A Puzzle about Say’s Law

This is how later Classical economists defined or formulated Say’s law, according to Thomas Sowell (1994: 39–41):

“(1) The total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output [an idea in James Mill].

(2) There is no loss of purchasing power anywhere in the economy. People save only to the extent of their desire to invest and do not hold money beyond their transactions need during the current period [James Mill and Adam Smith].

(3) Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector [John Stuart Mill].

(4) In real terms, supply equals demand ex ante [= “before the event”], since each individual produces only because of, and to the extent of, his demand for other goods. (Sometimes this doctrine was supported by demonstrating that supply equals demand ex post.) [James Mill.]

(5) A higher rate of savings will cause a higher rate of subsequent growth in aggregate output [James Mill and Adam Smith].

(6) Disequilibrium in the economy can exist only because the internal proportions of output differ from consumer’s preferred mix—not because output is excessive in the aggregate” [Say, Ricardo, Torrens, James Mill] (Sowell 1994: 39–41).

Does proposition (1) – that the “total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output” – mean the total factor payments received before the sale of a given volume (or value) of output?

Or are “total factor payments” assumed to include the profit that flows to owners of capital after sales, so that “total factor payments” consists of the following:

(1) all factor payments to labour (wages);

(2) all factor payments to sellers of durable and non-durable, non-labour factor inputs;

(3) all factor payments to owners of goods rented (e.g., land or property rent).

(4) all profits from ownership of real capital.*

* another issue is: are money loans and interest on money loans a further cost of production?

In other words, the question is: how did the Classical economists define profit and is it included in Say’s law?

If proposition (1) means total factor payments received before the sale of a given volume (or value) of output, then, with many prices set above costs of production to allow profit, it cannot be true that total factor payments are necessary to purchase that total volume of output – unless the aggregate value of losses on goods sold (where prices are below costs of production) equals the aggregate value of profits.

If that is so (as some interpret Say’s law), this is just a grossly unrealistic general equilibrium theory, where the economy is assumed to have a tendency to rapid adjustment:

“There could be, Say argued, a temporary glut of some commodities, but this would result from the fact that market equilibrium had not been attained. Some prices would be too low and others too high, relative to their respective long-run equilibrium prices or costs of production. In this case, there would be a glut of those commodities whose prices were too high and simultaneously a shortage of those commodities whose prices were too low. The gluts and shortages would exactly cancel out in the aggregate.” (Hunt and Lautzenheiser 2011: 137).

But, in modern economies, most prices are set as a mark-up on total unit costs and are generally not adjusted to clear markets: that is, mark-up prices do not fluctuate around costs of production, but will generally be set above total unit costs. The price adjustment required in Say’s law does not normally happen.

The issue is also interesting because, in Classical economics, the “equilibrium price” (or natural price) is assumed to be the cost of production price (however this is defined), towards which all prices gravitate.

But, if a real world price is really a cost of production price, then the normal “equilibrium prices” of Say’s law would mean owners of capital get no profits.

In short, are total factor payments received for producing a given volume of output defined as (1) ex ante (before actual sales) alone or (2) ex ante and ex post payments (before and after the actual sales of those products)?

In either case, we have the following observations:

(1) if total factor payments are ex ante and ex post payments (before and after the actual sales), then Say’s law includes profits as a factor payment, and requires either (i) total equilibrium in product markets or (ii) a grossly unrealistic tendency to general equilibrium in the real world where aggregate value of losses on products sold equals the aggregate value of profits, or

(2) if total factor payments are ex ante payments (before sales) alone, then there is no reason why total factor payments should be necessary to purchase the aggregate volume of output if most industries earn profits by charging prices above costs of production, unless, once again, one assumes a grossly unrealistic tendency to general equilibrium in the real world where aggregate value of losses equals the aggregate value of profits.

Of course, this is before we get to the obvious points

(1) that people save money income,

(2) that there are different marginal propensities to consume,

(3) that we have an endogenous money system that generates new credit money and new spending in addition to total factor payments received, and

(4) that people spent money income on (i) second hand, real assets and (ii) financial assets on secondary markets, as well as newly produced commodities,

so there is no logically necessary nor empirical reason to think Say’s law would ever hold in the real world.

Further Reading
“The Myth of Say’s Law,” October 7, 2010.

“Say’s Law Presupposes Aggregate Demand as a Meaningful Concept,” May 28, 2011.

“Say Repudiated Say’s Law,” December 1, 2011.

“Jean Baptiste Say on Failures of Aggregate Demand,” December 1, 2011.

“Say’s Law: An Overview and Bibliography,” April 13, 2013.

BIBLIOGRAPHY
Hunt E. K. and Mark Lautzenheiser. 2011. History of Economic Thought: A Critical Perspective (3rd edn.). M.E. Sharpe, Armonk, N.Y.

Sowell, T. 1994. Classical Economics Reconsidered. Princeton University Press, Princeton, N.J.

Steve Keen on Neoclassical Economics and European Austerity

Steve Keen gives a lecture below on mainstream economic theory and the austerity in Europe, in a talk in Vienna.

Some Post Keynesian Links on IS-LM

A list of posts from various Post Keynesians below on IS-LM:

Matias Vernengo, “ISLM: A Further Explanation and a Defense,” Naked Keynesianism, December 1, 2013.

Matias Vernengo, “ISLM: what is it good for?,” Naked Keynesianism, February 16, 2011.

Roberto Lampa, “Oskar Lange Theory of Interest and the ISLM,” Naked Keynesianism, January 8, 2014.

Lars Syll, “Why IS-LM still isn’t good enough (wonkish),” 30 October, 2012.

Lars Syll, “IS-LM is bad Economics no matter what Krugman says,” Real-World Economics Review Blog, March 20, 2013.

Lars Syll, “IS-LM vs. Minsky,” 25 March, 2014.

Lars Syll, “Krugman’s vindication of the IS-LM gadget — brilliantly silly,” 27 March, 2014.

Lars Syll, “Did Keynes accept the IS-LM Model?,” 22 June, 2014.

Bill Mitchell, “The IS-LM framework – Part 1,” Billy Blog, July 26, 2013.

Bill Mitchell, “The IS-LM Framework – Part 2,” Billy Blog, August 2, 2013.

Bill Mitchell, “The IS-LM Framework – Part 3,” Billy Blog, August 9, 2013.

Bill Mitchell, “IS-LM Framework – Part 4,” Billy Blog, August 16, 2013.

Bill Mitchell, “IS-LM Framework – Part 5,” Billy Blog, August 23, 2013.

Bill Mitchell, “IS-LM Framework – Part 6,” Billy Blog, August 30, 2013.

Bill Mitchell, “The IS-LM Framework – Part 7,” Billy Blog, September 6, 2013.

Steve Keen, “Krugman’s Economic Modelling Morass,” Business Spectator, 7 March 2013.

Steve Keen, “Where Krugman went wrong,” Business Spectator, 8 March 2013.

Steve Keen, “How Krugman lost equilibrium,” Business Spectator, 13 March 2013.

Steve Keen, “Oblivious to the essence of equilibrium,” Business Spectator, 14 March 2013.

Steve Keen, “Modelling Economic Balance like it’s 1975,” Business Spectator, 27 March 2013.

“Misinterpretations in Mainstream Economics,” Unlearning Economics, February 19, 2013.

“Debunking Economics, Part VIII: Macroeconomics, or Applied Microeconomics?,” Unlearning Economics, August 26, 2012.

Philip Pilkington, “Policing the Economists from Within Their Own Minds – ISLM as a Model of Intellectual Control,” Naked Capitalism, March 8, 2012.

Philip Pilkington, “Tending to His Own Garden: Has Krugman Finally Turned on the ISLM?,” Fixing the Economists, August 24, 2013.

Philip Pilkington, “Problems with Static Interest Rates in the ISLM,” Fixing the Economists, November 12, 2013.

Philip Pilkington, “Further Problems With the Static Framework of the ISLM,” Fixing the Economists, November 13, 2013.

Philip Pilkington, “Krugman uses ISLM to proclaim looming Fiscal Crisis, denounces those who don’t use ISLM,” Fixing the Economists, March 27, 2014.

Philip Pilkington Interviews

Some very interesting interviews here with Philip Pilkington on economic methodology, aggregate demand and various other subjects.

The first can be found here:

Entitled Thoughts: Philip Pilkington on Modern Economic Methodology, Part 1.

The second is below.

Keynes’ Letters to John Hicks and IS-LM

In 1936 and 1937, John Hicks and John Maynard Keynes engaged in a correspondence regarding the General Theory and issues related to it.

In October 1936, John Hicks sent Keynes a letter in which he raised the issue of liquidity preference and interest rate theories and also sent Keynes a draft of his famous paper “Mr. Keynes and the ‘Classics’; A Suggested Interpretation” (Econometrica 5.2 [1937]: 147–159).

Keynes replied to Hicks on 31 March, 1937 in a letter that is sometimes taken to show that Keynes strongly approved of IS-LM (the letter can be found in Keynes 1973: 79–81).

Unfortunately, I have not had the time to chase up and read the full copy of Keynes’ letter, but some have actually argued that Keynes’ reaction to Hicks’ paper was only “lukewarm” (Kriesler and Nevile, “IS-LM and Macroeconomics after Keynes,” p. 4).

At any rate, Joan Robinson notes that Keynes did object to the model in his letter to Hicks:

“Whenever equilibrium theory is breached, economists rush like bees whose comb has been broken to patch up the damage. J. R. Hicks was one of the first, with his IS-LM, to try to reduce the General Theory to a system of equilibrium. This had a wide success and has distorted teaching for many generations of students. Hicks used to be fond of quoting a letter from Keynes which, because of its friendly tone, seemed to approve of IS-LM, but it contained a clear objection to a system that leaves out expectations of the future from the inducement to invest.” (Robinson 1978: 13).

So Keynes did have reservations about the model’s ability to incorporate expectations, and also about loanable funds theory (Tily 2007: 207–208).

Moreover, Keynes and Hicks had further correspondence. In a later letter, Hicks affirmed that he was thinking of interest as determined by a type of loanable funds theory, or “by saving and investment” (Keynes 1973: 82).

Keynes replied in a short letter on 11 April, 1937 rejecting loanable funds:

Keynes to Hicks, 11 April, 1937
“Dear Hicks,

I do not really understand how you mean interest to be determined by saving and investment under II, near the bottom of your second page. However, I am trying to bring the whole thing to a head by a short article I shall write for the next Journal commenting on Ohlin’s exposition of the Swedish theory of interest regarded as determined by the demand and supply for loans, which is being printed in the same issue. I am there accusing you of agreeing with the Swedes in this matter. If this is a calumny, and your theory is really quite different, forgive me.

Yours sincerely,
J.M.K.”
(Keynes 1973: 83).

The “short article” Keynes was writing was “Alternative Theories of the Rate of Interest” (The Economic Journal 47.186 [1937]: 241–252), in which Keynes numbered Hicks with Bertil Ohlin and Dennis Robertson as a supporter of loanable-funds, a theory which Keynes himself rejected (Keynes 1937: 241–243; Tily 2007: 209).

By implication, Keynes must have thought that Hicks held a theory of the interest rate that was wrong (Tily 2007: 209).

If IS-LM relies on a loanable funds model, and Keynes rejected loanable funds, then it is difficult to see how Keynes could have supported IS-LM, if he had been consistent.

And Hicks did continue to adhere to a modified form of loanable funds, and was even taken to task for it by others sympathetic to the General Theory like Hugh Townshend (1937) (King 2002: 22).

