ECO 4114

POST-KEYNESIAN THEORY: MONEY AND EFFECTIVE DEMAND

Syllabus

Instructor: Marc Lavoie January 2006 Office: 200 Wilbrod St., Room 08A Tuesday: 17:30 - 20:20 Telephone: 562 5800 (ext. 1687) E-mail: [email protected] Office hours: Tuesday: 14:30- 16:00 or by appointment Email: [email protected] Website: http://aix1. uottawa. ca/~robinson/Lavoie/index. html

COURSE OBJECTIVES

In this course I shall present approaches, theories and models, which are generally ignored by orthodox theory, i.e., what has been taught in intermediate micro and macro. This alternative approach to neoclassical is called post-Keynesian theory.

The main objective of this course is to show that a coherent and powerful alternative to mainstream theory can be built; and that this alternative relies on the works of Keynes, Kalecki and the classical authors, as developed by economists such as , , Luigi Pasinetti and Paul Davidson. The emphasis will be on the positive contributions of this tradition.

For those who wish to oppose mainstream economic policies, i.e., the economic policies endorsed by the establishment (austerity policies, zero-inflation policies, downsizing, salary cuts, social program cuts, the ‘Washington consensus’, etc.), post- offers a solid theoretical economic background. It also turns out that some aspects of post-Keynesian consumer theory are key aspects of heterodox environmental economics.

Students that have absolute faith in market mechanisms or who are likely to become angered or annoyed when listening to implicit or explicit criticisms of what they have taken great pains to learn in previous courses are advised to drop the course and take something else. 2

TEXTBOOK

There is one recommended text, which is a book of short readings, which has been ordered from the Bookstore:

J.E. King (ed.), The Elgar Companion to Post Keynesian Economics, Edward Elgar Pub., 2003, paperback.

French readers may find it useful to use my introduction to post-Keynesian (PK) economics, a few copies of which can also be found at the Bookstore:

M. Lavoie, L’économie postkeynésienne, La Découverte (Repères), 2004.

This book is in the process of being translated for Macmillan/Palgrave, under the title Introduction to Post-Keynesian Economics, and I will put up the translation on my website as it becomes available.

OTHER USEFUL GENERAL PK REFERENCES

There are several post-Keynesian textbooks, which students may wish to consult. Most of them are on reserve at the Morisset Library.

Marc Lavoie, Foundations of Post-Keynesian Economic Analysis, Edward Elgar, Aldershot (U.K.), 1992.

Holt and Pressman (eds), A New Guide to Post Keynesian Economics, Routledge, 2001.

Lee, Frederic S., Post Keynesian Price Theory, Cambridge University Press, 1998.

Paul Downward, Pricing Theory in Post Keynesian Economics, Edward Elgar, 1999.

T.I. Palley, Post Keynesian Economics: Debt, Distribution and the Macro Economy, London : Macmillan Press, 1996.

Paul Davidson, International Money and the Real World, Macmillan, 1982.

Paul Davidson, Post Keynesian Macroeconomic Theory, Edward Elgar, 1994.

Philip Arestis, Post-Keynesian Approach to Economics, Edward Elgar, 1992.

Fernando J. Cardim de Carvalho, Mr Keynes and the Post Keynesians, Edward Elgar, 1992. 3

Alfred S. Eichner, The Macrodynamics of Advanced Market Economies, M.E. Sharpe, 1987 (1992).

Peter J. Reynolds, Political Economy: A Synthesis of Kaleckian and Post Keynesian Economics, Wheatsheaf, Sussex, 1987.

Louis-Philippe Rochon, Credit, Money and Production: An Alternative Post-Keynesian Approach, Edward Elgar, Cheltenham, 2000.

Engelbert Stockhammer, The rise of Unemployment in Europe: A Keynesian Approach, Edward Elgar, Cheltenham, 2004.

Phil A. O’Hara (ed.), Encyclopedia of Political Economy, 2 volumes, Routledge, Londres, 1999 (2001 paperback). These two books are to be found in the reference section of the Morisset Library.

WEBSITES

Here are a few suggestions of interesting websites that provide an extensive amount of information regarding heterodox economics and critiques of mainstream economics.

Check the sites listed at: http://aix1.uottawa.ca/~robinson/english/other_links.htm

Check also: The heterodox network: http://www.open.ac.uk/socialsciences/hetecon/index.htm

The Post-Autistic Network: http://www.paecon.net/

A funny and original, but also informative, website, that of Aussie Steve Keen: http://www.debunking-economics.com/

STUDENT EVALUATION

(i) a mid-term exam [25%] (ii) a final exam [45%]; (iii) a term paper [30%]; (iii) the outline of the term paper and participation [5%]; 4

The due date for the term paper is Tuesday March 21st 2006. The paper should be around 3500 words. The paper should be printed in 12 pt font, double-spaced or with 1½ spacing. There are about 250 words in a double-spaced page. Penalties will be awarded to papers which are not given on time. There will be a 20% penalty per office day late.

