Heterodox Approaches to Help Management and Public Policy Makers

2014 Cambridge Conference Business & Economics ISBN : 9780974211428

Heterodox Approaches to Help Management and Public Policy makers

Heterodox economics will not make is needed contribution to academic research and public policy unless heterodox do a better job in disseminating their finings and communicating them more effectively. These proportions are illustrated from industrial pricing in the face of global competition.

This paper is written in a business-like format to help appreciate the real differences between standard approaches taught in most teriotatry institutions aroudn the globe and the heterodox ones, which seem to match reality far better and are often easier to expound.

Some Broad Propositions for Discussion and Debate

1. Heterodox approaches to economics can make, potentially, a huge contribution to public policy, economic analysis and human welfare.

2. Those contributions are being limited by:

(a) the lack of clear simple statements of why and where “classical” or “standard” approaches to economics are failing or deficient;

(b) the resistance of conventional economists to heterodox methods and findings, often to protect dogma and methods embodied in well-used textbooks; and

(c) squabbles within factions of heterodox economists.

3. An attempt to capture the core of heterodox economic approaches is in section A. It needs to be debated and where accepted to be used – widely.

4. Especially in relation to industry or micro matters, heterodox economists have provided relatively little useful analysis of economic issues and policy in an open-economy setting.

5. The relatively little open-economy heterodox economics has produced predictions and policy implications quite markedly at variance with predictions and policy implications coming from standard economics. Some samples are at section B.

6. Whether the evidence derives from intensive surveys (mostly these days carried out by central banks) or by statistical /econometric methods, the empirical work in this area strongly favours the heterodox approaches. A sample is findings found in section C

7. Arguably, most heterodox economists are unaware of these differences (in 5.) and findings (in 7.)

Neville Norman [email protected]; [email protected];

Section A: Standard and Heterodox (e.g. Post-Keynesian) approaches to pricing analysis

July 1-2, 2014 Cambridge, UK 1 2014 Cambridge Conference Business & Economics ISBN : 9780974211428

Characteristic Mainstream Economist Post-Keynesian Approach to Approach to pricing Pricing 1. Purpose of the pricing Explain price determination and Explain price determination and hypothesis the causes and effects of price the causes and effects of price movements movements 2. Treatment of time Usually one-period models; Historical time with past and some advanced approaches use future consciousness of dynamic optimisation decision-makers; any single techniques. period is a selection from explicit history 3. Supposed business motivation Single-period profit Can include profit goal maximisation, mostly. Can be maximisation, with past learning sales maximisation. In advanced and future consciousness; risk models, the present-value of a consciousness is paramount, profit stream will be commonly especially in relation to assumed. uncertainties surrounding demand factors. 4. Information base for pricing Core models assume full and Imperfect knowledge, especially decisions complete information about all about demand shifts, relevant causative factors competitive strategies and their (usually demand and cost consequences for own-firm functions) and their connections demand conditions; good to the business goal. knowledge about costs which thus becomes a reliable base for pricing decisions. 5. Economy-wide backdrop No explicit connection to the Inherent potential macro- macro economy; the broader economic instability; distorted economy is presumed to be determination of prices and irrelevant or neutral to business wages through the economy. pricing decisions. 6. Industry conditions and link Neo-classical imperfect Imperfect competition and to competitors/rivals competition models presume information; distortions about in market power and product and factor markets; consciousness of rivals and risks significant rival consciousness. of entry (where permitted) in Demand uncertainty causes all setting prices. Capital firms deliberately to create equipment is tuned to uses and significant excess productive fully utilised capacity, the normal condition in industry. 7. Sensitivity of price to demand Positive and significant link Mark-up models imply zero shifts from demand movements to response of prices in relation to price adjustments in all neo- movements in industry and classical models macro demand pressure. 8. Sensitivity of price to Home producers match Domestic producers set prices (foreign) rival prices as affected duty/exchange corrected rival according to costs with little or by exchange rates, tariffs and import prices and price no reference to rival world price movements movements; the law of “one (imperfectly-substitutable) price” prevails everywhere import prices. 9. Sensitivity of price in relation Partial positive shifting of Full (100%) shifting of any and to sustained unit cost shifts indirect taxes (costs) into all (normal) cost changes into prices. 10. Sensitivity of prices in Partial positive shifting of Full (100%) shifting of indirect relation to indirect tax shifts. indirect taxes (costs) into prices: taxes (seen as costs) into prices. never 100% shifting Section B: Predictive differences between Standard and Heterodox approaches