One can perhaps conclude that far too much has been read into the short and private letter Keynes wrote to Hicks, where Keynes may well have been being polite and encouraging to Hicks, and at the same time did not want to pick a fight with someone who was sympathetic to the General Theory.

BIBLIOGRAPHY
Hicks, J. R. 1936. “Keynes’ Theory of Employment,” The Economic Journal 46.182: 238–253.

Keynes, John Maynard. 1937. “Alternative Theories of the Rate of Interest,” The Economic Journal 47.186: 241–252.

Keynes, John Maynard. 1973. The General Theory and After. Part II: Defense and Development. The Collected Writings of John Maynard Keynes. Vol. XIV. Macmillan, London and Basingstoke.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Kriesler, Peter and John Nevile. 2002. “IS-LM and Macroeconomics after Keynes.”
http://www.asb.unsw.edu.au/schools/economics/Documents/P.%20Kriesler%20and%20J.%20Nevile%20-%20IS-LM%20in%20Macroeconomics%20After%20Keynes.pdf

Robinson, Joan. 1978. “Keynes and Ricardo,” Journal of Post Keynesian Economics 1.1: 12–18.

Tily, Geoff. 2007. Keynes’s General Theory, The Rate of Interest and Keynesian Economics: Keynes Betrayed. Palgrave Macmillan, New York, N.Y.

Townshend, Hugh. 1937. “Liquidity-Premium and the Theory of Value,” The Economic Journal 47.185: 157–169.

When Hicks Recanted IS-LM

The famous paper where Hicks is generally taken to have recanted IS-LM and admitted its failings was published in the Journal of Post Keynesian Economics in 1981:

Hicks, John. 1980–1981. “‘IS-LM’: An Explanation,” Journal of Post Keynesian Economics 3.2: 139–154.

The paper also inspired a minor symposium in the Journal of Post Keynesian Economics Spring edition in 1982, with commentary on Hicks’ paper by a number of Post Keynesians:

Shackle, G. L. S. 1982. “Sir John Hicks’ ‘IS-LM: An Explanation’: A Comment,” Journal of Post Keynesian Economics 4.3: 435–438.

Chick, Victoria. 1982. “A Comment on ‘IS-LM: An Explanation,’” Journal of Post Keynesian Economics 4.3: 439–444.

Weintraub, Sidney. 1982. “Hicks on ‘IS-LM: More Explanation’?,” Journal of Post Keynesian Economics 4.3: 445–453.

All welcomed Hicks’ paper, although Shackle (1982: 438) argued that Hicks still appeared to cling to a notion of equilibrium in his paper that was questionable.

BIBLIOGRAPHY
Chick, Victoria. 1982. “A Comment on ‘IS-LM: An Explanation,’” Journal of Post Keynesian Economics 4.3: 439–444.

Hicks, John. 1980–1981. “‘IS-LM’: An Explanation,” Journal of Post Keynesian Economics 3.2: 139–154.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Shackle, G. L. S. 1982. “Sir John Hicks’ ‘IS-LM: An Explanation’: A Comment,” Journal of Post Keynesian Economics 4.3: 435–438.

Weintraub, Sidney. 1982. “Hicks on ‘IS-LM: More Explanation’?,” Journal of Post Keynesian Economics 4.3: 445–453.

Keynes and IS-LM

Updated

Did Keynes accept the IS-LM model?

Harcourt and Turnell (2012a [2005]: 35) argue that Roy F. Harrod, James E. Meade, W. Brian Reddaway and David Champernowne all found a type of IS-LM model in the General Theory.

This is an interesting subject, and a starting point is the discussion in King’s A History of Post Keynesian Economics since 1936 (2002), pp. 30–32.

First, King notes that Keynes’ heart attacks and his burden of work related to the Second World War stopped him from making systemic, point-by-point responses to all the controversy caused by the General Theory (King 2002: 30).

Others have noted that Keynes’ response to interpretations of the General Theory was to encourage and support any favorable treatments as a pragmatic and tactical move.

King notes that Keynes “never once repudiated the IS-LM interpretation of the General Theory” but “endorsed it warmly” (King 2002: 31), although Kriesler and Nevile have pointed out in their paper “IS-LM and Macroeconomics after Keynes” (Kriesler and Nevile 2002) that the early IS-LM models of Roy Harrod and W. B. Reddaway were not exactly the same as that of John Hicks (1937).

Although it can be disputed that any of these data actually show Keynes specifically endorsing IS-LM without reservation, nevertheless he did not explicitly reject it either, and King lists the following evidence:

(1) a letter to Roy Harrod in August 1936
Keynes wrote a letter on 30 August 1936 to Roy Harrod, commenting on Harrod’s paper “Mr. Keynes and Traditional Theory,” Econometrica 5.1 (1937): 74–86.

Keynes said this:

“My dear Roy,

I like your paper (may I keep the copy you have sent me?) more than I can say. I have found it instructive and illuminating, and I really have no criticisms. I think that you have re-orientated the argument beautifully. I also agree with your hints at the end about future dynamic theory.

I am reading a paper to the economic club at Stockholm on about the same date as you will be reading this, and have been thinking (it isn’t written yet) of trying to pick out what I thought most important. But I now feel that I should like to read them your paper instead! There are, however, one or two points mainly omitted in yours which I should be inclined to put into mine:--

(1) I have been much pre-occupied with the causation, so to speak, of my own progress of mind from the classical position to my present views,--with the order in which the problem developed in my mind. What some people treat as an unnecessarily controversial tone is really due to the importance in my own mind of what I used to believe, and of the moments of transition which were for me personally moments of illumination. You don’t feel the weight of the past as I do. One cannot shake off a pack one has never properly worn. And probably your ignoring all this is a better plan than mine. For experience seems to show that people are divided between the old ones whom nothing will shift and are merely annoyed by my attempts to underline the points of transition so vital in my own progress, and the young ones who have not been properly brought up and believe nothing in particular. The portholes of light seen in escaping from a tunnel are interesting neither to those who mean to stay there nor to those who have never been there! I have no companions, it seems, in my own generation, either of earliest teachers or of earliest pupils; yet I cannot in thought help being somewhat bound to them,--which they find exceedingly irritating!

(2) My second point is, perhaps, part of my first. You don’t mention effective demand or, more precisely, the demand schedule for output as a whole, except in so far as it is implicit in the multiplier. To me the most extraordinary thing, regarded historically, is the complete disappearance of the theory of demand and supply for output as a whole, i.e. the theory of employment, after it had been for a quarter of a century the most discussed thing in economics. One of the most important transitions for me, after my Treatise on Money had been published, was suddenly realising this. It only came after I had enunciated to myself the psychological law that, when income increases, the gap between income and consumption will increase,--a conclusion of vast importance to my own thinking but not apparently, expressed just like that, to anyone else’s. Then, appreciably later, came the notion of interest being the measure of liquidity-preference, which became quite clear in my mind the moment I thought of it. And last of all, after an immense lot of muddling and many drafts, the proper definition of the marginal efficiency of capital linked up one thing with another.

(3) You do not show how in conditions of full employment, which I should now like to define as the limiting case in which the supply of output schedule ceases to be elastic, my theory merges in the orthodox theory.

I should much like to have your paper for the … [Economic Journal]. My only ground for hesitation is the personal embarrassment of how much space as editor I can properly give to discussions of my own stuff. In December I am expecting something from Ohlin. Would next March be too late from your point of view?”

581. J. M. Keynes to Harrod, 30 August 1936
http://economia.unipv.it/~dbesomi/edition/editionstuff/rfh.271.htm#18792

Given that Roy Harrod is sometimes credited with anticipating the IS-LM model of Hicks, Keynes’ praise is suggestive, and Barens (1999) argues that Harrod’s model in “Mr. Keynes and Traditional Theory” was a correct interpretation of the model in Chapter 18 of the General Theory.

The Post Keynesians Harcourt and Turnell (2012a [2005]: 35) agree that a type of IS-LM model really is to be found there, and so does Matias Vernengo, who argues that IS-LM “is a reasonable representation of some ideas in … [Chapter 18], in particular because Keynes was unable to shed some of his neoclassical ideas.”

But, as other Post Keynesians have pointed out, in Chapter 18 of the General Theory, Keynes played down the role of uncertainty (which he had stressed in Chapter 12) and, if he had really maintained the crucial role of uncertainty, as he did later in his fundamental article “The General Theory of Employment” (1937), this would have “ruled out any stable functional relationship between investment and the interest rate” (King 2002: 14).

That the door was thereby left open in Chapter 18 for neoclassical synthesis Keynesians to reformulate the General Theory as a general equilibrium model like IS-LM where the interest rate has a pivotal role, as King (2002: 14) notes, does not mean that either Chapter 18 or IS-LM is compatible with other aspects of Keynes’ thinking.

It is, furthermore, interesting to note that Kriesler and Nevile (in “IS-LM and Macroeconomics after Keynes,” pp. 4–5) argue that Harrod’s model in “Mr. Keynes and Traditional Theory” was not quite the same as that of Hicks, but has a number of differences, not least of all that Harrod’s was not a clear-cut Walrasian general equilibrium model and also that Harrod did discuss expectations, unlike Hicks.

(2) an August 1936 letter to W. Brian Reddaway
In 1936, W. B. Reddaway published a review of the General Theory (“General Theory of Employment, Interest and Money,” Economic Record 12 [1936]: 28–36).

In a footnote, Reddaway produced a model that is fundamentally similar to Hicks’ IS-LM, but Keynes in a letter to Reddaway (Keynes 1973: 70) seems to have had no specific objections to it or the review generally (Harcourt 2012b [2004]: 295).

However, Kriesler and Nevile (in “IS-LM and Macroeconomics after Keynes,” p. 5) note that Reddaway’s model has a much greater role for expectations and uncertainty than Hicks’, and “can be read as consistent with either a Marshallian or Walrasian approach.”

(3) a letter to John Hicks in 31 March, 1937
In a letter commenting on a draft of J. R. Hicks’ famous paper “Mr. Keynes and the ‘Classics’; A Suggested Interpretation” (Econometrica 5.2 [1937]: 147–159), where IS-LM was developed, Keynes did not reject the model, but said that “I found it very interesting and really have next to nothing to say by way of criticism” (Keynes 1973: 79).

Unfortunately, I have not had the time to chase up and read the full copy of Keynes’ letter. Some have actually argued that Keynes’ reaction to Hicks’ paper was only “lukewarm” (Kriesler and Nevile, “IS-LM and Macroeconomics after Keynes,” p. 4). Others think that Keynes did have reservations about the ability of the model to represent the crucial role of expectations.

(4) an article responding to Dennis Robertson
Keynes (1938) replied to an article by Robertson (1938) in the Economic Journal, and on p. 321, note 1, he said this of Oskar Lange’s analysis of the General Theory in Lange’s “The Rate of Interest and the Optimum Propensity to Consume” (Economica n.s. 5.17 [1938]: 12–32):

“In this connection Mr. Robertson refers with approval to an article by Dr. Lange which follows very closely and accurately my line of thought. The analysis which I gave in my ‘General Theory of Employment’ is the same as the ‘general theory’ explained by Dr. Lange on p. 18 of this article, except that my analysis is not based (as I think his is in that passage) on the assumption that the quantity of money is constant.” (Keynes 1938: 321, n. 1).

Lange’s article “The Rate of Interest and the Optimum Propensity to Consume” (1938) was the first serious application of the IS-LM model (King 2002: 103).

(5) Keynes’ implicit support for Kaldor’s use of IS-LM in a 1937 article
In Pigou (1937), the latter defended the real balances effect against Keynes, and Kaldor (1937) was a response to this.

