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Notes
- 1.
Perhaps surpassed only by “free trade” ideology which applies SDM to the global macroeconomy—see Chap. 8.
- 2.
Classical, or pre-NC, political economy was unabashedly class-based (Heilbroner 1992).
- 3.
A detailed technical review and critique of NC macroeconomics that is beyond the scope of this book is provided in Taylor (2004) ). Taylor takes on some of the most sophisticated versions of NC household and firm, individual utility and profit maximization, macroeconomic models. One of these, the so-called Keynes-Ramsey dynamic optimization model, purports to show that the interest rate or “social rate of discount,” modeled as a function of individual savings preferences and time preferences, is equal to the real profit rate at an individually optimal social accumulation rate. Taylor demonstrates that these MIRA “Methodological Individualism and Rational Action” and RBC “Real Business Cycle” models are mathematically unstable, and thus unworkable, and empirically untenable.
- 4.
In this section I am largely summarizing David Colander’s excellent exposition from Chap. 10 of the second edition of his introductory macroeconomics textbook (Colander 1994). Unfortunately, even Colander, a well-known post-Keynesian, eliminated this clear and unambiguous treatment of Keynesian economics as a radical break from prevailing individual choice-based orthodoxy and replaced these sections with the usual analytically muddled but ideologically coherent (in terms of supporting PCFM and SDM) AD and AS analysis in later editions of his textbook, presumably to make the book more palatable to mainstream trained instructors who are used to this formulation (Colander 1998).
- 5.
- 6.
See Chap. 8.
- 7.
This is all very reminiscent of the utterly misguided political support in the USA and in Europe to for unworkable “austerity” policies, see for example Krugman (2015b).
- 8.
Though, as will be discussed below, Michal Kalecki, a prominent political economist and head of the Central Planning Office in Poland, who also taught at Cambridge and elsewhere and who independently developed a class-based version of what had come to be known as “Keynesian macroeconomics,” was pretty much ignored in the Capitalist world.
- 9.
As noted in footnote 4 of chapter 5, ‘Income effects’ may also play a role but are less important than substitution effects for most purchases.
- 10.
Marglin (1984) has demonstrated that the NC model is dependent on highly elastic factor substitution (with MRTS > = 1), whereas more realistic inelastic factor substitution (with MRTS < 1) supports neo-Marxist and post-Keynesian economic models, where MRTS is the “Marginal Rate of Technical Substitution.”
- 11.
In fact, as discussed below, there is now considerable evidence that falling overall prices or price deflation can lead to prolonged macroeconomic slumps and effective demand shortages, suggesting that the AD curve generally slopes upward rather than downward (Thorpe 2015).
- 12.
Alfred Marshall’s (1890) book Principles of Economics included the SDM or “Marshallian cross” as an example of partial-equilibrium single market NC analysis under increasing cost conditions. Marshall’s, more institutionally grounded partial equilibrium NC economics was later overtaken by more formalistic general-equilibrium “Walrasian” analysis (see Walras (1877)) in modern economics texts which treat increasing marginal costs as a fundamental economic principle rather than a special case—see, for example, Mankiw (2008).
- 13.
This same debate has been played out over the years at a much more mathematically sophisticated level, with “Ramsey pricing,” and “Hamiltonian integration” over infinite optimal choice horizons and “saddle path” equilibrium jumps worthy of the finest scholasticism or Talmudic scholarship replacing these simple introductory text book stories. As has been already noted, Taylor (2004) shows in rigorous detail that these mathematical contortions are infeasible ideological economic and mathematical fantasies that reflect the hegemonic grip of MIRA on mainstream NC economic theory.
- 14.
This was necessary as this “Keynes’ effect” implied that changes in the supply of money (with all prices except interest rates held constant) would, at least temporarily, impact AD, in violation of the “money neutrality” principle.
- 15.
Though for clarity we have used “price levels” throughout this discussion, since the 1930s, overall price levels have rarely gone down. Instead, they have increased at lower or higher “rates of inflation” leading to the same effects.
- 16.
See, for example, Palley (2008a).
- 17.
Note that housing price bubble “wealth effect” consumption increases, such as in the U.S from 2000–2006, were not caused by overall AO and AS mismatch but by asset price bubbles in specific markets.
- 18.
And contrary to reigning economics textbook mythology, the Smoot-Haley tariff on 1930 could not have played an important role in causing or exacerbating the Great Depression as it was enacted after the depression started, raised (already very high) tariffs on only 1/3 of tradable goods from 44.6 % to 53.2 %, and with the exception of France did not cause a massive “tariff war” retaliation (Fletcher 2009, p. 140–141).
- 19.