Feature of pricing Mainstream pricing PK pricing approach Demand curve information Known exactly, so slopes and Risky and unreliable demand base elasticities can be computed base, and this is understood and known by all forms by the firm, even those with making prices and used in considerable market power; optimization exercises to thus they seek to base pricing derive profit-maximising decisions mainly upon more prices reliable cost information. Demand fluctuations effects Positive correlation with Weak or zero correlation prices with prices: too risky to use demand movements as a basis for price making. Unit cost shift of x% (e.g. a Less than (x/2) % shift in Close to x% price shift to 10% increase therein) price in the same direction preserve proportionality with (e.g. less than 5%) costs (e.g. close to 10%)

Section C SOME EMPIRICAL WORK OF RELEVANCE

A large part of what we know about the way prices are set in many manufacturing and service firms comes from the evidence of surveys, such as those detailed in Lee (1998) and Coutts and Norman (2011). Lee surveys some 25 accounting/costing studies and 71 empirical pricing studies all cited at sections A and B of Lee (1998) at pp. 232-240. Lee finds a predominance of sticky or administered prices and close attention to unit cost computations at a normal or budgeted output, just as the Oxford Group found decades earlier. While the degree of competition influences the extent to which firms take account of competitors’ prices, mark up pricing is still prevalent in most industrial markets.

Manufacturing firms typically plan a production capacity that enables them to operate with spare capacity. As a consequence, unit direct costs for levels of production below full capacity are typically falling or fairly constant, except possibly when working at full capacity. Competition between firms does not lead to the elimination of spare capacity. Firms typically meet changes in demand within the business cycle by some combination of increasing production levels from existing capacity, inventory changes and lengthening or shortening of order books – price changes are relatively unimportant. Increases in the cost of wages, materials, energy etc. appear to be more important in causing price increases than short-run demand fluctuations. Some surveys find evidence for asymmetry in price increases compared with price reductions, with demand factors tending to influence price reductions more than price increases.

The degree of competition does appear to influence the extent to which firms take into account the prices of rivals, but even in markets with a high degree of competition, mark-up price setting appears to be a common practice.

Recent survey evidence for UK in Bank of England (1999), for the Euro area in Fabiani et al. (2006) and for Australia in Park, Rayner and D’Arcy (2010) affirms the central role of cost factors, the lesser role of import prices, and the insignificant role of demand pressure, in industrial price movements in practice.

It has been mentioned above, and proved in the appendix, that (non-mainstream) PK theory implies that demand changes have a much smaller influence on price than cost changes, in the short run. By contrast, the (mainstream) marginalist theory always implies that demand has some significant effect (otherwise firms would not be profit-maximizing). These different predictions from the PK and mainstream theory are eminently testable hypotheses.