Keynes published Kaldor’s paper in the Economic Journal, and on p. 752–753, footnote 2, Kaldor used Hicks’ IS-LM model: Keynes did not seem to object to the use of this model.

As King (2002: 31) notes, the problem with all this is that it sits uncomfortably with Keynes’ later thinking on uncertainty and expectations, particularly in his 1937 article “The General Theory of Employment” (Quarterly Journal of Economics 51.2: 209–223).

Moreover, at the same time that Keynes was praising the IS-LM interpretation of the General Theory, he also endorsed the emerging heterodox interpretations of it too (King 2002: 32). If Keynes was also supporting non-general equilibrium interpretations of the General Theory, then there is a clear problem with saying that Keynes gave some explicit and consistent support for IS-LM.

One can only conclude that Keynes gave mixed signals on this subject and his thinking was not entirely coherent. But this can also be said of the General Theory itself.

Kriesler and Nevile have an interesting view on why Keynes did not explicitly reject IS-LM models:

“Only one question needs to be answered to make the case complete. Why did Keynes give it [sc. the IS-LM model] his cautious approval in 1937?

The major reason is certainly the clear cut position in IS-LM that it is effective demand that determines the level of employment not the balancing, at the margin, of the utility of wages against the disutility of work. It rejects Pigou’s theory of employment and Say’s law, against which Keynes was crusading. A second reason is probably that it showed the effects of changes in the quantity of money on the real economy. As Keynes pointed out, in the letter to Hicks already quoted, a strict classical economist would not admit that a change in the quantity of money could have any effect on the level of employment or any other real variable. Keynes argued strongly that it could. He stressed that the rate of interest, which had a key impact on output and employment, was a monetary phenomenon (1936, Chap.13, 1973, p.80). He would surely have welcomed support for this in IS-LM.”
Kriesler, Peter and John Nevile. “IS-LM and Macroeconomics after Keynes,” p. 7.
http://www.asb.unsw.edu.au/schools/economics/Documents/P.%20Kriesler%20and%20J.%20Nevile%20-%20IS-LM%20in%20Macroeconomics%20After%20Keynes.pdf

A final point to be borne in mind is that, while many Post Keynesians think IS-LM is worthless (and indeed the problems with it are devastating), others (who may well be in a minority) argue that a suitably reformulated IS-LM model has some analytical value: Harcourt and Turnell (2012a [2005]: 35) argue that a type of IS-LM model can capture “Keynes’s most abstract model in which short-term expectations and long-term expectations are assumed to be independent of one another, and short-term expectations are assumed to be realised immediately ... .” (Harcourt and Turnell 2012a [2005]: 35). Of course, one would assume that such an abstract model does not really describe the real world, but is an analytical tool only.

Note
Finally, does anyone know where there is an online complete copy of Keynes’ letter to John Hicks, 31 March, 1937, in which Keynes discusses the draft of J. R. Hicks’ famous paper “Mr. Keynes and the ‘Classics’; A Suggested Interpretation” (Econometrica 5.2 [1937]: 147–159)?

Update
Lars Syll has an impressive list of problems with IS-LM in the post below, and his conclusion is that it is “difficult to see how and why Keynes in earnest should have ‘accepted’ Hicks’s construct”:

Lars Syll, “Did Keynes accept the IS-LM Model?,” 22 June, 2014.

Links
Matias Vernengo, “ISLM: A Further Explanation and a Defense,” Naked Keynesianism, December 1, 2013.

Matias Vernengo, “ISLM: what is it good for?,” Naked Keynesianism, February 16, 2011.

Lars Syll, “IS-LM is bad Economics no matter what Krugman says,” Real-World Economics Review Blog, March 20, 2013.

Lars Syll, “IS-LM vs. Minsky,” 25 March, 2014.

Lars Syll, “Krugman’s vindication of the IS-LM gadget — brilliantly silly,” 27 March, 2014.

Bill Mitchell, “The IS-LM framework – Part 1,” Billy Blog, July 26, 2013.

Steve Keen, “Krugman’s Economic Modelling Morass,” Business Spectator, 7 March 2013.

Steve Keen, “Where Krugman went wrong,” Business Spectator, 8 March 2013.

Steve Keen, “How Krugman lost equilibrium,” Business Spectator, 13 March 2013.

Steve Keen, “Oblivious to the essence of equilibrium,” Business Spectator, 14 March 2013.

Steve Keen, “Modelling Economic Balance like it’s 1975,” 27 March 2013.

“Misinterpretations in Mainstream Economics,” February 19, 2013.

“Debunking Economics, Part VIII: Macroeconomics, or Applied Microeconomics?,” August 26, 2012.

BIBLIOGRAPHY
Barens, I. 1999. “From Keynes to Hicks – An Aberration? IS-LM and the Analytical Nucleus of the General Theory,” in Peter Howitt et al. (eds.), Money, Markets and Method: Essays in Honour of Robert W. Clower. Edward Elgar, Cheltenham UK.

Cord, Robert. 2013. Reinterpreting the Keynesian Revolution. Routledge, London.

Dillard, Dudley. 1990. “Interpreting Mr. Keynes: The IS-LM Enigma,” History of Political Economy 22.3: 582–584.

Harcourt, Geoffrey Colin and Sean Turnell. 2012a [2005]. “On Skidelsky’s Keynes,” in Geoffrey Colin Harcourt, On Skidelsky’s Keynes and Other Essays: Selected Essays of G.C. Harcourt. Palgrave Macmillan, New York. 13–58.

Harcourt, Geoffrey Colin. 2012b [2004]. “Reddaway, [William] Brian, 1913–2002,” in Geoffrey Colin Harcourt, On Skidelsky’s Keynes and Other Essays: Selected Essays of G.C. Harcourt. Palgrave Macmillan, New York. 294–304.

Harrod, R. F. 1937. “Mr. Keynes and Traditional Theory,” Econometrica 5.1: 74–86.

Hicks, J. R. 1937. “Mr. Keynes and the ‘Classics’; A Suggested Interpretation,” Econometrica 5.2: 147–159.

Kaldor, Nicholas. 1937. “Prof. Pigou on Money Wages in Relation to Unemployment,” The Economic Journal 47.188: 743–753.

Keynes, John Maynard. 1937. “The General Theory of Employment,” Quarterly Journal of Economics 51.2: 209–223.

Keynes, John Maynard. 1938. “Mr. Keynes and ‘Finance,’” The Economic Journal 48.190: 318–322

Keynes, John Maynard. 1973. The General Theory and After. Part II: Defense and Development. The Collected Writings of John Maynard Keynes. Vol. XIV. Macmillan London and Basingstoke.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Kriesler, Peter and John Nevile. 2002. “IS-LM and Macroeconomics after Keynes,” in Philip Arestis, Meghnad Desai, and Sheila Dow (eds.), Money, Macroeconomics and Keynes: Essays in Honour of Victoria Chick, Volume One. Routledge, London and New York.

Kriesler, Peter and John Nevile. 2002. “IS-LM and Macroeconomics after Keynes.”
http://www.asb.unsw.edu.au/schools/economics/Documents/P.%20Kriesler%20and%20J.%20Nevile%20-%20IS-LM%20in%20Macroeconomics%20After%20Keynes.pdf

Lange, Oskar. 1938. “The Rate of Interest and the Optimum Propensity to Consume,” Economica n.s. 5.17: 12–32.

Moggridge, D. E. 1976. John Maynard Keynes. Penguin Books, New York.

Pigou, A. C. 1937. “Real and Money Wage Rates in Relation to Unemployment,” The Economic Journal 47.187: 405–422.

Reddaway, W. B. 1936. “General Theory of Employment, Interest and Money,” Economic Record 12: 28–36.

Robertson, D. H. 1938. “Mr. Keynes and ‘Finance,’” The Economic Journal 48.190: 314–318.

Young, Warren. 1988. “Interpreting Mr Keynes: The IS-LM Enigma,” The Economic Journal 98.389: 214–216.

A Bibliography on the History of Post Keynesian Economics (updated)

I have recently done a diagram here of the various strands of Post Keynesian economics, and that diagram allows one to get a feel for the history of the Post Keynesian school as well.

To supplement this, I have complied a bibliography below of books and articles on the history of Post Keynesianism, which I have now updated:

Ambrosi, Gerhard Michael. 2003. Keynes, Pigou and Cambridge Keynesians: Authenticity and Analytical Perspective in the Keynes-Classics Debate. Palgrave Macmillan, Basingstoke.

Arestis, P. 1996. “Post-Keynesian Economics: Towards Coherence,” Cambridge journal of Economics 20.1: 111–135.

Arestis, Philip, Dunn, Stephen P. and Malcolm Sawyer. 1999. “Post Keynesian Economics and its Critics,” Journal of Post Keynesian Economics 21.4: 527–549.

Davidson, Paul. 2003–2004. “Setting the Record Straight on ‘A History of Post Keynesian Economics,’” Journal of Post Keynesian Economics 26.2 245–272.

Davidson, Paul. 2005. “Galbraith and the Post Keynesians,” Journal of Post Keynesian Economics 28.1: 103–113.

Davidson, Paul. 2005. “Responses to Lavoie, King, and Dow on what Post Keynesianism is and who is a Post Keynesian,” Journal of Post Keynesian Economics 27.3: 393–408.

Davidson, Paul. 2013. “Keynesian Foundations of Post-Keynesian Economics,” in G. C. Harcourt and Peter Kriesler (eds.), The Oxford Handbook of Post-Keynesian Economics. Volume 1: Theory and Origins. Oxford University Press, New York. 122–137.

Dunn, S. P. 2000. “Wither Post Keynesianism?,” Journal of Post Keynesian Economics 22.3: 343–364.

Fontana, Giuseppe. 2005. “‘A History of Post Keynesian Economics since 1936’: Some Hard (and not so Hard) Questions for the Future,” Journal of Post Keynesian Economics 27.3: 409–421.

Hamouda, O. F. and Geoffrey Colin Harcourt. 1988. “Post-Keynesianism: From Criticism to Coherence?,” Bulletin of Economic Research 40.1: 1–33.

Hamouda, O. F. and Geoffrey Colin Harcourt. 2003 [1988]. “Post-Keynesianism: From Criticism to Coherence?,” in Claudio Sardoni (ed.), On Political Economists and Modern Political Economy: Selected Essays of G. C. Harcourt. Routledge, London. 209–232.

Harcourt, G. C. 2001. “Post-Keynesian Thought,” in G. C. Harcourt, 50 Years a Keynesian and Other Essays. Palgrave, London. 263–285.

Harcourt, Geoffrey Colin. 2006. The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers. Cambridge University Press, Cambridge and New York.

Harcourt, Geoffrey Colin and Prue Kerr. 2009. Joan Robinson. Palgrave Macmillan, New York, NY.

Hayes, M. G. 2010. “The Fault Line between Keynes and the Cambridge Keynesians: A Review Essay,” Review of Political Economy 22:1: 151–160.

King, J. E. 1994. Conversations with Post Keynesians. Macmillan, Basingstoke.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

King, J. E. 2005. “Unwarping the Record: A Reply to Paul Davidson,” Journal of Post Keynesian Economics 27.3: 377–384.

King, J. E. 2009. Nicholas Kaldor. Palgrave Macmillan, Basingstoke and New York.

King, J. E. 2012. “Post Keynesians and Others,” Review of Political Economy 24.2: 305–319.

Kregel, Jan. 2013. “A Personal View of the Origins of Post-Keynesian Ideas in the History of Economics,” in G. C. Harcourt and Peter Kriesler (eds.), The Oxford Handbook of Post-Keynesian Economics. Volume 1: Theory and Origins. Oxford University Press, New York. 45–50.