There is another deadline: each student must present a written document (about one page), by February 14th, with an outline of the paper, and a bibliography of the documents which the student plans to use. An appointment must be taken before February 14th, during which the student will explain and justify the written document. Students who present an outline demonstrating that work is in good progress will get a high grade. In all cases the chosen topic must be approved. Students who hand in an essay based on an unapproved topic will get a zero mark for the term paper.

Suggested topics for the essays:

King’s Elgar Companion to Post Keynesian Economics (2003) provides about 80 entries on various topics, and is a useful source of essay topics and starting bibliographies. Your best bet is to find a topic within one or a couple of the entries listed in that book.

Papers will be marked according to the following criteria; (i) quality of presentation (typed, fonts, footnotes, lack of typos, clear sections and subsections) (ii) fluidity of style, lack of spelling and grammar mistakes (iii) the depth of the paper (how deeply the topic has been covered, the quality of the analysis, not superficial) (iv) the width of the paper (whether the paper covered a lot of ground, and took several different sources into account) (v) the quality and extent of references (and whether standard norms of scientific papers were followed (see the references as they are presented in the King (2003) book) (vi) whether the topic pursued was the approved topic (vii) whether the paper was given on time

You will find a complete guide about how to write a dissertation or an essay (references, etc.) on the following web site: http://www.sciencessociales.uottawa.ca/guide-en.asp The guide also explains what is plagiarizing. Check for the definition of plagiarism. Do not plagiarize.

COURSE OUTLINE

There are 12 lectures, one of which will be devoted to the mid-term exam. All dates are tentative.

Most of the references can be found through the Library electronic journals. op.cit. means that the reference is part of the books to be found on reserve, as listed above.

1. An overview of post-Keynesian economics (Jan. 10)

King (2003): Austrian School, Babylonian mode of thought, Bastard Keynesianism, Cambridge economic tradition, critical realism, Fundamentalist Keynesians, Institutionalism, Kaldorian Economics, Kaleckian Economics, Marginalism, New Classical Economics, , Non-ergodicity, Time in economic theory, Uncertainty

M. Lavoie (1992), ch. 1 (pp. 1-19). Lavoie (2004), ch.1

L.L. Pasinetti 2005. “The Cambridge school of Keynesian economics”, Cambridge Journal of Economics, 29 (6), November, pp. 837-848. 5

M. Setterfield, 2003. “What is analytical political economy?”, International Journal of Political Economy, Summer, 33 (2), pp. 4-16.

2. The Cambridge controversies and empirical research (Jan. 17)

King (2003): Capital theory, Sraffian economics.

M. Lavoie (1992), ch. 1 (pp. 20-41).

A. Shaikh, 1990. “Humbug production function”, in J. Eatwell et al. (Eds), The New Palgrave: Capital Theory, Macmillan, pp. 191-194.

A. Shaikh, 2005. “Nonlinear dynamics and pseudo-production functions”, working paper, New School University, forthcoming in Eastern Economic Journal. Find article on: http://homepage.newschool.edu/~AShaikh/

M. Anyadike-Danes and W. Godley. 1989. “Real wages and employment: A sceptical view of some recent empirical work”, Manchester School, June, 57 (2), pp. 172-187.

3. Microeconomics: An alternative theory of household choice (Jan. 24)

King (2003): consumer theory

M. Lavoie (1992), ch. 2. Lavoie (2004), ch. 2 part 1.

R. Roy, 2005. “The hierarchy of needs and the concept of groups in consumer choice theory [1943]”, History of Economics Review, Summer, 42, pp.50-56.

M. Lavoie, 2004. “Post-Keynesian consumer theory: Potential synergies with consumer research and economic psychology”, Journal of Economic Psychology, vol. 25 (5), pp. 639-649.

John M. Gowdy and Kozo Mayumi,2001. “Reformulating the foundations of consumer choice theory and environmental valuation”, Ecological Economics, 39 (2), pp. 223-237.

Alfred S. Eichner, 1992, op.cit., ch. 9: The household sector: expenditures and cash balances.

4. Microeconomics: objectives of firms (Jan. 31)

King (2003): Competition

M. Lavoie (1992), ch. 3, pp. 94-118. Lavoie (2004), ch. 2, part 2.

E. Stockhammer, 2004. “Financialization and the slowdown of accumulation”, Cambridge Journal of Economics, 28 (5), pp. 719-741.

