the tax base itself (i.e. ‘tax evasion’). Improved information exchange between tax authorities, which is now being driven by fiscal insolvency in developed countries, would allow tax incidence to be shifted so as to improve income distribution within OECD countries. Such cooperation could also permit the replacement of the current discretionary system of fiscal transfers from rich to poor countries (‘development aid’) by equitable sharing of global capital tax revenue.     

Is ex‐ante ex‐post analysis irrelevant to Keynes's theory of employment?

Ex‐ante ex‐post analysis has become a standard tool in macroeconomics. Yet Keynes dismissed it. We argue that Keynes's dismissal of ex‐ante ex‐post analysis is not an oddity but an indication of the originality of his theory of employment compared to standard macroeconomics. First, the principle of effective demand does not amount to a process that determines employment and income at the point of intersection of the traditionally defined ex ante supply and demand functions. Second, the finance motive allowed Keynes to confirm the identity of aggregate supply and demand already asserted in The General Theory. This latter conclusion is puzzling, however, since the principle of effective demand presupposes the possibility of a discrepancy between supply and demand. We suggest that Keynes's theory of employment is linked to a theory of income distribution whereby profits are a redistributed share of factor income which is transferred to firms when prices exceed factor costs. The identity and the equilibrium condition then relate to separate measurements of income and output, factor cost and prices.     

The dependence structure of income distribution

This article investigates the dependence structure of income distribution in the US by providing two approaches – one regression-based and the other copula-based – to reveal new information about income dependence. The system of Seemingly Unrelated Regressions (SUR) is estimated for both quintile income shares and mean income growth by controlling for macroeconomic variables, and Kendall's tau statistics are derived for income dependence. Results from less restrictive copula models corroborate the regression-based results. However, income growth models do not support the common claim that the rich are getting richer while the poor are getting poorer. Income dependence patterns do not appear to be affected by business cycles, but Democratic and Republican presidential administrations have drastically different income dependence results.     

An account of the Washington Lend Lease negotiations 1944 by E. A. G. Robinson

In September 1944, John Maynard Keynes set sail for Washingtonwhere Keynes was to be a key negotiator in the talks leadingup to Stage II of Lend Lease. Accompanying him and his wifewas Keynes's colleague and friend, E. A. G. (Austin) Robinson.Robinson's role was to be Head of Programmes Division for theMinistry of Production. While Keynes would deal with Harry Whiteand Henry Morgenthau, Robinson was involved with the underlyingproduction of a case for the urgent financial needs of war-timeBritain. Robinson saw the tensions at all levels of daily lifeand he recorded his demanding times in a series of letters hometo his wife, Joan Robinson. These letters are published herefor the first time.     

Keynes,the socialisation of trade,and international monetary institutions

While Keynes began formulating his ideas concerning the post-WWII international financial system in the early 1940s, the genesis of these ideas can be traced to his earlier work. The Keynes Plan represents the culmination of his search for adequate institutions that guide economic activity for the public good. The reasons given by Keynes for the establishment of an International Clearing Bank are relevant in the modern international economy, given the current imbalances in international trade. As Keynes argued for the socialisation of investment as a method to achieve full-employment in the domestic economy, he argued for the “socialisation of trade” as a method to achieve international economic balance among nations.     

Institutions hold consumption on a leash: an evolutionary economic approach to the future of consumption

As first suggested by Keynes (1930), much thinking about the future of consumption starts with claims about future income, technology or demographics, perhaps concocted in a growth model, and then considers what consumption will look like, as a separate question, given those priors. A different approach starts one step further back with inquiry into the type of institutions that would produce such evolutionary growth. You then ask how those same institutions would shape consumption. I argue that the future of consumption depends on income and innovation, which themselves depend on the evolution of institutions. I suggest that this is an evolutionary economic approach to the future of consumption.     

NEW ESTIMATES OF HOURS OF WORK AND REAL INCOME IN CANADA FROM THE 1880s TO 1930: LONG-RUN TRENDS AND WORKERS' PREFERENCES

The first set of hours of work estimates constructed for Canada and its regions for the 1880–1930 period is presented in this article. These estimates suggest a trend decline in hours of work, especially following First World War. In addition, these estimates suggest that the decline in hours of work came at no or little cost in terms of real weekly income. The trends uncovered for Canada are found to be similar to those revealed for the U.S. In effect, by the early twentieth century workers were realizing their long expressed preferences for a shorter workweek at no loss in real income.     