Lavoie, Marc. 2005. “Changing Definitions: A Comment on Davidson’s Critique of King’s History of Post Keynesianism,” Journal of Post Keynesian Economics 27.3: 371–376.

Lavoie, Marc. 2010. “Should Sraffian economics be dropped out of the Post-Keynesian School?,” Paper prepared for the Conference at the University of Roma Tre, 2–4 December.
http://host.uniroma3.it/eventi/sraffaconference2010/abstracts/pp_lavoie.pdf

Lavoie, Marc. 2011. “History and Methods of Post-Keynesian Economics,” in Eckhard Hein and Engelbert Stockhammer (eds.), A Modern Guide to Keynesian Macroeconomics and Economic Policies. Edward Elgar, Cheltenham. 1–33.

Lavoie, Marc. 2014. “To which of the Five Streams of Post-Keynesianism does John King belong?”
http://www.vu.edu.au/sites/default/files/cses/pdfs/lavoie-paper.pdf

Lee, Frederic S. 2009. A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century. Routledge, London and New York.

Mongiovi, G. 2003. “Sraffian Economics,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics. Edward Elgar, Cheltenham. 318–322.

Pasinetti, Luigi L. 2007. Keynes and the Cambridge Keynesians: A ‘Revolution in Economics’ to be Accomplished. Cambridge University Press, Cambridge.

Roncaglia, A. 1991. “The Sraffian Schools,” Review of Political Economy 3.2: 187–220.

Thirlwall, A. P. 1987. Nicholas Kaldor. Wheatsheaf Books, Brighton, England.

Tymoigne, Eric and Frederic S. Lee. 2003–2004. “Post Keynesian Economics since 1936: A History of a Promise That Bounced?,” Journal of Post Keynesian Economics 26.2: 273–287.

Walters, B. and D. Young. 1997. “On the Coherence of Post-Keynesian Economics,” Scottish Journal of Political Economy 44.3: 329–349.

Lavoie on “Should Sraffian Economics be dropped out of the Post-Keynesian School?”

This excellent paper by Marc Lavoie can be read here:

Marc Lavoie, “Should Sraffian Economics be dropped out of the Post-Keynesian School?,” Paper prepared for the Conference at the University of Roma Tre, 2–4 December 2010.

This subject is particularly interesting because many Post Keynesians have come to the view that Sraffian economics should not be part of “broad tent” Post Keynesianism, as noted by John King writing in 2012:

“Almost no one today regards ‘Post Keynesian-Sraffian’ economics as a single coherent school of thought (an exception is Luigi Pasinetti, 2007). By the end of the last century the Sraffians had been expelled (or, perhaps, had expelled themselves) from the Post Keynesian tradition, and in 2012 it is not at all clear whether the classical surplus approach to political economy (as its few remaining practitioners prefer it to be known) will long survive the retirement of the first post-Sraffa generation of theorists like Heinz Kurz and Neri Salvadori.” (King 2012: 314).

Pratten (1996: 439), Arestis, Dunn and Sawyer (1999), Dunn (2000: 350), and Mongiovi (2003: 218) seem to agree with this assessment.

Even though Lavoie himself says that the “project to build a fruitful alternative to neoclassical economics that would be based on a synthesis of the Keynesian monetary production economy and the Sraffian surplus approach is dead” (Lavoie 2010: 9), he still argues that Sraffians should not be expelled from “broad tent” Post Keynesianism (Lavoie 2010: 1), but nevertheless others disagree and even Lavoie himself sees problematic issues with certain aspects of Sraffian economics.

First, Lavoie (2010: 2) notes that Roncaglia (1991) identified three subgroups of Sraffians, as follows:

(1) the Marxian Sraffians, such as Pierangelo Garegnani (1930–2011) and John Eatwell;

(2) the Ricardian Sraffians, such as Luigi Pasinetti, and

(3) the Smithian Sraffians, such as Paolo Sylos Labini (1920–2005) and Alessandro Roncaglia.

Debates between the Marxian Sraffians and the Fundamentalist Keynesians were a major source of conflict at the Post Keynesian Trieste summer schools and conferences that were held between 1981 and 1990 (Lavoie 2010: 2), and even to the point of thwarting any synthesis between the various strands of “broad tent” Post Keynesianism, according to some observers (King 2002: 158).

The conflict centred on both methodological issues and Sraffian economic theory and its alleged deficiencies.

Pratten (1996) argued that Sraffian economics was a closed-system model and hence incompatible with the open-systems Post Keynesian approach (Lavoie 2010: 6).

Many Post Keynesians have also found the Sraffian fixation on long period equilibrium positions as a “centre of gravitation” towards which the economy moves as unacceptable, as Arestis, Dunn and Sawyer point out:

“The main characteristic of Sraffian economics relevant here is the use of long-period analysis where there would be an equalization of the rates of profit and full capacity utilization in the long period. The assumption that there are persistent forces that drive the economy toward a normal or long-period position when the world is characterized by uncertainties, nominal contracts, and path dependency sits rather uncomfortably with the general thrust of Post Keynesian economics” (Arestis, Dunn and Sawyer 1999: 544).

Many Kaleckians and fundamentalist Post Keynesians reject any tendency to Sraffian long-period equilibrium as empirically irrelevant for a real world economy (Arestis, Dunn and Sawyer 1999: 545).

Lavoie (2010: 10), however, points to the historical association of Sraffianism with Post Keynesian economics through the Cambridge capital controversies and a common preference for government intervention.

But differences also exist:

“Sraffians and Post Keynesians seem to disagree most about the fatal flaws of mainstream theory. For Sraffians the flaws of neoclassical theory are mostly due to their adoption of continuous downward demand curves for investment or for labour, based on diminishing marginal productivity. All Sraffians (Eatwell, Garegnani, Kurz, Mongiovi, etc.) complain of Keynes because he kept an excess baggage of neoclassical theory, a complaint even made by Herbert Simon (1997, p. 14). For several other post-Keynesians, the flaws are to be found in the neoclassical school’s avoidance of fundamental uncertainty, the instability of expectations, and the nonneutrality of money.” (Lavoie 2010: 12).

Furthermore, even Lavoie (2010: 11) admits that Sraffian long-period equilibrium remains a contentious issue, and indeed refers to this as “the cause of all the troubles” (Lavoie 2010: 12).

Marxian Sraffians following Garegnani appear to think that competition really brings about a tendency towards a uniform rate of profit in capitalism, and that long-period prices of production are centres of gravity for market prices (Lavoie 2010: 14).

But Lavoie (2010: 16) argues that “dissident” Sraffian strands are compatible with Post Keynesianism, that some Sraffian positions have been caricatured by their opponents (Lavoie 2010: 19–21), and that some modern Sraffians have given up the more extreme positions on long run equilibrium (Lavoie 2010: 23, citing Roncaglia 1995: 120).

For Lavoie (2010: 17), the “conception of production prices … is, in my view, the only remaining obstacle in the attempt to integrate Sraffian and Keynesian analyses.”

Lavoie’s conclusions are worth quoting at length:

“One of the lessons of the present study is that the interpretation of Sraffa’s outputs as actual normal outputs has already been given up by all strands of the Sraffian school. There is no clash here between Sraffians and post-Keynesians: they all recognize that both in the short and in the long period, rates of capacity utilization are likely to be different from their normal level. Even more surprising, many Sraffians accept the possibility of path dependence, a characteristic which other post-Keynesians take to heart as it exemplifies Joan Robinson’s historical time and the presence of radical uncertainty.

What is instead at stake is whether dominant Sraffians are ready to give up the concept of the gravitation towards production prices. This in my view is the crucial issue, as recognized earlier by Frederic Lee, who, despite his sympathies with Sraffian economics and the surplus approach as well as his belief in a ‘Post Keynesian-Sraffian tradition’, rejects the notion of prices of production as centres of gravity (King 1995, p. 195), even concluding some years later that ‘with the long period method problematical, it appears that the Sraffian social surplus approach is a dead end’ (Lee and Jo 2010, p. 21). Arestis, who explicitly supports the position taken by Roncaglia that was stated at the beginning of this conclusion, is just as anxious, claiming that ‘once we have got rid of long-run centres of gravity, we may be able to demonstrate that Sraffian and Post Keynesian economics have much in common’ (King 1995, p. 205).

I would argue that due to specialization and the outpour of literature, Sraffian and other post-Keynesian economists have grown somewhat apart since the 1990s. However, all strands of post-Keynesian economics, when dealing with similar issues, have converged towards each other. … Thus efforts to provide a synthesis of the various strands of post-Keynesian economics ought to be maintained and should keep track of Sraffian economics.” (Lavoie 2010: 23–24).

BIBLIOGRAPHY
Arestis, P. 1996. “Post-Keynesian Economics: Towards Coherence,” Cambridge journal of Economics 20.1: 111–135.

Arestis, Philip, Dunn, Stephen P. and Malcolm Sawyer. 1999. “Post Keynesian Economics and its Critics,” Journal of Post Keynesian Economics 21.4: 527–549.

Dunn, S. P. 2000. “Wither Post Keynesianism?,” Journal of Post Keynesian Economics 22.3: 343–364.

Harcourt, G. C. 2001. “Post-Keynesian Thought,” in G. C. Harcourt, 50 Years a Keynesian and Other Essays. Palgrave, London. 263–285.

King, J. E. 1994. Conversations with Post Keynesians. Macmillan, Basingstoke.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

King, J. E. 2012. “Post Keynesians and Others,” Review of Political Economy 24.2: 305–319.

Lavoie, Marc. 2010. “Should Sraffian economics be dropped out of the Post-Keynesian School?,” Paper prepared for the Conference at the University of Roma Tre, 2–4 December.
http://host.uniroma3.it/eventi/sraffaconference2010/abstracts/pp_lavoie.pdf

Mongiovi, G. 2003. “Sraffian Economics,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics. Edward Elgar, Cheltenham. 318–322.

Pratten, S. 1996. “The Closure Assumption as a First Step: Neo-Ricardian Economics and Post-Keynesianism,” Review of Social Economy 54.4: 423–443.

Roncaglia, A. 1991. “The Sraffian Schools,” Review of Political Economy 3.2: 187–220.

Roncaglia, A. 1995. “On the Compatibility between Keynes’s and Sraffa’s Viewpoints on Output Levels,” in G. C. Harcourt, A. Roncaglia and R. Rowley (eds.), Income and Employment in Theory and Practice. St. Martin’s Press, New York. 111–125.

L. Randall Wray on the Thom Hartmann Program

L. Randall Wray is interviewed on the Thom Hartmann Program below.

The interview ranges over quite a few issues, including Piketty.

Sraffians versus Kaleckians versus Fundamentalist Post Keynesians

Chapter 10 of John King’s A History of Post Keynesian Economics since 1936 (2002) looks at the disputes between Sraffians, Kaleckians and fundamentalist Post Keynesians – or between the various subgroups of “broad tent” Post Keynesianism as defined by Hamouda and Harcourt in 1988.

A review of this chapter follows:

(1) Sraffians and Kaleckians versus Fundamentalist Keynesians
The Sraffians and Kaleckians had a number of criticisms of Keynes’ General Theory and the fundamentalist Post Keynesians.

First, the Sraffians. King (2002: 206) notes that Sraffians repudiate all forms of supply and demand analysis and the Marshallian microfoundations that fundamentalist Keynesians use.

There was also a debate about whether economic analysis should be focused on the long or the short period, since Keynes had concentrated on the short period, but Sraffians were more interested in the long period. At one stage, even Joan Robinson thought that Post Keynesians should use Sraffa’s long period analysis to displace attempts to use general equilibrium theory to interpret the General Theory (King 2002: 206).