John Kenneth Galbraith, Economics and the Public Purpose, Pelican Books, 1975 (1973), ch. 9- 10, pp. 108-125. 6

5. Microeconomics: cost and pricing theory (Feb. 7)

King (2003): marginalism, pricing and prices, production

M. Lavoie (1992), ch. 3, pp. 118-148. Lavoie (2004), ch. 2, parts 3-6.

M. Lavoie, “Pricing”, in Holt and Pressman, op. cit., ch. 3.

Andrews, P.W.S. 1949. “A reconsideration of the theory of the individual business”, Oxford Economic Papers, 1 (1), pp. 54-89.

D. Amirault et al. 2004-2005. “A survey of the price-setting behaviour of Canadian companies”, Bank of Canada Review, Winter, pp. 29-40

P. Downward and F. Lee, “Post Keynesian pricing theory reconfirmed? A critical review of Asking about Prices”, Journal of Post Keynesian Economics, Spring 2001, 23(3), 465-483.

A. Roncaglia, “Energy and market power: an alternative approach to the economics of oil”, Journal of Post Keynesian Economics, Summer 2003, 25(4), 641-660.

6. : credit and money (Feb. 14)

King (2003): Central banks; circuit theory, credit rationing, development finance; endogenous money, expectations, finance motive, financial instability hypothesis, liquidity preference, monetary policy, money, rate of interest.

M. Lavoie (1992), ch. 4. Lavoie (2004), ch. 3.

M. Lavoie, 2005. “Monetary base endogeneity and the new procedures of the Canadian and American monetary systems”, Journal of Post Keynesian Economics, Summer, 27 (4), pp. 689-709.

R. Wray, “Money and inflation”, in Holt and Pressman, op. cit., ch. 8.

M. Wolfson, “A Post Keynesian theory of credit rationing”, Journal of Post Keynesian Economics, Spring 1996, 18 (3), 443-470.

MID-TERM EXAM: FEBRUARY 28TH

7. Macroeconomics: employment and effective demand (March 7, 14)

King (2003): Effective demand, employment, full employment, multiplier, profits, underconsumption, unemployment, wages and labour markets.

M. Lavoie (1992), ch. 5, pp. 217-266. Lavoie (2004), ch. 4. 7

M. Seccareccia, “An alternative to labour-market orthodoxy: the post-Keynesian/institutionalist policy view”, Review of Political Economy, no. 1, 1991, 43-61.

M. Lavoie, “Real wages, employment structure and the aggregate demand curve in a Kaleckian short-run model”, Journal of Post Keynesian Economics, Winter 1996-97, 19 (2), 275-288.

M. Lavoie, «Efficiency wages in Kaleckian models of employment», Journal of Post Keynesian Economics, vol. 23, no. 3, Spring 2001, 449-464.

8. Macroeconomics: growth theory fundamentals (March 21)

King (2003): Dynamics, growth and income distribution, growth theory, investment, saving, traverse.

M. Lavoie (1992), ch. 6, pp. 282-316. Lavoie (2004), ch. 5.

M. Setterfield, “Macrodynamics”, in Holt and Pressman, op. cit., ch.9.

M. Lavoie, «The Kaleckian model of growth and distribution and its neo-Ricardian and neo- Marxian critiques», Cambridge Journal of Economics, vol. 19, no. 6, December 1995, 789-818.

9. Macroeconomics: introducing some complexities in growth models (March 28)

M. Lavoie (1992), ch. 6, pp. 316-371.

M. Lavoie, «Kaleckian effective demand and Sraffian normal prices: towards a reconciliation», Review of Political Economy, vol. 15, no 1, January 2003, pp. 53-74.

E. Stockhammer, “Is there an equilibrium rate of unemployment in the long run?”, Review of Political Economy, vol. 16, no 1, January 2004, pp. 59-78.

10. Macroeconomics: inflation theory (April 4)

King (2003): inflation, stagflation

M. Lavoie (1992), ch. 7.

Mario Cassetti, 2003. “Bargaining power, effective demand and technical progress: a Kaleckian model of growth”, Cambridge Journal of Economics, 27, pp. 449-464.

H. Bloch, A.M. Dockery and D. Sapsford, 2004. “Commodity prices, wages, and U.S. inflation in the twentieth century”, Journal of Post Keynesian Economics, Spring 2004, 26 (3), 523-545.

P. Arestis and M. Sawyer, 2005. “Aggregate demand, conflict and capacity in the inflationary process”, Cambridge Journal of Economics, 29 (6) pp. 959-974. 8

11. Open economics (AT YOUR OWN LEISURE)

King (2003): Balance-of-payments-constrained , Bretton Woods, exchange rates, globalization, international trade, Tobin tax, international economics.