Keynesians (and others) have likened the effect of “interest lowering” monetary policy in this context to “pushing on a string.” The claim is that while active credit restraint or “pulling on a string” will certainly reduce AD, the converse is much more uncertain. The recent bout of long-term macroeconomic stagnation in Japan, despite very low and even negative real interest rates, appears to be a good example of an economy stuck in a “liquidity crisis” upon which low interest rates have little to no effect. The tepid growth of the USA and world economies from the 2008 Lesser Depression despite record low, and in some cases negative, interest rates is another good example of the inadequacy of low-interest rate policies in severe recessions.
- 20.
Though the extent to which the quantity of money can be independently regulated by Central Bank authorities is a debatable issue among Keynesians with some arguing that an accommodative credit and money supply that expands and contracts through endogenous money creation by banks and other financial institutions according to the needs of investors is more likely, (Lavoie 2009, Chap. 3) see Chapter 7and (Palley 2008b
- 21.
As generic long-term bonds generate fixed nominal returns, when their price rises, the value of the returns relative to the bond price, or effective “interest rate” for buying the bond or lending money to the bond issuer, falls and vice versa when the price of bonds increases.
- 22.
More precisely the AS curve is a “final cost”, after mark-up, aggregate cost curve, unlike the horizontal pre-mark-up cost curve in the DCM.
- 23.
- 24.
Taylor (2014) offers a consistent analytical framework that rejects the unrealistic NC theoretical model used by Piketty (2014), see Varoufakis (2014) and Galbraith (2014). In an interview, Taylor has estimated that a reversal of the doubling since the mid-80s of the income share going to the top 1 % (now about 1/5 of all income) would require a Scandinavian like marginal tax rate on this group of about 60 % (Parramore 2015).
- 25.
See, for example, Harvey (2007) on the role of business, foundations, and the state department in fostering neoliberal ideology.
- 26.
For regional economics, two of the most popular planning software packages, REMI and IMPLAN, are primarily based on input–output fixed-price effects though REMI adds NC price change effects. Social Accounting Matrixes (SAM) and input–output modeling are also used extensively in international development planning (Taylor 2004
- 27.
In macroeconomics, Y often symbolizes “Income” and (ex-post) “Output” as the two flows should be equal to each other in national economic (NIPA) accounts. I is reserved for “Investment.”
- 28.
As has been noted earlier in the text, the Polish Marxist economist Michael Kalecki developed a similar AD-based macro theory independently but simultaneously with Keynes. For alternative Kaleckian cross models, see Nell (2006) and Lavoie (2007, p. 86–96).
- 29.
Based on US BEA “quantity index” estimates, US real GDP increased by about 73.3 % from 1942 to 1946 while price inflation during this period of stringent price controls was only 3.5 % in spite of a 50 % war time real weekly wage increase in manufacturing (BEA real gross domestic quantity indices 1942–1946) (Tassava 2008; Goodwin 2001).
- 30.
“PKs” generally believe that Keynesian economics is a truly different macroeconomic paradigm than NC microeconomics. They believe that “Keynesianism” applies in the long run as well as in the short run and to finance as well as to the real economy. They are generally very critical of NC economics, especially when applied to the macroeconomy—see, for example, Lavoie (2009), Godley and Lavoie (2007). In contrast, “Keynesians,” especially in the USA, often have a much more limited and restricted view of Keynesian ideas as applying to special case situations within a general NC long-run paradigm. References to “Keynesians” in this text, in so far as they are contrasted with NC economists, are thus generally most applicable to PKs—the strongest advocates of Keynesian ideas.
- 31.
Exceptions to this may occur, as, for example, in Nordic countries and much of western Europe in the post-World War II period when worldwide AD was expanding rapidly, so that “supply side” policies of enhanced investment and expanding labor supply (by making it easier for women to work in the Nordic countries and by importing “guest workers” in western European countries other were necessary. These conditions facilitated sucessful “active labor market” (especially in Sweden) full employment policies. See Huber and Stephens’ excellent review of this in Development and Crisis of the Welfare State, U. Chicago Press, 2001.
- 32.
For discussion and references on various ways to control prices while allowing for legitimate cost pass-through, see Chase (2000).
- 33.
Op. cit. See. at discussion of “supply side” policies in Nordic social democratic welfare states in Huber and Stephens (2001).
- 34.
Japan’s recent economic recession is a good contemporary case. Note the widespread concern over the role that price deflation has had in extending and deepening the stagnation.
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Baiman, R.P. (2016). Aggregate Supply and Demand in the Macroeconomy: An Ill-Defined and Misapplied Fiction. In: The Morality of Radical Economics. Palgrave Macmillan, New York. https://doi.org/10.1057/978-1-137-45559-8_6
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