Garegnani (1983) was an important statement of the Sraffian position. Garegnani argued that there were two routes to the principle of effective demand, as follows:

(1) the first was, via Sraffa, the critique of neoclassical real capital and labour market theory, and

(2) the second, via Keynes, which uses liquidity preference and rejects neoclassical monetary theory.

Garegnani pointed out that the Cambridge capital controversies had shown that the demand curves for labour and capital were not necessarily downward sloping or well behaved, and that this was sufficient to invalidate neoclassical theory, a critique which was not open to Keynes since the capital critique happened after his death (King 2002: 207).

The level of employment and output were determined by effective demand, but in essence, although money was important, effective demand could be explained by the consumption function and the multiplier, without Keynes’ role for expectations, uncertainty or money as an explanation of involuntary unemployment in the short period (King 2002: 207). The problem, according to Garegnani, was that Keynes had not provided an alternative to the neoclassical theory of output in the long period (King 2002: 207).

Garegnani concluded:

“This does not mean that ‘money does not matter’, or that ‘real’ phenomena will again emerge as independent of ‘monetary’ factors. What I contend is only that, Keynes’s liquidity preference is not necessary to establish the principle of effective demand in the short or the long period. Money does play an essential role for effective demand in that … it allows the circle production-income-demand-production to break in the savings-investment link; but this, so far as I can see, has little to do with an explanation of the rate of interest by means of Keynes’s liquidity preference.” (Garegnani 1983: 78).

In short, according to Garegnani, the Sraffian real critique of neoclassical capital theory provided a better foundation for the principle of effective demand (King 2002: 207).

Next, we have the Kaleckian objections to Keynes and fundamentalist Post Keynesianism, which often amounted to the charge that Kalecki’s theories were more realistic in relation to modern capitalist economies than some of Keynes’ ideas.

The early Joan Robinson had already argued that Kalecki’s macroeconomics were superior to Keynes’ (King 2002: 207). Sawyer (1987) argued that Kalecki had integrated imperfect competition and oligopoly into his economics and thus provided a better theory than Keynes (King 2002: 208). Furthermore, in Kalecki’s theory, wage and profit shares were determined by the degree of monopoly rather than marginal productivity, and real wages by union power rather than supply and demand for labour (King 2002: 208). Furthermore, there was an important role for retained earnings in investment that Keynes had neglected (King 2002: 208).

Kaleckians also argued for a greater role for social power in economic analysis, and contended that Kalecki had employed a theory of endogenous money when Keynes had assumed exogenous money in the General Theory (King 2002: 208).

(2) Kaleckians and Fundamentalist Keynesians versus Sraffians
Next, we have the Kaleckian and fundamentalist Post Keynesian criticisms of Sraffian economics.

First, the fundamentalist Post Keynesian view of Sraffa. After Joan Robinson broke with the Sraffians, she later produced a fundamentalist Post Keynesian critique of the Sraffians (Robinson 1979). Robinson charged that the Sraffians ignored the role of fundamental uncertainty, the role of expectations and the precarious basis on which expectations were formed in capitalist societies (King 2002: 209).

Sraffian economics was also in error by focussing on static and timeless equilibrium positions and on the “fetish” of the long period (King 2002: 209).

Robinson now thought that economics should be mainly concerned with the short period and that Keynes’ marginal efficiency of capital was a mistake:

“[sc. Keynes] made a fatal mistake in offering a quasi-long-period definition of the inducement to invest as the ‘marginal efficiency of capital’, that is, the profit that will be realised on the increment to the stock of capital that results from current investment and, still worse, identified the profitability of capital with its social utility. This was an element in the old doctrine from which he failed to escape. He had an alternative concept of the inducement to invest as the expected future return on sums of finance to be devoted to investment. Minsky (1976) points out that he did not seem to recognise the difference between the two formulations. If he had stuck to his short-period brief, he would have used only the second.” (Robinson 1979: 179–180).

She also charged that Garegnani’s long period and the normal rate of profit in the long run were metaphysical concepts (King 2002: 209; Robinson 1979: 179–180).

Hyman Minsky was also scathing about Sraffian long period equilibrium positions (Minsky 1990), and the Sraffian uniform long run rate of profit was also unacceptable to Minsky.

Minsky also argued, in contrast to Sraffians, that uncertainty and money were fundamental elements of capitalism and the basis of any viable theory, as Keynes had argued (King 2002: 209; Minsky 1990: 363–366).

The Kaleckian critique of Sraffian economics was developed in Halevi and Kriesler (1991), Kriesler (1992), Sawyer (1992) and Steindl (1993).

Halevi and Kriesler (1991) also attacked as unrealistic concepts (1) the Sraffian idea of a tendency to a uniform long-run rate of profit and (2) the tendency to long-run natural prices. Kalecki, they argued, rightly focussed on the short period, not the dubious long period as in Sraffa, and also Sraffians were mistaken in their treatment of the concept of capacity utilisation (King 2002: 210).

(3) Fundamentalist Keynesians and Sraffians versus Kaleckians
Finally, we have the fundamentalist Post Keynesian and Sraffian criticisms of Kaleckian economics.

Fundamentalist Post Keynesian reception of Kalecki has been mixed. Paul Davidson argued that Keynes’ system was more general than Kalecki’s, and could be applied to both situations of perfect and imperfect competition (King 2002: 211). Money and uncertainty were fundamental to any realistic economics, and to the core of Keynes’ theory and hence Post Keynesian economics (King 2002: 212), but Kalecki did not pay sufficient attention to them.

Other fundamentalist Keynesians like Victoria Chick and Sheila Dow have had little interest in Kaleckian theory (King 2002: 212).

Secondly, Sraffian criticisms of Kaleckian economics are not well developed, though Steedman (1992) attacked Kaleckian theory and argued that they had ignored issues such as input–output relations, joint production, and aspects of mark-up pricing.

So what is the state of the debate today?

Joan Robinson had turned against Sraffian theory in the late 1970s, and preferred a Keynes-Kalecki synthesis (King 2002: 214). She also contended that the reswitching debate in the Cambridge capital controversy was ultimately “an unnecessary distraction” (King 2002: 214).

In the 1990s, a type of Keynes-Kalecki synthesis was continued. Philip Arestis’ The Post-Keynesian Approach to Economics (1992) used an approach that attempted to synthesise Keynes and Kalecki (King 2002: 216).

In the same year, Marc Lavoie’s Foundations of Post-Keynesian Economic Analysis (1992) favoured a Kaldorian and Kaleckian synthesis (King 2002: 217).

By the time of Arestis, Dunn and Sawyer’s (1999) defence of the coherence of Post Keynesian economics from Walters and Young (1997), they excluded the Sraffians from three-fold division of “broad tend” Post Keynesianism (and non-neoclassical Institutionalists had replaced the Sraffians) (King 2002: 219).

It could be argued that it is probably Sraffian theory that is the least compatible with the other strands of Post Keynesianism, and that the Sraffian theories of (1) a tendency to a uniform long-run rate of profit and (2) to long-run “natural” prices are empirically dubious and unnecessary concepts.

King (2002: 219–220) concludes that Post Keynesian economics went through a period of synthesis in the 1990s and is no less coherent than the eclectic theories within the neoclassical tradition.

BIBLIOGRAPHY
Arestis, Philip. 1992. The Post-Keynesian Approach to Economics: An Alternative Analysis of Economic Theory and Policy. Edward Elgar Publishing, Aldershot, Hants, England.

Arestis, Philip, Dunn, Stephen P. and Malcolm Sawyer. 1999. “Post Keynesian Economics and its Critics,” Journal of Post Keynesian Economics 21.4: 527–549.

Eatwell, John. 1983. “The Long-Period Theory of Employment,” Cambridge Journal of Economics 7.3–4: 269–285.

Garegnani, P. 1983. “Two Routes to Effective Demand: Comment on Kregel,” in J. A. Kregel (ed.), Distribution, Effective Demand and International Relations. Macmillan, London. 69–80.

Halevi, Joseph and Kriesler, Peter. 1991. “Kalecki, Classical Economics and the Surplus Approach,” Review of Political Economy 3.1: 79–92.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Kriesler, Peter. 1992. “Answers for Steedman,” Review of Political Economy 4.2: 163–170.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Mainwaring, Lynn. 1992. “Steedman’s Critique: A Tentative Response from a Kaleckian,” Review of Political Economy 4:2: 171–177.

Minsky, H. P. 1990. “Sraffa and Keynes: Effective Demand in the Long Run,” in Krishna Bharadwaj and Bertram Schefold (eds.), Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory. Unwin Hyman, London. 362–371.

Robinson, J. 1979. “Garegnani on Effective Demand,” Cambridge Journal of Economics 3: 179–180.

Sawyer, Malcolm C. 1987. “Towards a post-Kaleckian Macroeconomics,” in Philip Arestis and Thomas Skouras (eds.), Post-Keynesian Economic Theory: A Challenge to Neo-classical Economics. Wheatsheaf Books, Brighton. 146–179.

Sawyer, Malcolm C. 1992. “Questions for Kaleckians: A Response,” Review of Political Economy 4.2: 152–162.

Steedman, Ian. 1992. “Questions for Kaleckians,” Review of Political Economy 4.2: 125–151.

Steindl, J. 1993. “Steedman versus Kalecki,” Review of Political Economy 5:1: 119–124.

Walters, B. and D. Young. 1997. “On the Coherence of Post-Keynesian Economics,” Scottish Journal of Political Economy 44.3: 329–349.

Top US Federal Marginal Tax Rates 1952–2009

The graph below shows the top US federal marginal tax rates on (1) earned income (in red) and (2) (where it diverges from the latter) ordinary income (in blue), from the the data here.

This is a large part of the story of rising US income inequality.

The major changes to the rates were as follows:

(1) from 1933 to the early 1940s the top marginal tax rate was progressively increased from about 60% to about 90% to fund the war effort, and stayed at 90% until the Kennedy–Johnson tax cut of 1964.

(2) the Kennedy–Johnson tax cut of 1964 reduced it to 70%.

(3) then under Reagan’s presidency the top marginal tax rate on ordinary income was reduced to 50% in the Economic Recovery Tax Act of 1981 and to 30% in 1988.

(4) subsequent changes have been minor, and the rate has fluctuated in a range from 30 to 40%.

Two Summaries of Bewley’s Why Don’t Wages Fall During a Recession?

Truman Bewley’s Why Wages Don’t Fall During a Recession (1999) is an excellent empirical study of the causes of downwards nominal wage rigidity and how and why wages are set in modern capitalist economies.

Two concise summaries of that book are here:

Robert Nielsen, “Why Wages Don’t Fall During A Recession,” December 23, 2013.
http://robertnielsen21.wordpress.com/2013/12/23/why-wages-dont-fall-during-a-recession/

Bryan Caplan, “Why Don’t Wages Fall During a Recession?: Q&A with me channeling Truman Bewley,” http://econlog.econlib.org/archives/2013/09/why_dont_wages.html

BIBLIOGRAPHY
Bewley, T. F. 1999. Why Wages Don’t Fall During a Recession. Harvard University Press, Cambridge, MA.

Davidson on the History of Post Keynesianism

Paul Davidson (2003–2004 and 2005) presents a history of Post Keynesian economics in response to King (2002).

In contrast to King (2002) and Hamouda and Harcourt (1988), Davidson (2003–2004: 247) argues that neither Sraffians nor Kaleckians should be identified as Post Keynesians.