Tests can be performed using statistical analysis that ranges from basic regression analysis to advanced econometrics. The approach broadly is to assemble data that will (statistically) explain the behaviour (variance) in a (dependent variable) series of product prices. The candidate explanatory variables are evident from our survey of the literatures in both management and economics: domestic materials and labour costs, domestic demand pressure, (rival or adjacent) import prices, trade policy and exchange rates, especially. In simple terms, we are seeking to estimate the size and significance of various coefficients that link each of these explanatory variables to the prices we are explaining. There are then cross-checks and diagnostic procedures to follow. When these tests are satisfied, we should be able to resolve many disputes and differences evident from the assembly of hypotheses above. To take an example, in the global setting, mainstream economic theory posits that ONLY the coefficient attaching to the import price term will be strong and significant, and it should imply 100% pass-through to domestic product prices. PK theory asserts the opposite: little or no role for import prices, but dominance from the (domestic) cost coefficient. The management literature is not designed to set up specifications for econometrics, but it implies a wider and richer array of explanatory variables than the econometric techniques can handle.

There is a battery of econometric results summarized in Coutts and Norman (2011), which can be stated synoptically as: “.. cost-oriented pricing is the dominant mode of behaviour. Econometrically, demand is found to have little, if any, influence on prices outside the auction market for materials.” “Considerable evidence has accumulated that industrial firms tend to set prices as a markup on normal unit costs (his emphasis) …Faced with temporary changes in demand, firms generally alter production and employment rather than price.”

Much interest attaches to the elasticity version of a coefficient linking foreign and domestic prices. Full pass-through consistent with mainstream theory requires the value to be near 1.0, while the PK alternative approach would place it at zero. Coutts and Norman (2011) provide a number of such results, ranging from 0.08 to around 0.32 for UK manufacturing overall. These results strongly affirm the PK approach as compared with mainstream analyses, suggesting that the PK conditions mirror reality much more closely than the mainstream theories. The import price effects contributes to the explanation and cannot be ignored, despite the similar and more extreme findings of Brinkman (1999) at p. 162, that “tariffs and non-tariff barriers were mostly insignificant and appeared with positive as well as negative signs. These results challenge the conventional emphasis on policy-induced trade barriers as an explanation for high price levels and its corollary trade liberalization as the solution to high price levels.” The most detail previous exploration of this matter, econometrically, is in Coutts and Norman (2007), which found for UK data 1970-2000 import price coefficients mainly around 0.3, which are quite damaging to the presumed universality of conventional theory assuming that coefficient to be 1.0.

Consistent with the management literature, Coutts and Norman (2007) report a considerable diversity of experience within the manufacturing sector that is worth citing in some detail.

“We identified three broad categories of price adjustment for the later 1990s and early 2000s:

a) Sectors that produce mainly homogeneous products traded at international prices. The chemicals and base metals sectors largely belong to this group. In both sectors, the sterling prices of imported goods fell in line with exchange rate appreciation between 1996 and 2000, and domestic prices fell substantially. b) Sectors in which international competitor prices fell in line with the exchange rate rise, but in which domestic prices increased, or fell by modest amounts. c) Sectors whose competitor prices fell by only about 8% or less, while domestic prices increased, or fell by only modest amounts.

An implication of these results is relevant to the transmission of inflation and (via the terms of trade) to swings in aggregate demand. Although a floating exchange rate will directly influence the prices of finished goods imported into domestic markets, we find that the impact on competing domestic goods is rather small. Explanations of the pricing decisions of manufacturing firms will remain defective until trade and tariff theory incorporates partial price adjustment rather than import price dominance as the typical circumstance.”

Many of these findings produce a coefficient on the import price term explaining domestic price movements in the range 15-30%, which would be zero in an extreme mark-up model (as in Norman (1996)), but 100% in the conventional trade-tariff-exchange model that still dominates economics textbooks. Unpublished research by the authors for Australian data finds similar results. This is a useful test because the Australian currency appreciated markedly in the years 2005-8 and domestic- product prices did not fall much, thus maintaining quite fully their relationship to unit costs as Post- Keynesian approaches would have predicted. In all these tests the demand pressure variable emphasized in mainstream theory was NEVER significant in the face of price-movement explanations from cost and import price factors.