International Trade Union Organizations

An attempt is made in this article to demonstrate that Alfred Marshall and John Maynard Keynes erected a number of signposts that point in the direction of a normative, institutional and policy-oriented social economics of labor. They opined that dysfunctioning institutions had thrown most members of the working class into an abyss of poverty. According to Marshall, poverty was caused by institutional neglect of education for the masses. Hence he recommended a drastic overhaul of those institutions that impinged on education. Keynes argued that the rentiers were the villains because they had intentionally reduced their funding of entrepreneurial investments. Consequently, investments dwindled and unemployment caused working-class poverty to rise above its customary levels. Keynes's solution was public investment in private enterprises, which he called socialization of investment. This would cause euthanasia of the anti-social rentiers. Because of their recommendations, Marshall and Keynes called themselves socialists.     

George Shackle and uncertainty: a revolution still awaited

It is argued that Keynes consciously sought incomes policy, first, in 1925, and, secondly, during the second world war. The first occasion concerned the need to keep costs down in the wake of the revaluation of sterling. The second instance concerned the difficulties of financing the war effort that would arise from a chronic excess demand for labour leading to greatly increased wages. Keynes came to recognize that cost push wage inflation was a serious potential threat to the maintenance of full employment. However despite his specific proposals then it is uncertain what he would have advocated for contemporary circumstances, as he increasingly came to view this as a ‘political’ rather than an ‘economic’ problem.     

Vicarelli’s Keynes (and today’s international disorder)

The article speculates about the legacy of Fausto Vicarelli’s interpretation of John Maynard Keynes’s work in the times of a major global crisis. In particular, it puts an emphasis on those aspects of Keynes’s “method” that Vicarelli rightly considered as revolutionary in his Keynes, of 1977, as well as in other writings. The article then turns to Vicarelli’s reconstruction of Keynes’s early work in international economics (Indian Currency and Finance, Economic Consequences of the Peace) and reflects upon the continuing relevance of the philosophy inspiring Keynes’s plans of global reform in the Forties, also in the light of Vicarelli’s (Keynes-inspired) vision of the problem of policy space at the international level.     

Keynes versus Wagner: public expenditure and national income for three African countries

The public expenditure/income hypothesis has long been debated in economics. Following Keynes, public expenditure is seen as an exogenous factor to be used as a policy instrument to influence growth. On the other hand, Wagner argues that expenditure is an endogenous factor or an outcome, not a cause, of growth in national income. The purpose of this paper is to apply both the Granger and Holmes-Hutton statistical procedures to test the income-expenditure hypothesis for three African countries-Ghana, Kenya and South Africa. We find that the hypothesis of public expenditure causing national income is not supported by the data for these African countries.     

Changes in the Income Distribution of the Dutch Elderly between 1989 and 2020: a Dynamic Microsimulation

This paper analyzes the income distribution of the Dutch elderly using a microsimulation model. Microsimulation models allow for detailed estimates of the income distribution. Our model deviates from traditional models by explicitly considering the persistency and heteroskedasticity of real income shocks. In this way, modeling all underlying processes influencing household income becomes less necessary, which can improve the trade‐off between refinement and tractability of microsimulation models. We show the results of three model specifications with different levels of refinement. The results are in line and indicate that between 2008 and 2020, the highest predicted annual growth among the elderly is for median‐income households (about 1.2 percent). High‐income households have a somewhat lower predicted growth (about 1.0 percent) and low‐income households only have a predicted annual growth of 0.5 percent. Inequality therefore seems to increase in the lower part of the distribution, while it will probably decline in the upper part of the distribution.     

Permanent On-The-Spot Job Creation—The Missing Keynes Plan for Full Employment and Economic Transformation

The paper rejects the conventional view that Keynes had an aggregate demand approach to full employment. Instead, it proposes that he advocated a very specific labor demand targeting approach that would be implemented both in recessions and expansions. Modern policies, which aim to “close the demand gap” between current and potential output are inconsistent with Keynes's work on theoretical and methodological grounds. There is considerable evidence to suggest that a permanent program for direct or (in his words) “on-the-spot” job creation is the missing Keynes Plan for full employment and economic transformation. The current crisis presents the social economist with a unique opportunity to set fiscal policy straight along the original Keynesian lines. The paper suggests what specific form such a policy might take.