Sraffians, Davidson contends, do not accept Keynes’ emphasis on uncertainty and have no proper place for money in their economic system, and Michał Kalecki, unlike Keynes, did not think interest rates had an important effects on economic life, his monetary analysis was different from that of Keynes, and his theory (unlike Keynes’) assumed that some degree of monopolistic competition was a necessary condition for involuntary unemployment (Davidson 2003–2004: 247, 249). In addition, Sraffians and Kaleckians do not overthrow the neoclassical ideas of neutral money and ergodicity (Davidson 2003–2004: 263).

Whether Joan Robinson, Nicholas Kaldor, and Roy Harrod were really the first Post Keynesians or better seen as “forefathers” and a “foremother” of Post Keynesianism is, according to Davidson, a minor “quibble,” but Kalecki should not be classified as a Post Keynesian (Davidson 2003–2004: 247).

Next, Davidson notes the animosity between Roy Harrod and the Cambridge Keynesians (such as Robinson, Kahn, and Kaldor), and to a lesser extent the bad relations between Robinson and Kaldor (Davidson 2003–2004: 249–250).

This may well have hindered a unified Post Keynesian front in the post-WWII period, and another consequence was that two Post Keynesian generalisations of growth theory were developed in the UK: that of Roy Harrod and that of Joan Robinson in the Accumulation of Capital (1954) (Davidson 2003–2004: 250).

Another impediment was the hysterical McCarthyism that plagued America after 1945 and caused British Post Keynesianism to be suspect, which greatly hindered it in the US in those years (Davidson 2003–2004: 250–251).

While King sees the Cambridge capital controversy as instrumental in the emergence of Post Keynesian economics as a distinct school (King 2002: 80), Davidson sees the publication of Sidney Weintraub’s book An Approach to the Theory of Income Distribution (1958) as the moment when Post Keynesian economics emerged, and also holds that Weintraub was the “founding father of Post Keynesianism in the United States” (Davidson 2003–2004: 251–252).

In America, a major development was the foundation of the Journal of Post Keynesian Economics by Sidney Weintraub and Paul Davidson in 1978, as Post Keynesians were being excluded from mainstream journals (Davidson 2003–2004: 257).

In contrast to King, Davidson does not see Minsky as a Post Keynesian, and notes that

“Minsky often told me that he never wanted to be identified as a Post Keynesian (hence he fails King’s test of identifying oneself as a Post Keynesian). …. In reality Minsky was, and always wanted to be, a mainstream Keynesian who used the Modigliani variant of the IS-LM system and whose major distinction from other mainstream Keynesians was that he possessed knowledge of actual real-world financial markets.” (Davidson 2003–2004: 252).

Furthermore, Davidson does not see Alfred Eichner’s work as essentially Post Keynesian, but as an attempt to generalise Kalecki’s theory and even as a “special case of the emerging New Keynesian theory where wage and price rigidity was an essential element” (Davidson 2003–2004: 256).

In short, although Davidson once adopted a “broad tent” view of what Post Keynesianism is (Davidson 2005: 394–395), he now sees this “broad tent” approach to Post Keynesianism as adopted by Hamouda and Harcourt (1988) as a stumbling block to a coherent Post Keynesian school, and prefers a “narrow tent” definition of Post Keynesianism (or “fundamental Keynesianism”) as a school that rejects the three classical axioms, namely, the ergodic axiom, the neutral money axiom and the gross substitution axiom (Davidson 2003–2004: 263; Davidson 2005: 395–397).

BIBLIOGRAPHY
Davidson, Paul. 2003–2004. “Setting the Record Straight on ‘A History of Post Keynesian Economics,’” Journal of Post Keynesian Economics 26.2 245–272.

Davidson, Paul. 2005. “Responses to Lavoie, King, and Dow on what Post Keynesianism is and who is a Post Keynesian,” Journal of Post Keynesian Economics 27.3: 393–408.

Hamouda, O. F. and Geoffrey Colin Harcourt. 1988. “Post-Keynesianism: From Criticism to Coherence?,” Bulletin of Economic Research 40.1: 1–33.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Hamouda and Harcourt on the History of Post-Keynesian Economics

Hamouda and Harcourt (1988; reprinted in Hamouda and Harcourt 2003) provide a review of the history of “broad tent” Post Keynesian economics and its various strands, and a response to the charge that Post Keynesian economics is not coherent.

Hamouda and Harcourt (1988: 1) note that in the late 1980s Walrasians like Frank H. Hahn and neoclassical synthesis economists like Robert Solow had a poor understanding of Post Keynesian economics and were not clear about what its theories involved.

They furthermore noted that “Post Keynesian economics” was itself an expression referring to heterogeneous groups in several strands (Hamouda and Harcourt 1988: 2).

Although not all Post Keynesians agree completely with their analysis, Hamouda and Harcourt (1988: 2) identify a number of “routes” or influences that led to the various Post Keynesian strands, as follows:

(1) Classical Political economy to Marshall and Keynes and to the American Post Keynesians
The first “route” runs from Classical economics to the British marginalist Alfred Marshall, and then to John Maynard Keynes. Keynes inherited his early economic thinking from Marshall, but emancipated himself from Marshallian neoclassical ideas in the General Theory and later work.

An important American Post Keynesian strand developed as inspired from the work of Keynes and included Sidney Weintraub, Paul Davidson, Jan Kregel and Hyman Minsky. Lorie Tarshis was also a North American Post Keynesian who independently developed a Keynesian macroeconomic theory that was developed from the work of Keynes, Richard Kahn, Joan Robinson and even Gardiner Means (Hamouda and Harcourt 1988: 6).

(2) Classical Political economy to Sraffa and later Sraffians
The second strand is the neo-Ricardian or Sraffian group. Piero Sraffa’s work is foundational for this strand, and that in turn was influenced by Classical political economy and Ricardo, or least Sraffa’s reinterpretation and reformulation of it.

Sraffa’s work was developed by later Sraffians/neo-Ricardians such as Pierangelo Garegnani, Krishna Bharadwaj, John Eatwell and Luigi Pasinetti, who introduced the Keynesian principle of effective demand into his theories.

(3) Classical Political economy to Marx to Kalecki and later Kaleckians
The third group runs from Classical economics, via Marx, to Michał Kalecki.

Kalecki was the important modern figure here, but, though influenced by Marx, was an unconventional Marxist and rejected the labour theory of value.

Kalecki developed a theory of effective demand, but using the ideas of mark-up pricing and social conflict as the determinant of wages (Hamouda and Harcourt 1988: 13).

Hamouda and Harcourt (1988: 14) see Joan Robinson and her followers as developers of this Kaleckian tradition in Post Keynesian economics.

Hamouda and Harcourt (1988: 18–19) also see Paolo Sylos Labini as having contributed to the Kaleckian strand of Post Keynesian theory.

Hamouda and Harcourt (1988: 3) also identify a number of “outstanding individual figures” who are not easily classified into one of the strands listed above: for example, Nicholas Kaldor, Luigi Pasinetti, Richard M. Goodwin (Hamouda and Harcourt 1988: 23), George L. S. Shackle, and Wynne Godley (Hamouda and Harcourt 1988: 23–24).

The final point that Hamouda and Harcourt (1988: 25) make is that it is within each strand that coherent approaches and macroeconomic theories have been developed.

They conclude:

“… within the various strands that we have discerned and described, there are coherent frameworks and approaches to be found, though obviously there remain within each unfinished business and unresolved puzzles. The real difficulty arises when attempts are made to synthesize the strands in order to see whether a coherent whole emerges. Our own view is that this is a misplaced exercise, that to attempt to do so is mainly to search for what Joan Robinson called ‘only another box of tricks’ to replace the ‘complete theory’ of mainstream economics which all strands reject. The important perspective to take away is, we believe, that there is no uniform way of tackling all issues in economics and that the various strands in post Keynesian economics differ from one another, not least because they are concerned with different issues and often different levels of abstraction of analysis.

An important implication of the above conclusion is that the policies which may be rationalized by post Keynesian analysis are very-much geared to concrete situations, the historical experiences and the sociological characteristics of the economies concerned. More generally, this approach which was that, for example, of Keynes, Kalecki, Joan Robinson and Arthur Okun, sometimes and most appropriately, has been dubbed the ‘horses for courses’ approach.” (Hamouda and Harcourt 1988: 25).

Of course, Hamouda and Harcourt wrote this article in 1988, and one could well argue that, since that time, there has been a convergence to some extent between the various strands, but also the emergence of new strands such as modern monetary theory (MMT).

BIBLIOGRAPHY
Hamouda, O. F. and Geoffrey Colin Harcourt. 1988. “Post-Keynesianism: From Criticism to Coherence?,” Bulletin of Economic Research 40.1: 1–33.

Hamouda, O. F. and Geoffrey Colin Harcourt. 2003 [1988]. “Post-Keynesianism: From Criticism to Coherence?,” in Claudio Sardoni (ed.), On Political Economists and Modern Political Economy: Selected Essays of G. C. Harcourt. Routledge, London. 209–232.

Colin Rogers’ Money, Interest and Capital, Chapter 3

Chapter 3 of Colin Rogers’ Money, Interest and Capital (1989) deals with neo-Walrasian general equilibrium theory and the role of money in that theory.

Such general equilibrium models do not take the value of capital as a given quantity, but as an array of quantities (Rogers 1989: 45).

Neo-Walrasian models reduce to ones of perfect barter in which perfect knowledge, tâtonnement and recontracting are assumed to coordinate all economic activity before trade commences (Rogers 1989: 46).

Money as a unit of account is added without disrupting or changing any of the perfect barter conditions (Rogers 1989: 46). That is, money is an inessential addition to a real model in which perfect barter is assumed (Rogers 1989: 46).

An economic model that treats money as an unnecessary addition does not adequately describe real world monetary capitalist economies, especially the problems of a modern economy with a credit and banking system (Rogers 1989: 47).

The most sophisticated neo-Walrasian model is that of Arrow-Debreu, which abolishes any problems that arise in the real world from uncertainty or shifting expectations; the Arrow-Debreu model also collapses the future into the present (Rogers 1989: 48).

Alternatively, neo-Walrasian temporary equilibrium models relax the Arrow-Debreu assumption of a complete set of futures markets for all time-dated commodities, but still face the problem of expectations (Rogers 1989: 48–49).

The solution that was adopted by many neoclassical models was the Rational Expectation hypothesis, which assumes that agents correctly predict on average the equilibrium prices of the future (Rogers 1989: 49).

Thus neo-Walrasian temporary equilibrium models are functionally equivalent to Arrow-Debreu models, and once again reduce to models where money is an inessential addition (Rogers 1989: 49).

Rogers considers the neo-Walrasian equilibrium model of Hahn (1982), in order to compare it with Wicksellian monetary theory. In Hahn’s model, equilibrium does not generate an equality of interest rates between the two commodities produced in the model (Rogers 1989: 53). The peculiar feature of the neo-Walrasian interest rate theory is that it does distinguish profit from interest (Rogers 1989: 58).

In short, all neo-Walrasian models must be rejected as irrelevant to real world economies because they ultimately have no real role for money (Rogers 1989: 67).

BIBLIOGRAPHY
Hahn, Frank. 1982. “The Neo-Ricardians,” Cambridge Journal of Economics 6.4: 353–374.

Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

Colin Rogers’ Money, Interest and Capital, Chapter 2

Chapter 2 of Colin Rogers’ Money, Interest and Capital deals with Wicksell’s monetary theory.

Wicksellian monetary theory was widely accepted in the period before Keynes’ General Theory, and indeed Keynes himself accepted the natural rate of interest in the Treatise on Money.