In 2010, Coutts and Norman performed additional econometric tests on updated data, to the year 2010), during which the GFC took hold and gave considerable scope to investigate the underlying factors bearing on price adjustments in industry, especially the role of severe and sustained compression of demand and purchasing power. Briefly, these latest findings are:

1. Through the first decade of the 21st century, the relative importance of the import price term from mainstream theory became progressively greater and higher in value, the long-run coefficient coming towards 40% in some cases. The most probable explanations are the supply-side disappearance of firms and the demand-side increasing price consciousness of buyers during the GFC.

2. Despite the embodied role of the GFC in the updated data, demand pressure as such still NEVER plays any significant role in the pricing process, affirming proposition P1 above.

3. While numerically lower than before 2000, the cost coefficient remains largest and reflects the continued and most important role for costs, despite them having zero consideration in mainstream global pricing theory.

4. The attention to diversity of experience within the industry sector, as emphasized in the management literature, remains urgently necessary.

References

Bank of England (1999), “What makes prices sticky? Some evidence for the United Kingdom.” Bank of England Quarterly Bulletin, 39 (3), August, 262-271.

Brinkman, H.-J. (1999), Explaining Prices in the Global Economy. A Post-Keynesian Model, Elgar, Cheltenham.

Coutts, K. and Norman, N. (2007), “Global Influences on UK Manufacturing Prices: 1970-2000”, European Economic Review”, 51, Issue 5, July 2007, 1205-1221.

Coutts, K., and Norman, N. (2011), “Post Keynesian Approaches to Industrial Pricing: A Survey and Critique” in Harcourt, G.C. and Kriesler, P. (eds), Handbook of Post Keynesian Economics, OUP, Oxford.

Fabiani, S., Druant, M., Hernando, I., Kwapil, C., Landau, B., Loupias, C., Martins, F., Mathä, T., Sabbatini, R.,Stahl, H. and Stokman, A. (2006), “What firms’ surveys tell us about price-setting behaviour in the euro area”, International Journal of Central Banking, 2(3), 3–47.

Harcourt, G.C. and P, Krielser, (eds.) (2013) Oxford Handbook of Post-Keynesian Economics, OUP, Oxford – many chapters of relevance to our theme, but see within chapter on Post-Keynesian pricing approaches by K J Coutts and N R Norman

Martin, S. (2001), Advanced Industrial Economics, Blackwell, Oxford.

Lee, F. (1998), Post Keynesian Price Theory, C.U.P., Cambridge.

Norman, N. (1996), “A General Post Keynesian Theory of Protection”, Journal of Post Keynesian Economics, 18(4), 509-531.

Park, A., Rayner, V. and D’Arcy P. (2010), “Price-setting behaviour – insights from Australian firms”, Reserve Bank of Australia Bulletin, June Quarter, 7-14.

Roberts, M. and Supina, D. (2000), “Output, Price and Markup Dispersion in Micro Data: The Roles of Producer Heterogeneity and Noise”, 1-36 in Industrial Organization, edited by M. R. Baye, Elsevier, Amsterdam.

Williamson, N. (2005), Managerial Economics: A Problem-Solving Approach, CUP, Cambridge.

Section D: How to recognize a Good Post Keynesian

Prologue:

I wrote this while preparing my part of a chapter in Geoff Harcourt’s forthcoming Handbook of Post Keynesian Economics to which Ken Coutts of Cambridge and I are contributing various parts on industrial pricing, trade and tariff policy, pass-through effects and exchange rate impacts. As we did the research and contemplated what people told us we realised that: (1) there is already a large and not very succinct literature on the properties and meaning of Post Keynesian economics; (2) it needs to be pulled together, crisply; and (3) Post-Keynesians disagree fervently among themselves, even on whether to put the hyphen between Post and Keynesian! Bravely, I have assembled these notes which are running the gauntlet among Post Keynesians and others. To say the least, comments of any kind are very welcome. I have a larger version of this in draft which subjects much allegedly Post-Keynesian price and tariff analysis to the tests I have assembled below. Provisional Finding1: we are all ‘bastard Keynesians’ if Keynesians, Post or otherwise, at all. However, there are some distinguishing features that are notable in large measure in most Post-Keynesian writings, models and hypotheses. Thus this note seems warranted. Neville N ([email protected]) Cambridge 26.x.08. Melbourne 16.xii.08

