The ‘Keynesian Moment’ in Policymaking, the Perils Ahead, and a Flow-of-Funds Interpretation of Fiscal Policy

With the global crisis, the policy stance around the world has been shaken by massive government and central bank efforts to prevent the meltdown of markets, banks, and the economy. Fiscal packages, in varied sizes, have been adopted throughout the world after years of proclaimed fiscal containment. This change in policy regime, though dubbed the 'Keynesian moment,' is a 'short-run fix' that reflects temporary acceptance of fiscal deficits at a time of political emergency, and contrasts with John Maynard Keynes's long-run policy propositions. More important, it is doomed to be ineffective if the degree of tolerance of fiscal deficits is too low for full employment. Keynes's view that outside the gold standard fiscal policies face real, not financial, constraints is illustrated by means of a simple flow-of-funds model. This shows that government deficits do not take financial resources from the private sector, and that demand for net financial savings by the private sector can be met by a rising trade surplus at the cost of reduced consumption, or by a rising government deficit financed by the monopoly supply of central bank credit. Fiscal deficits can thus be considered functional to the objective of supplying the private sector with a provision of financial wealth sufficient to restore demand. By contrast, tax hikes and/or spending cuts aimed at reducing the public deficit lower the available savings of the private sector, and, if adopted too soon, will force the adjustment by way of a reduction of demand and standard of living. This notion, however, is not applicable to the euro area, where constraints have been deliberately created that limit public deficits and the supply of central bank credit, thus introducing national solvency risks. This is a crucial flaw in the institutional structure of Euroland, where monetary sovereignty has been removed from all existing fiscal authorities. Absent a reassessment of its design, the euro area is facing a deflationary tendency that may further erode the economic welfare of the region

Classical Macrodynamics and the Labor Theory of Value

This paper outlines a multisector dynamic model of the convergence of market prices to natural prices in conditions of fixed technology and composition of demand. Prices and quantities adjust in real-time in response to excess supplies and differential profit-rates. Finance capitalists earn interest income by supplying money-capital to fund production. Industrial capitalists, as the owners of firms, are liable for profits and losses. Market prices stabilize to profit-equalizing prices of production proportional to the total coexisting labor required to reproduce commodities. This result resolves the classical problem of the incommensurability between money and labor-value accounts in conditions of profits on stock, i.e. Marx's transformation problem

Critique of the neoclassical theory of growth and distribution

The paper surveys the main theories of income distribution in their relationship with the theories of economic growth. First, the Classical approach is considered, focusing on the Ricardian theory. Then the neoclassical theory is discussed, highlighting its origins (Bohm-Bawerk, Wicksell, Clark) and the role of the aggregate production function. The emergence of a "Keynesian" theory of income distributionin the wake of Harrod's model of growth is then recalled together with the surprising resurgence of the neoclassical theory (following the contributions of Solow and Meade). But, as the paper shows, the neoclassical theory of income distributionlacks logical consistency and has shaky foundations, as has been revealed by the severecritiques moved to the neoclassical production function. Mainstream economic literature circumvents this problem by simply ignoring it, while the models of endogenous growth exclude the issue of distribution theory from their consideration. However, while mainstream economics bypasses the problems of incomedistribution, this is too relevant an issue to be ignored and a number of new research lines, briefly surveyed, try new approaches to it

The Cambridge School of Keynesian Economics

There have been strong ties between the Cambridge Journal of Economics (CJE) and the Cambridge School of Keynesian Economics, from the very beginning. In this paper, the author investigates the environment that saw the birth of the CJE at Cambridge (UK), in 1977, and the relationship that linked it to the direct pupils of Keynes. A critical question is explicitly examined: why didn't the 'Keynesian revolution' succeed in becoming a permanent winning paradigm? Some behavioural mistakes of the members of the Keynesian School may explain this lack of success, but only to a certain extent. In any case, there were and there still are remedies too. But what we are inheriting is a unique set of analytical building blocks (the paper lists eight of them) that makes this School of economics a viable (and in some directions definitely superior) alternative to mainstream economics. Admittedly, there is some important work still to be done. The paper highlights the need for a two-stage approach, addressing pure theory and extensive institutional analysis. It is argued that a combination of the two would strengthen the coherence of the theoretical foundations, and at the same time would provide a fruitful extension of economic analysis to empirical, institutional and economic dynamics investigations. Copyright 2005, Oxford University Press.