The real natural rate of interest lies at the heart of Wicksell’s version of loanable funds theory, and links Wicksell’s capital theory with his monetary theory (Rogers 1989: 22). Wicksell’s monetary theory was an attempt to extend the quantity theory to an economy with credit money and loans (Rogers 1989: 23).

Wicksell’s theory of capital was in turn developed from the work of Jevons and Böhm-Bawerk (Rogers 1989: 27).

The concept of capital can be divided into two ideas:

(1) real capital, or the physical goods themselves, e.g., machines, tools, or raw materials, or

(2) capital defined in terms of a sum of exchange value (or in monetary terms). (Rogers 1989: 27).

Real capital in sense (1) can be measured in technical units, but that would mean that there would be as many technical units as there are types of capital goods (Rogers 1989: 28).

But in order to calculate the rate of interest (the return on capital), capital has to be measured in monetary terms.

Rogers continues:

“Apart from pointing out the technical necessity of defining capital in value terms, Wicksell also suggests that it is necessary for theoretical reasons; namely, that in equilibrium the rate of interest must be the same on all capital. This condition is, of course, the classical condition of long-period equilibrium defined in terms of a uniform rate of return on all assets. It is the notion of equilibrium employed by Wicksell to define the natural rate of interest. To define such an equilibrium, however, capital must be treated as a mobile homogeneous entity so that it may move between sectors to equalize the rate of interest/profit. Capital defined as value capital (financial capital) can fulfil this role but capital defined in technical or quantity terms cannot.” (Rogers 1989: 28).

Wicksell consequently argued that all capital goods can be regarded as “saved up labour and land” (Rogers 1989: 29).

When the money rate of interest at which demand for investment credit and the monetary supply of savings is equal, there is a monetary equilibrium rate. And, when this monetary equilibrium rate is also equivalent to the expected yield on new capital, then the money rate of interest and the real Wicksellian natural rate of interest are equal (Rogers 1989: 39).

Rogers argues that the Cambridge capital critique applies to Wicksell’s theory of capital, and that it has proven that Wicksell’s natural rate of interest is untenable outside a purely abstract one-commodity world (Rogers 1989: 22).

Rogers reviews the Cambridge capital controversy (Rogers 1989: 30–39), and notes the problems with the aggregative (Wicksellian) neoclassical production function (Rogers 1989: 30–32).

In essence, the major issues raised by the Cambridge Capital controversy relevant here are as follows:

(1) the problems with the treatment of capital in the neoclassical production function Q = f(K,L), and the circularity involved in defining the quantity of capital K, when to determine K one needs to know the rate of interest, but to determine the rate of interest one needs to know the value of capital K (Rogers 1989: 31). The upshot is that K cannot be an exogenous variable in the production function.

(2) it is not possible, as noted above, to define the Wicksellian natural rate outside of a one commodity world (Rogers 1989: 32);

(3) the issue of reverse capital deepening, and

(4) capital reswitching (Rogers 1989: 32).

Rogers points to three modern neoclassical responses to the Cambridge capital controversy, as follows:

(1) those neoclassical economists who accept the critique and use an alternative neo-Walrasian analysis for general equilibrium theory that is not subject to the Cambridge capital critique, but that nevertheless has insolvable problems of its own (Rogers 1989: 34–35);

(2) those neoclassical economists who use a methodological defence of the neoclassical production function and Wicksellian general equilibrium theory applied to a one commodity world, which is supposed to be a useful pedagogical tool or “parable” teaching fundamental ideas of neoclassical interest theory, although it is untrue that such an unrealistic and empirically irrelevant model has any great lessons to teach (Rogers 1989: 34).

(3) those neoclassical economists who simply accept the neoclassical production function “on faith” (Rogers 1989: 33, n. 7).

Now the Classical loanable funds model of interest is supposed to relate how interest in a monetary economy still reflects the real forces of productivity and thrift (Rogers 1989: 40).

But in a monetary economy the act of saving money does not necessarily reflect real saving (Rogers 1989: 42).

The only viable model in which the Wicksellian neoclassical interest theory is possible is one which assumes a one commodity world where that single commodity can function either a capital good or a consumption good (Rogers 1989: 32, n. 6).

The natural rate can only be defined in a one commodity world, but not in a world with heterogeneous capital goods (Rogers 1989: 32, 43). The consequence is that only the monetary rate of interest in the loanable funds model is left after the untenable natural rate is cut out, and that the money rate of interest is cut free of the real forces of productivity and thrift (Rogers 1989: 43).

BIBLIOGRAPHY
Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

The Wealth of the Top 10% in the US

An interesting graph of the top decile income share in the United States from 1910–2010 from Piketty’s data here.

As we see, since 1981 the top 10%’s wealth has soared back to the level it was at in the 1920s, and a major cause, though not the only one, was Reagan’s changes to the tax system which made that system substantially less progressive.

The process is illustrated by changes to the top marginal tax rate.

From 1933 to the early 1940s the top marginal tax rate was progressively increased from about 60% to about 90%, and stayed at 90% until the Kennedy–Johnson tax cut of 1964 reduced it to 70%. Even with this, the minor fluctuations from 1945 to the early 1981 are within the band of 32%-36% and showed no long-run trend upwards but relative stability until the early 1980s.

Libertarians are fond of railing against so-called “soak-the-rich” tax systems, and yet from the 1940s to 1981 the US had a tax system with large progressive taxes on high individual income.

But those high taxes rates were consistent with very strong economic growth in that era: in fact, if we ignore the World Wars, the best decadal per capita GNP growth the US ever had, in the period from 1871 to 2001, was in the decade from 1961 to 1970.

Then under Reagan’s presidency the top marginal tax rate was reduced to 50% in the Economic Recovery Tax Act of 1981 and to 30% (in 1988). Further adjustments were but minor and only changed this rate in a range from 30 to 40%, as can be seen in the data here.

I have largely steered clear of the whole debate on Thomas Piketty’s Capital in the Twenty-First Century, but it seems to me James Galbraith, amongst others, has provided a good heterodox Keynesian perspective on it:

(1) Galbraith, James K. 2014. “Policy, not capitalism, is to blame for the income divide,” May 26, Ft.com.

(2) Galbraith, James K. 2014. “Kapital for the Twenty-First Century?,” Dissent, Spring.

Addendum
Philip Pilkington also has some good posts analysing Piketty’s work here:

Philip Pilkington, “Piketty’s Regressive Views on Public Debt and the Potential Impact of his Book,” Fixing the Economists, April 30, 2014.

Philip Pilkington, “Why Thomas Piketty is Wrong About Inflation and Interest Rates,” Fixing the Economists, May 16, 2014.

Rothbard’s Argument for Natural Rights and the Absolute Right to Private Property is Totally Flawed

And it is easy to demonstrate so, and I expand below on an old post of mine.

First, Rothbard did not attempt to justify his natural rights ethics by means of theology (Rothbard 2002: 4), so this need not detain us.

Rothbard used a non-religious or secular justification for natural law and natural rights, and he presents his case for natural rights in For a New Liberty: The Libertarian Manifesto (2nd edn; 2006 [1973]):

“Let us turn then to the natural-rights basis for the libertarian creed, a basis which, in one form or another, has been adopted by most of the libertarians, past and present. ‘Natural rights’ is the cornerstone of a political philosophy which, in turn, is embedded in a greater structure of ‘natural law.’ Natural law theory rests on the insight that we live in a world of more than one—in fact, a vast number—of entities, and that each entity has distinct and specific properties, a distinct ‘nature,’ which can be investigated by man’s reason, by his sense perception and mental faculties. Copper has a distinct nature and behaves in a certain way, and so do iron, salt, etc. The species man, therefore, has a specifiable nature, as does the world around him and the ways of interaction between them. To put it with undue brevity, the activity of each inorganic and organic entity is determined by its own nature and by the nature of the other entities with which it comes in contact. Specifically, while the behavior of plants and at least the lower animals is determined by their biological nature or perhaps by their ‘instincts,’ the nature of man is such that each individual person must, in order to act, choose his own ends and employ his own means in order to attain them. Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life. Since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man’s survival and prosperity that he be free to learn, choose, develop his faculties, and act upon his knowledge and values. This is the necessary path of human nature; to interfere with and cripple this process by using violence goes profoundly against what is necessary by man’s nature for his life and prosperity. Violent interference with a man’s learning and choices is therefore profoundly ‘antihuman’; it violates the natural law of man’s needs.” (Rothbard 2006 [1973]: 26–27).

There are severe problems here, as follows:

(1) It is untrue that “since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man’s survival and prosperity that he be free to learn, choose, develop his faculties, and act upon his knowledge and values.” Rothbard is claiming a moral necessity here. He is deducing a morally necessary “ought” from an “is,” a deduction which, as Hume showed, is impossible to justify. But putting that aside for the moment (more on it later), even his reasoning is faulty.

Take a clear example: all human beings begin life as children and nearly always subject to the coercion of their parents who impose rules, deprive them of the freedom to do anything they want, and at the same time choose to impart knowledge and values to their children.

Children can and do survive and flourish while being subject to quite severe parental constraints and rules. For example, if one is raised Catholic, one did not give one’s consent when a child to be raised with Catholic values and religion: the choice was made by the parents, but one may well become a moral, successful, and prosperous human being, despite that parental coercion in knowledge and values.

There are even adults who prefer to let others choose their ends.

Certain mentally impaired human beings can survive and even flourish even though they are subject to strict control by their carers.

(2) Rothbard’s statement is wrong:

“Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life.”

On the contrary, human beings do possess “automatic instincts”: hunger, thirst, and a vast range of genetically determined behavioural traits. To take one example: human children have a genetic predisposition to acquire language as naturally as a bird grows its feathers.

(3) Rothbard and the “is-ought” problem of David Hume.
The central passage where Rothbard attempts to deduce a human being’s natural right to be free from violence or coercion is here:

“the nature of man is such that each individual person must, in order to act, choose his own ends and employ his own means in order to attain them. Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life. Since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man’s survival and prosperity that he be free to learn, choose, develop his faculties, and act upon his knowledge and values. This is the necessary path of human nature; to interfere with and cripple this process by using violence goes profoundly against what is necessary by man’s nature for his life and prosperity. Violent interference with a man’s learning and choices is therefore profoundly ‘antihuman’; it violates the natural law of man’s needs.”

This is subject to Hume’s “is–ought problem,” or at least one important interpretation of it that is compelling.

When a person argues that some moral “ought” statement is necessarily true and entailed by some prior descriptive facts, there are insuperable difficulties with defending such moral necessity.

Remember that the “ought” here entails a necessity in the truth of the moral statement.

How is it possible to deduce with necessary truth the prescriptive/normative statement “violent interference with a man’s learning and choices is therefore profoundly ‘antihuman’” from mere descriptive statements?

To see how unconvincing this argument is, one only needs to make some changes to it to see the absurdity of the underlying type of argument:

“the nature of a leaf under the influence of gravity is to fall to the ground, such that each leaf must, in order to fall, be free from obstruction and interference when it detaches from the tree. Possessing no automatic instincts, each leaf must be subject to gravity, and fall to the ground; to interfere with and cripple this process by using interference to stop the leaf falling to the ground goes profoundly against what is necessary by the leaf’s nature. Violent interference with a leaf’s nature is therefore profoundly ‘antileaf’; it violates the natural law of the leaf’s natural action.”

Just because the nature of a leaf (or really its propensity to do certain things under natural laws) is to fall to the ground under the influence of gravity, it simply does not follow that we have deduced with necessary truth that the leaf has any moral right whatsoever to fall to the ground.