What are the central general and distinguishing features of Post-Keynesian (PK) economics? We have a list. This is a demanding list. It reminds one of Shackle’s quips about identifying a ‘complete economist’: it dispenses at once of the notion that there are, or ever have been, any complete ones. 2 It may help to define our boundaries. Some PKs may look or try to look like Karl Marx; alas personal characteristics are unreliable criteria for detecting allegiance. In the end, a PK economist or approach is defined by emphasis and example. We comment on these details as we progress. This list goes further and deeper than a plain enumeration of assumptions about ‘the economy’ commonly found in the PK literature, though that enumeration is fully incorporated and adopted

1 Joan Robinson relentlessly reminded many of us that Keynes persistently contended that all academic conclusions were provisional ones, subject to being refined and refuted by subsequent inquiry and evidence. Keynesians frequently claim greater humility that other economists. I say the jury is out on that one! (NRN)

2 G L S Shackle (1955) p. 241. Shackle went on to give a short list of guide notes on how to recognize someone not wholly confounded by economic and financial matters. Here the answer lies in describing issues and criteria that are important to PK philosophy and which not generally shared by other schools of economics.

July 1-2, 2014 Cambridge, UK 7 2014 Cambridge Conference Business & Economics ISBN : 9780974211428 here. We also begin with general PK criteria before moving to background features governing what can be described as PK pricing approaches in particular. This approach is bound to be controversial because of the considerable time spent by PKs trying to define themselves and because of the divisions within PK economists that this process exposes.

A. Motivation.

A PK economist is dominated by the desire to understand intimately the workings of the economic and social system and to focus attention on methods, models and matters that will actually help people, now or in the future; to look beyond immediate issues of the day; to explain as well as to predict, and not to enforce or selectively propound economics of a kind that by predilection supports preconceived viewpoints. Realism and relevance replace paranoia parading positive predictability. (My paraphrase of Lawson, 1989). But realistic idealism pales into tragedy when realism requires detail that is too great to carry in the head or to communicate, even to committed scholarly audiences. However, PKs are conscious of the linkage of social and political phenomena from and to narrower versions of economics epitomised by markets, prices, firms, growth rates, incomes and all relevant monetary values. In performing their task, PK economists take a broader view of individual and institutional motivations behind decisions than non-PK (NPK) approaches commonly do. Some who reject PK economics will claim similar motivation; some PKs betray it.

B. Methods of Analysis

PK economics need not be any less scholastic, or rigorous, than NPK approaches. Maths and econometrics can be involved, though a PK economist will be more conscious of the restrictions and limitations of condensing human psychology into manageable mathematics. Many PK economists are competent technicians; they are just more careful and guarded about it. For example, while PK economists may be well capable of using the calculus to derive something as arcane as the price-cost margin assuming exact and known demand (average revenue) functions and single-period full- information profit maximization pricing goals, they should imagine while doing this that their stomachs feel as they would after ingesting barrels of green apples. They should also explain and communicate their objections. Some PKs defend the use of econometrics vigorously. Paul Downward and his co-authors provide outstanding examples (Downward, Finch et al. 2002; Downward and Mearman 2003; Downward and Mearman 2004). We concur with them.

Most PKs argue that there needs to be some connection back to the writings of J. M. Keynes3 (which writings?)(or Marx, or Kalecki, or Joan Robinson), and this is best illustrated by deeper consideration of the assumptions about the workings of the economy as detailed in section E below.

