Wednesday, December 14, 2011

Palley versus Foster and McChesney: The Causes of the Crisis

I raised the issue of the Right Marxists or “Keynesian Marxists” in the last post. There is an interesting debate here between the Post Keynesian Thomas I. Palley and the Marxists John Bellamy Foster and Robert W. McChesney on the origins and causes of the financial crisis of 2008:
Thomas I. Palley, “The Limits of Minsky’s Financial Instability Hypothesis as an Explanation of the Crisis,” Monthly Review 61.11 (April, 2010).

John Bellamy Foster and Robert W. McChesney, “Listen Keynesians, It’s the System! Response to Palley,” Monthly Review 61.11 (April, 2010).
In his article, Thomas Palley reviews four explanations of the crisis, as follows:
(1) Minsky’s financial instability hypothesis (as argued by Jan Kregel, Charles Whalen, and L. Randall Wray);

(2) the structural Keynesian view of Palley himself(1);

(3) the new Marxist view of Foster and McChesney(2), and

(4) the social structure of accumulation (SSA) view of Kotz(3).
Palley’s “structural Keynesian” view also incorporates the Minsky’s financial instability hypothesis, but looks at longer economic factors from the 1970s that have encouraged neoliberal bubble economics. Once we consider the dynamics of debt deflation as argued by Steve Keen and Richard Koo, Palley’s view of the crisis is an interesting interpretation.


(1) Thomas I. Palley, “America’s Exhausted Growth Paradigm,” Chronicle of Higher Education (April 11, 2008); and Thomas I. Palley, “America’s Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and the Great Recession,” New America Foundation (July 22, 2009),

(2) John Bellamy Foster and Robert W. McChesney, “Monopoly-Finance Capital and the Paradox of Accumulation,” Monthly Review 61.5 (October, 2009), 1–20.

(3) David M. Kotz, “The Financial and Economic Crisis of 2008,” Review of Radical Political Economics 41.3 (2009): 305–317.


  1. No mention of Austrian theory of the business cycle? You're clearly being purposefully ignorant. Pretending like it doesn't exist won't make it go away and won't change it from being true to being false.

    I mean, your position is that depressions are caused by a lack in aggregate demand, and therefore you advocate that legalized counterfeiters print and spend money on themselves and their friends, as if this is supposed to benefit poor people who have to pay higher prices than they otherwise would have paid, and you say this as if Goodhart's law doesn't apply to aggregate spending targets.

    You do know Goodhart's law, don't you? The Lucas critique?

    Your position is pie in the sky nonsense.

  2. Oh look, an Austrian defending ideas that came out of the Rational Expectations movement.

    (Should we tell him?)

  3. Oh look, an Austrian defending ideas that came out of the Rational Expectations movement.

    I don't adhere to the rational expectations school. I consider it preposterous.

    Austrian ABCT did not arise out of the rational expectations school.

    If you asked any Austrian today:

    "Do you believe agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random, or that the agents inside the rational expectations model all assume the model's predictions are valid?"

    They'd respond with an unequivocal no.

  4. Christof,

    "Austrian ABCT did not arise out of the rational expectations school."

    Your above statement is false. In orthodox Austrian econ circles, many people see Hayek as a person that was a pioneer to the concept of rational expectations. To validate my point, here is Jerry O'Driscoll on Hayek and on why he should be regarded highly in mainstream macro economics.

    "Hayek did invent the concept of neutral money, which is at the center of much of modern macroeconomics. Along with Mises and Wicksell, he also incorporated the core of what we now call rational expectations into his analysis. The fact is that much of modern macroeconomics (particularly of the fresh water variety) owes a great deal to Hayek."

    On a side note, I find it completely weird that the majority of Austrians defend Hayek and his influence on mainstream economic theory. Austrian Econ used to praise itself on being part of the heterodoxy, I guess things change, huh.