A Post-Keynesian Model of the Palestinian Economy: The Economics of an Investment-Constrained Economy

The 60-year-old Israeli-Palestinian conflict has deeply influenced the evolution of the Palestinian economy. In the last two decades political instability and the Israeli closure policy have generated protracted economic stagnation and poor capital formation. The paper describes the consequences on the Palestinian economy of existing high transaction costs and market fragmentation. We propose a simple one-sector Post-Keynesian model that describes Palestine as a demand-driven economy. We show that high transaction costs and market fragmentation discourage investment by curtailing expected profitability, reducing the size of the market and depressing entrepreneurs' animal spirits. In the short run, these two factors induce low levels of capacity utilization and low rates of capital accumulation. The situation is even more worrying in the long run when entrepreneurs can revise their expectations. Depressed animal spirits and low levels of capacity use give rise to a low-growth trap from which Palestine can hardly escape. We also highlight the possible positive impact of the removal of high transaction costs and of market fragmentation, and the ensuing beneficial effects on the long-run equilibrium values of capital accumulation and capacity use. The conclusions place these analytical results into the historical situation of the Palestinian economy, and consider what is needed, politically and economically, in order to establish a sustained development process.

The division of labour is limited by the extent of the market. (Adam Smith, Wealth of Nations, Book I, chapter III)     

An index of macroeconomic performance

This article develops a composite index of macroeconomic performance (IMP) and uses this index to ask: did the macroeconomic performance of the US economy improve during the 1990s relative to its own past performance; and has US macroeconomic performance been superior to that of other advanced capitalist economies during the post‐war period as a whole? It is demonstrated that by studying the behaviour of an IMP, it is possible to draw conclusions about these comparative macroeconomic performance puzzles that are robust with respect to changes between multiple index weighting schemes.     

The phillips curve and US macroeconomic performance during the 1990s

This paper identifies two competing accounts of recent US macroeconomic performance, both of which are capable of explaining the concurrence of low unemployment and low inflation experienced by the US after 1995. Econometric evidence provides partial support for both views, establishing that while there has been no change in the position of the long run Phillips curve in the US during the 1990s, this long run Phillips curve is likely not vertical. These results suggest that recent US macroeconomic performance is not sustainable and that US policy makers ultimately face a choice between higher unemployment or higher inflation in the long run.     

Inequality,Debt Servicing and the Sustainability of Steady State Growth

We investigate the claim that the way in which debtor households service their debts matters for macroeconomic performance. A Kaleckian growth model is modified to incorporate working households who borrow to finance consumption that is determined, in part, by the desire to emulate the consumption patterns of more affluent households. The impact of this behavior on the sustainability of the growth process is then studied by means of a numerical analysis that captures various dimensions of income inequality. When compared with previous contributions to the literature, our results show that the way in which debtor households service their debt has both quantitative and qualitative effects on the economy's macrodynamics.     

Supply and Demand in the Theory of Long-run Growth: Introduction to a symposium on demand-led growth

Recent developments in growth theory have encouraged a revisionist interpretation of the field. According to this interpretation long-run growth should be, and always has been, interpreted as a supply-side process. The focus of this symposium is the macro-economics of demand-led growth. As a precursor to the contributions that follow, two central insights of demand-led growth theory are highlighted. First, chronic effective demand problems create a role for aggregate demand in determining the utilization rates of productive resources, even in the long run. Second, the demand-led actual rate of growth influences both the accumulation and productivity of factor inputs, and hence the economy's potential rate of growth.     

Notes and comments. Cumulative causation, interrelatedness and the theory of economic growth: a reply to Argyrous and Toner

In responding to the comments of George Argyrous and PhillipToner, this reply focuses on four areas of contention betweenmyself and my critics. First, it is suggested that my originalmodel places more weight on the growth-enhancing characteristicsof increasing specialisation in production than either Argyrousor Toner acknowledge. Secondly, it is demonstrated that both'formal' and 'verbal' models of cumulative growth typicallyplace unwarranted emphasis on the importance of initial conditions.Thirdly, the evolutionary properties of my original model aredefended against the claim that lock-in renders it mechanicaland deterministic. Finally, it is argued that mathematicallymodelling open but structured social processes (such as economicgrowth) should not be rejected as redundant in principle.     

Hysteresis in the normal rate of capacity utilization: A behavioral explanation

Kaleckians describe a normal rate of capacity utilization that is subject to hysteresis effects. This means that the normal rate varies directly with the actual rate of capacity utilization, ensuring that steady-state equilibrium conditions in the Kaleckian model are fully adjusted (the actual and normal rates of capacity utilization are equalized) but without this last condition implying that the rate of capacity utilization is constant in the long run. The relationship between distribution and growth unique to the Kaleckian model is, thus, preserved. The hysteresis mechanism has been criticized from various quarters, however, these criticisms focusing on its alleged lack of behavioral foundations. This paper shows that consistent with the stylized facts, variation in the normal rate of capacity utilization in response to variation in the actual capacity utilization rate can be derived from the links between both variables and the volatility of the macroeconomic environment—volatility, in the presence of fundamental uncertainty, being an important reason why firms deliberately under-utilize capacity (even in the long run) in the first place. The result is an empirically grounded behavioral foundation for hysteresis in the normal rate of capacity utilization.     

Why Economists should Choose their Inheritance: Physics and Path-independence in Economic Systems

Abstract

This paper considers the possibility of using fiscal rather than monetary policy as the instrument of stabilization policy in a new consensus framework. Describing the conduct of fiscal policy in terms of a ‘pseudo Taylor rule’, it is shown that fiscal policy is as, if not more, effective than monetary policy as a tool for macroeconomic stabilization. The conclusion reached is that the comparative neglect of fiscal policy as an instrument of stabilization policy in new consensus macroeconomics is unwarranted.     

A Guide for “JEE Content” Submissions

This is an update of a guide to the thinking of the editorial collective for the Content section of the Journal of Economic Education (JEE). The authors discuss the type of papers they are looking for, what in their view constitutes a good paper, and how their review process works. They specifically discuss their reviewing process, the content they are looking for, and their view of the structure of a good paper. Although they focus specifically on Content articles for the JEE, many of the general issues discussed may carry over to other sections of the JEE and to journals more generally.