Predictive ability is not a sufficient test to certify good economics, according to most PKs; there must be explanation and understanding of the entire economic (and probably social and institutional) process in a PK approach. An attempt to understand the causes of an economic event is important. This is not to dismiss prediction tests, because approaches that cannot reliably predict are plainly not addressed to the circumstances they purport to explain. PKs are just saying prediction is not enough, and it can be an unreliable guide. The priority given to explanation and understanding means that there is scope for plural research methods to be used in understanding events: economics should be defined by subject matter not analytical method (Runde 1998; Lawson 2003; Dow 2004; Downward and Mearman 2006).

There needs also to be explicit rejection of central features of the grand neo-classical synthesis, if an approach is to be genuinely counted as PK. This is a theme on which Philip Arestis’s (1992) treatment of Post-Keynesianism is based.4 John King (King 2003) concurs.

C. Momentum: The Treatment of Time.

PKs profess to work in chronological time rather than logical time, and frequently they do. Strangely, economic hypotheses based on chronological time dovetail far better with the data and methods of modern time-series econometrics, which some PKs reject, than static classical approaches. There is a genuine difficulty here in that much work that professes to be PK economics is erected on a timeless or one-period framework, akin to most neo-classical theories. To count such work as PK we may be to excuse its failure to meet this test, providing it scores well enough on the other criteria. We need thus to say much more about this test and to discipline ourselves to what adherence to its strictures means for our work. Dates and delays do matter, and PKs need to emphasise that more firmly; but the same could well be claimed for much NPK work, such as models expressed in difference and differential equations and in the dynamic optimisation literature.

The economic system is always evolving in PK treatments. It might be useful to say something like the following: We can take snapshots of the economic system, but the evolutionary process is always uppermost in the mind of the PK economists, even if conventional-looking diagrams are used to communicate relationships, feasible zones and stopping points.

3Arestis’s (1992) p.ix emphasizes this aspect of PK delineation from the start.

4 Arestis, chapter 2 especially. Also King (2003), p. xiv

D. Information presumed by decision makers in the economy

Uncertainty is the dominant description of the state of information available to decision makers depicted in PK economics.5 PK economics rejects rational expectations.6Equally, full information models such as imperfect competition cannot strictly qualify for anything like PK economics, even though they may be used to derive some findings and policy implications that PJ economists might be tempted to share. Decision makers in the world embraced by PK economics normally proceed with consciously imperfect information. The underlying decision-making environment of substantial uncertainty is quite central to nearly all heterodox approaches in economics; orthodoxy claims to incorporate it, by certainty-equivalence and paranoia over precision and exact solutions, betray the apparent commitment to incomplete information in orthodox economics. In pricing analysis, any approach that uses seriously and relies upon an exact demand/average revenue function presumed to be known in all its manifestations in all relevant time periods contradicts this important pre- requisite for PK economics.

Uncertainty and historical time in Post Keynesian economics have particular implications for role of money in the economy. Money is the mechanism through which transactions in the real economy are managed over time and this means that the real economy can not be considered separately from its financial institutions. This is expressed by Post Keynesians in arguments about the non-neutrality of money (Davidson 1987; Davidson 1988; Minsky 1993).

E. Assumptions about How the Economy Operates

This sub-set of requirements for PK economics is derived from the study of many PK theories or approaches and from specific reflective writings of economists seeking to describe and delineate PK economics.

E.1: Inherent instability of the economic system:

5 Arestis (1992) pp 90-1

6 Arestis (1992) Chapter 1

While the economic system can be observed at places of rest, there are always disturbing undercurrents that make equilibrium and steady-state growth paths inoperable, unobtainable or undefinable. Cycles around any statistically-defined trend are not regular or predictable; indeed their causes are never fully known; and known causes are accumulated in the course of an economy’s development. Stages or epochs associated with different economic and social orders can be observed, each one generating forces to question and change them. This feature is borrowed from Karl Marx. PK economists should be seizing the opportunity to advance the role and insights of PK economics in the light of the global financial crisis from late 2007.