Hume’s “is–ought problem” is a profound and devastating one for natural rights theorists and indeed for anyone who thinks that he can necessarily deduce moral truths from natural facts.

(4) Rothbard’s argument for the “right to self-ownership” is flawed.
Rothbard’s defence of the “right to self-ownership” is as follows:

“The most viable method of elaborating the natural-rights statement of the libertarian position is to divide it into parts, and to begin with the basic axiom of the ‘right to self-ownership.’ The right to self-ownership asserts the absolute right of each man, by virtue of his (or her) being a human being, to ‘own’ his or her own body; that is, to control that body free of coercive interference. Since each individual must think, learn, value, and choose his or her ends and means in order to survive and flourish, the right to self-ownership gives man the right to perform these vital activities without being hampered and restricted by coercive molestation. Consider, too, the consequences of denying each man the right to own his own person. There are then only two alternatives: either (1) a certain class of people, A, have the right to own another class, B; or (2) everyone has the right to own his own equal quotal share of everyone else. The first alternative implies that while Class A deserves the rights of being human, Class B is in reality subhuman and therefore deserves no such rights. But since they are indeed human beings, the first alternative contradicts itself in denying natural human rights to one set of humans. Moreover, as we shall see, allowing Class A to own Class B means that the former is allowed to exploit, and therefore to live parasitically, at the expense of the latter. But this parasitism itself violates the basic economic requirement for life: production and exchange.” (Rothbard 2006 [1973]: 28).

The first problem with this argument is that ownership and private property in the sense defined by Rothbard (and this point is crucial) are not even natural concepts. You do not naturally “own” your body in the sense in which Rothbard defines the word: but you do possess/have a body as a consequence of genetic and biological processes.

But ownership rights and private property rights even as moral concepts are socially constructed concepts and, in any sufficiently complex society, legal concepts too, not natural concepts.

Let us turn to Rothbard’s justification for absolute self-ownership to expand on this point:

“The right to self-ownership asserts the absolute right of each man, by virtue of his (or her) being a human being, to ‘own’ his or her own body; that is, to control that body free of coercive interference.”

This is just another instance of Rothbard’s reasoning being utterly unconvincing because it is subject to Hume’s “is–ought problem.”

That human beings qua natural human beings (and not malformed or severely injured human beings, for instance) possess bodies is an empirical fact, as we have seen.

It is clear that Rothbard uses “own” in a special moral sense here. For if “own” merely means “possess” or “have,” then one can no doubt say that human beings who possess bodies own (= possess or have) bodies, but this is a tautology and a trivial truth.

But it does not follow from his descriptive natural fact that humans beings must with necessary moral truth own their bodies in the sense of being able “to control that body free of coercive interference.”

Furthermore, Rothbard’s claim that there are only “two alternatives” to denying each man the right to own his own person is manifestly false, as is shown by Edward Feser (“Rothbard as a philosopher,” August 8, 2009).

In fact, there are a number of possibilities that Rothbard does not consider, as Feser notes:

(1) no human actually owns himself or herself;
(2) a divine, creator being owns all human beings;
(3) one group of human beings might have a right to partial ownership of another group;
(4) all human beings have a partial and/or unequal ownership of everyone else.

Again, we must remember that the word “own” here means the absolute, morally necessary natural right “to control a human body free of coercive interference.”

It is (1) that is right: no human being or any living thing owns itself in the sense of having some absolute, morally necessary natural right “to control its body free of coercive interference.”

Does this mean that human beings can have no moral rights? It does not: for there are many ethical theories apart from Rothbard’s natural rights theory that can overcome or evade Hume’s “is–ought problem.”

First, it is a mistake to think that morality requires absolute necessary truth, like the truth of a valid analytic statement such as “all bachelors are unmarried” or “1 + 1 = 2.”

For example, some types of consequentialism argue that morality aims at certain ends, and that the logic of moral argument can only be an inductive logic, not a necessary deductive logic.

That is to say, it is correct that no moral “ought” statement is necessarily implied by descriptive facts, but a statement urging certain actions to achieve certain ends may well be inductively implied by descriptive facts in a probabilistic sense only. What we call “ethics” is essentially the inductive logic of arguments about how to achieve certain ends. Even the ultimate ends that we should aim at can be justified with rational argument, empirical evidence and inductive argument (and I have sketched my own consequentialist ethics here, on the basis of the theory called prescriptivism).

So what is the consequentialist view of human rights and rights to property? Under consequentialism, what human beings can have is a non-necessary moral right to a high, but not absolute, degree of freedom from coercive interference and a high, but not absolute, degree of freedom of control over external property. In order to achieve certain ends, we must accept restrictions on both personal property rights and behaviour.

Let us now turn to Rothbard’s natural rights argument for absolute ownership of external objects or external property rights:

“We have established each individual’s right to self-ownership, to a property right in his own body and person. But people are not floating wraiths; they are not self-subsistent entities; they can only survive and flourish by grappling with the earth around them. They must, for example, stand on land areas; they must also, in order to survive and maintain themselves, transform the resources given by nature into ‘consumer goods,’ into objects more suitable for their use and consumption. Food must be grown and eaten; minerals must be mined and then transformed into capital and then useful consumer goods, etc. Man, in other words, must own not only his own person, but also material objects for his control and use. How, then, should the property titles in these objects be allocated?

Let us take, as our first example, a sculptor fashioning a work of art out of clay and other materials; and let us waive, for the moment, the question of original property rights in the clay and the sculptor’s tools. The question then becomes: Who owns the work of art as it emerges from the sculptor’s fashioning? It is, in fact, the sculptor’s ‘creation,’ not in the sense that he has created matter, but in the sense that he has transformed nature-given matter—the clay—into another form dictated by his own ideas and fashioned by his own hands and energy. Surely, it is a rare person who, with the case put thus, would say that the sculptor does not have the property right in his own product. Surely, if every man has the right to own his own body, and if he must grapple with the material objects of the world in order to survive, then the sculptor has the right to own the product he has made, by his energy and effort, a veritable extension of his own personality. He has placed the stamp of his person upon the raw material, by ‘mixing his labor’ with the clay, in the phrase of the great property theorist John Locke. ....

As in the case of the ownership of people’s bodies, we again have three logical alternatives: (1) either the transformer, or ‘creator’ has the property right in his creation; or (2) another man or set of men have the right in that creation, i.e., have the right to appropriate it by force without the sculptor’s consent; or (3) every individual in the world has an equal, quotal share in the ownership of the sculpture—the ‘communal’ solution. Again, put baldly, there are very few who would not concede the monstrous injustice of confiscating the sculptor’s property, either by one or more others, or on behalf of the world as a whole. By what right do they do so? By what right do they appropriate to themselves the product of the creator’s mind and energy? In this clear-cut case, the right of the creator to own what he has mixed his person and labor with would be generally conceded. (Once again, as in the case of communal ownership of persons, the world communal solution would, in practice, be reduced to an oligarchy of a few others expropriating the creator’s work in the name of ‘world public’ ownership.)

The main point, however, is that the case of the sculptor is not qualitatively different from all cases of ‘production.’ The man or men who had extracted the clay from the ground and had sold it to the sculptor may not be as ‘creative’ as the sculptor, but they too are ‘producers,’ they too have mixed their ideas and their technological know-how with the nature-given soil to emerge with a useful product. They, too, are “producers,” and they too have mixed their labor with natural materials to transform those materials into more useful goods and services. These persons, too, are entitled to the ownership of their products.” (Rothbard 2006 [1973]: 36–39).

The argument is just as flawed as Rothbard’s argument for absolute ownership of one’s own body:

(1) the fact that I have used my labour to possess some external object in nature not claimed by anyone else only means that I now possess or have it: the descriptive facts do not entail with necessary moral truth that I now have an absolute right to ownership of the object free from all external coercion. The morally necessary “ought” just does not follow from the “is.”

To see this, let us look at a real world example:

Bees use their labour to collect nectar from flowers: they now have a morally necessary natural right to the nectar!

Then honeybees return to the hive and give their nectar to worker bees. These bees labour by regurgitating the nectar and making honey from it (through the action of enzymes), and they then use their labour to store the honey in honeycombs.

It follows from this that bees own their honey and have the absolute natural right to not be aggressed against and have their honey stolen by other animals and humans!

If Rothbard’s natural rights arguments were true, then it would be a grossly immoral act for any human being to take honey from wild bee hives, and saying that a person used their labour to coercively collect the honey so that he “homesteaded” it does not overcome the problem: for then I could claim that the labour expended by a thief in robbing someone was a legitimate way to own the victim’s property. Clearly, this does not work under Rothbard’s ethics.

Another response would be that natural rights only apply to human beings: but even this does not succeed, for if no non-human, living thing has any absolute natural right to self-ownership and ownership of external things, then why should human beings? Why the double standard?

The answer to these various moral conundrums is of course that Rothbard’s natural rights theory is nonsense.

But what would a consequentialist say about this? Can we take honey from bees morally, given that the bees mixed their labour with the honey? The answer is “yes,” because no living thing has any necessary moral right to its external property in the first place.

Is it always moral to take honey from bees? Though it would have to rank low on the list of moral question humans must face, consequentialism can provide better answers than Rothbard’s natural rights ethics and its incoherence.

If a human being, for example, has no pressing need for food and destroys a hive and takes all the honey leaving the bees with no food and to suffer and starve, then one can make a consequentialist case that this is immoral. But here it would be immoral because we have to keep in mind the consequentialist aim of minimising the harm and suffering we cause to other living things (of course, even here empirical questions arise: is the animal in question conscious? Does it feel pain? Can it suffer?).

But fortunately most bee-keeping is not like this and such moral questions do not normally arise and, as noted above, even if they did would be low on our list of moral questions: for most beekeepers take a certain amount of the honey and leave the hive enough to survive and sometimes even provide the bees with sugar or corn syrup if necessary.

Yet another issue arises with animals: say you acquire fertilised chicken eggs and through your labour create chickens. Does it follow you have an absolute natural moral right to the animals, even to the point of torturing them and mistreating them? Is it immoral for another human being or the community through its laws and legal system to use non-lethal and limited coercion to stop you in your mistreatment? The absurd natural rights ethics of Rothbard says “yes,” the consequentialist rightly says “no,” because (1) you never had any absolute natural right to ownership of the animals in the first place and (2) greater moral issues arise when human beings own living things that can feel pain and suffer.

In short, with these examples, we see how Rothbard’s natural rights ethics leads to incoherence in the first instance, and moral bankruptcy in the second, and that consequentialism is superior.

(2) One of Rothbard’s arguments, taken from Locke, verges on the mystical:

“Surely, if every man has the right to own his own body, and if he must grapple with the material objects of the world in order to survive, then the sculptor has the right to own the product he has made, by his energy and effort, a veritable extension of his own personality. He has placed the stamp of his person upon the raw material, by ‘mixing his labor’ with the clay, in the phrase of the great property theorist John Locke.”

It is difficult to see how using one’s labour to create something makes the thing in question an “extension of [sc. the] … personality” of the labourer.

Even if did, it would still not follow that any necessary natural moral right to the created thing is created.

For example, are children the absolute property of parents, merely because parents have engaged in labour to create the children?

In conclusion, the foundation of Rothbard’s natural rights ethics is utterly flawed, incoherent and dependent on logical fallacies long known in the history of philosophy.

Links
Feser, Edward, “Rothbard as a philosopher,” August 8, 2009.

BIBLIOGRAPHY
Rothbard, M. N. 2006 [1973]. For a New Liberty: The Libertarian Manifesto (rev. edn), Ludwig von Mises Institute.

Feser, Edward, “Rothbard as a philosopher,” August 8, 2009