E.2 Capacity Slackness and demand determination of actual output:

Effective demand determines output volumes up to a capacity limit which is seldom ever reached; productive capacity is in any event expanded as soon as it is perceived to be limiting. This is the part of PK economics that most owes its allegiance to J M Keynes. Investment is not supply or savings constrained; it is limited by decisions, imagination, regulations and opportunities perceived by business firms. At the micro level, if cost functions are admissible in PK economics they should not reflect in their shape, slope or adjacent defining conditions any boundaries or constraints that arise from aggregate saving or more specific industry or firm-based capacity limitations. At the micro level, the PK capacity assumption and output determination mechanics can be expressed in more orthodox language by saying that income effects will tend to dominate substitution effects7. Again, PK economics solidly supports the use of stimulus packages while purchasing power has collapsed. Hardly any nation failed to adopt such packages in 2008: hardly an NPK dared publicly to oppose them. (Did PKs do enough to show the role and relevance of PK economics at this time?)

E.3 Power-based industry structure:

Significant market power being used in price setting and adjustment, product selection, the technique of production and its location is the general working of the producing sector. Oligopoly is the main market form in PK economics. This does not mean that orthodox ‘imperfect competition’ can possibly qualify as meeting this test, because there are other criteria that must be read in conjunction with the important general indicia, especially the stricture that imperfect information pervades consciously in the minds of all relevant decision-makers.

E. 4 Distorted or Administered Prices and Wages:

7 As they do even in many orthodox approaches in economics, such as the impact of tax rates on work effort, causing orthodox economists to resort to such pejorative and predilective descriptions as the backward-bending supply curve.

There is no simple market-clearing determination of prices and wages. Wages and prices exhibit limits and administered aspects8; in general there is a dominant cost determination of prices, with demand conditions playing little or no role in their formation and adjustment. The origins of this part of the PK approach stem back the Oxford research group of the 1930s and before that to Marx. These PK pricing premises, are strongly affirmed in nearly all survey and econometrics tests, even in the face of international competition, as reported in Coutts and Norman (2007).

E.5 Distribution Relevance as Goal and Determinant:

Income and wealth distribution are both important outcomes of the economic processes and are significant determinants of prices, output, industry structure, demand patterns, emotions, social actions, agitation, political activity, each considered with the set of economic phenomena by PK economists. Specifically, income and wealth distributions are not exogenously determined, or expressible or derivable from marginal productivity relationships or market-clearing processes. They arise from the interaction of social struggles, inheritance and endowments, regulations and differential opportunities available to different sectors of society. F. A Comparison with Criteria for PK Economics as developed by Other PK Economists

We can relate our own list of how to detect a complete or good PK economist to some well-known criteria in the PK literature that has been devised by others to define PK economics. There is a conservable overlap, but also considerable differences in emphasis. It can also be see, by applying any of these sets of tests, that many renowned PK approaches do not meet a large number of these demanding requirements for genuine or good PK economics.

1. Paul Davidson’s 1982 six-part list involves the commitment to historical time (C above); uncertainty as the relevant background assumption for decision makers (D above); institutional determination of prices and wages (E3-4); the central relevance of distribution of income and wealth (E5); the requirement that real capital is malleable and reflects time- based experience (C, E2); and that income effects dominate substitution effects (E2).

2. Alfred Eichner’s (1987) list also involves six conditions, expressed differently: there is an unstable economy which exhibits persistent cycles (E.1); there is an institutional determination of income and wealth distribution not expressible through marginal productivity relationships (E.4-5); uncertainty stands as the dominant information basis for making business, regulatory and other economic policy decisions (D); absorption or income-

8 Arestis (1992) pp 92-4

based closure conditions complete macro models rather than market clearing conditions (E.4); imperfect markets with power forces dominate price and quantity determinations in markets (E.3); and (PK) theory must explain and not merely predict economic behaviour (condition B).

3. John King’s Elgar Companion to Post Keynesian Economics provides a further delineation of PK economics from orthodoxy. The essential PK features are stated as “the dominance of effective demand rather than supply in determining the main economic (variates)” (E.2 in our list). King also makes it mandatory that genuine PK economics involves and emphasizes the rejection of the grand neo-classical synthesis (King (2003) p.xiv). (The final part of condition B. above). We argue that much more than this needs to be enumerated to nail down the genuine PK approach. In detail but indirectly King provides some of it, but it is not given there in a crystallized form. Thus our more schematic and structured account of PK conditions above.

4. John King likes and kindly drew my attention to Tony Thirlwall’s description of what John describes as a “reasonable minimum platform for PK economists”9

output and employment are determined in the product market, not the labour market; involuntary unemployment exists; an increase in savings does not generate an equivalent increase in investment; a money economy is fundamentally different from a barter economy; the Quantity Theory holds only under full employment, with a constant velocity of circulation, while cost-push forces cause inflation well before this point is reached; and capitalist economies are driven by the animal spirits of entrepreneurs, which determine the decision to invest (Thirlwall 1993, pp. 335-7).

We can take Tony Thirlwall’s list as a re-expression of E2, E3 and E4 without explicit reference to our other criteria addressing the decision-making (micro) environment, but with the valuable addition of some monetary and macro background features.

5. Marc Lavoie’s approach. Marc Lavoie (1992) sets up the ambitious objective of providing a “coherent set of (PK) theories that can provide an alternative to the dominant neoclassical paradigm… (arguing that) microeconomic foundations can be associated with post-

9 Cited as Thirlwall (1993) in King (2002)

Keynesian economics, and that these are consistent with its macroeconomics.” (Lavoie 1992, p1)

Lavoie admits that PK “is rather vague and has been used to define different sorts of economics and economists. As a first approximation, I shall define post-Keynesians as those economists who are extending and generalizing the seminal ideas of the unorthodox economists of the 1950s, most notably...Joan Robinson, Richard Kahn and Nicholas Kaldor.” (p.1) Lavoie argues that it is necessary to jettison Keynes’s own price theory (and probably the aggregative supply function) as they are “too closely associated with the neoclassical views to be kept within the synthesis” (p.3)

It seems a defining feature of the good Post-Keynesian economist to ignore the open economy, frequently doing so both consciously and apologetically. For instance, Marc Lavoie (1992, in the Preface at p. vii) honestly describes his conscious omission of “the consequences of an open economy” as “the main drawback of this book.” Indeed, throughout the life of the Journal of Post Keynesian Economics only a handful of contributions have adopted an explicitly open economy. Perhaps really good Post Keynesians will in time repair this imbalance and significant omission. My own attempt to start this process is at Norman (1996); in good PK tradition, that approach does not pass all the tests that are set out above for good PK economics.

The case for being conscious of what really constitutes PK economics is made out by observing how easily we can stray from it. It is useful to use our list of PK requirements to assess some work that is commonly presented as PK economics, especially in the areas of micro or pricing analysis all too frequently, some of this work seems to struggle or to lose the plot. For example in Nina Shapiro and Tracy Mott’s contribution as Chapter 3 in Paul Wells’s useful collection of PK essays, the authors rightly identify as PK pricing hypotheses those that present prices as being made by firms with discretion and power and which are based on costs. The treatment of the mark-up then descends into neo-classical territory or simply rank confusion: “When the product is priced in the market, its price depends on the particularities of its sale rather than those of production...” (Wells 1995 p. 36). Things go really off the rails when the authors suggest that Kalecki-type firms charge the “profit- maximizing price” (Wells 1995, p. 40). It is strange that there is no attempt in Wells (1995) to set out the general features of PK economics and very little detail of the PK pricing models that Shapiro and Mott seem to want to embrace.

July 1-2, 2014 Cambridge, UK 14