Book Review: Post-Keynesian Economics (Lavoie)

Post-Keynesian Economics: New Foundations by Marc Lavoie is a masterful overview of post-Keynesian economic thought. It is an academic text, and it is aimed at readers with a good understanding of economics already under their belt. Within the text, he draws upon the different schools of thought that comprise post-Keynesian economics, and shows that they provide a coherent understanding of macroeconomics. It is an excellent resource for those who aim to have a detailed understanding of economic thought.

Book Description

The book was published in 2014 by Edward Elgar. The main text is 584 pages, and has 62 pages of references. The book's chapters are:

1. Essentials of heterodox and post-Keynesian economics.
2. Theory of choice.
3. Theory of the firm.
4. Credit, money and central banks.
5. Effective demand and employment.
6. Accumulation and capacity.
7. Open-economy macroeconomics.
8. Inflation theory.
9. Concluding remarks.

This book is the second version of the text Foundations of Post-Keynesian Economic Analysis, which was published in 1992. Professor Lavoie has also written a shorter Introduction to Post-Keynesian Economics (2006). He describes the text as "targeted mainly at honours students and masters students, but I am sure that PhD students can also benefit from it."

Marc Lavoie is a prolific author in post-Keynesian economics, and is a Professor of Economics at the University of Ottawa.

Scope Of This Review

The breadth of the topics within this book is so great that I will not attempt to address them here. I expect that I will cover different topics it raises during later articles. Instead, I will focus on why I recommend it, and who would benefit from reading it. Additionally, I do not have a strong grasp of the many schools of thought within post-Keynesian economics, so I cannot judge whether all of them are being treated fairly.

Why Study Post-Keynesian Economics?

The motivation for studying post-Keynesian economics is that it appears to offer the strongest description of macroeconomics. I worked as a senior quantitative interest rates analyst, and I had extensive experience with macro rates strategy. However, coming as an outsider to economics, I was troubled by the ad hoc nature of economic analysis used in the financial markets, and the limited usefulness of research that was churned out by official bodies, such as central banks,

At first, Hyman Minsky appeared to be one of the few economists whose writings offered useful insights. Later on, I became acquainted with Modern Monetary Theory (MMT). Both MMT and Minsky's views fit within the broad spectrum of post-Keynesian thought. It is only once I delved into this broader post-Keynesian literature that it became clear why conventional economics was essentially useless for understanding developments in the macro economy.

The "Keynesian" portion of the term "post-Keynesian" may raise ideological hackles. I do not want to get involved in discussing the politics of post-Keynesian economics, but I would point out that it is distinct from the mainstream "Keynesian" economic consensus of the 1960s and 1970s.

The Target Audience Of This Book

If you wish to understand how economies evolve, you need to understand post-Keynesian economics. And if you are serious about following this line of study, this book (or one similar) is an invaluable resource. That said, the book is not particularly cheap, nor is it light reading. It is definitely not an introductory work.

I believe that this book is best suited for:

• Economics students;
• Readers with a good grounding in economics but not post-Keynesian economics; and
• Readers with a grasp of some areas of post-Keynesian economics (such as Modern Monetary Theory), and want to dig deeper into the theory.

Since various sections are (partially) reprinted from other publications, readers with a strong background in post-Keynesian economics would have to judge for themselves about the novelty of the contents.

I would view the book as a reference, and it may be best to read it in the order of your interest. In particular, I would suggest that someone new to post-Keynesian economics should read the first chapter last, or to skim over it. It discusses the various schools of thought, and it would be best to see how they dealt with various subjects before worrying about how to classify them

The difficulty level of the text varies depending on the subject. The discussions of money and banking in Chapter 4 are straightforward, as they correspond to a straightforward subject (at least if you approach the subject without blinkers). Conversely, the discussion of "ontological versus epistemic uncertainty" in Chapter 2 is somewhat arcane. (Some readers may have the opposite preferences than the reviewer.) This disparity is an additional reason why I would recommend reading the subjects in the order of interest.

I view the text Monetary Economics by Wynne Godley and Marc Lavoie as representing a more introductory text to post-Keynesianism. The stock-flow consistent models they develop in that text form a coherent introduction to macroeconomics. The reviewed Post-Keynesian Economics provides a deeper background explaining the modelling choices that were taken in Monetary Economics.

What Is It About?

The breadth of the topics covered makes it extremely difficult to summarize what this book is about. Even after reading it, I would not even hazard attempting to offer a summary of what post-Keynesian economics is.

The difficulty faced is that post-Keynesian economics consists of a number of schools of thought that have developed after the death of Keynes. These schools of thought had some disagreements, and one can debate whether particular economists are truly "post-Keynesian" or not. This has lead to the criticism that "post-Keynesian" economics is incoherent.

Marc Lavoie's objective is to show that these different schools of thought are close enough in world view to create a coherent body of economics. He gives a "broad tent" view of post-Keynesian economics; he describes himself as "a 'lumper' more than a 'splitter'" (page 44). An additional related objective is to show that this body of post-Keynesian economics stands alone, and is not defined solely by an opposition to "mainstream" economics.

The earlier Monetary Economics did provide a more coherent story, as it developed a series of macroeconomic models within a single framework. (It did cover some of the various controversies in text sections at the end of chapters, but the bulk of text followed the development of the models.) Post-Keynesian Economics presents various important theoretical controversies. It is left more to the reader to decide how coherent the viewpoints are.

I am most familiar with the debates around money and banking. For example, there are disagreements between the views of those in the Modern Monetary Theory camp and other post-Keynesians (including Marc Lavoie himself). But as he notes, these debates ended up largely being over semantic differences, and the operational gap between the two sides were actually quite small.

On a related note, Lavoie discusses the hope of Wynne Godley that "the core accounting equations and the dynamic stock-flow equations actually constitute a framework that constrains the range of possible results" (page 273). But, as he notes, "Unfortunately, things are not so simple" (page 273). Since researchers can disagree about the behavioural rules to be followed by the various sectors, they can create stock-flow consistent models that behave quite differently. My argument is that by demonstrating these differences in semi-realistic mathematical models is much better than purely verbal arguments or attempting to draw conclusions from entirely unrealistic model frameworks. (For example, see the questionable debates about "debt burdens" which are based on OLG models.)

The Advantages Of The Post-Keynesian Approach

The advantage of the post-Keynesian approach to macroeconomics is that a great deal of mysterious events are not that hard to understand. Particular examples of interest include:

• Why is Japan able to borrow at low interest rates, despite having a high debt-to-GDP ratio?
• Why did euro area countries have debt crises, but no other developed countries?
• Why did Quantitative Easing have no impact on the rate of inflation?
• Why was the Financial Crisis almost entirely unexpected?
• Why is the United States economy not accelerating despite years of negative real rates?

Of course, after staring at predictive failures for years, other economists learned to patch their theories ("it's all the fault of the zero lower bound!"). However, almost all of these issues are the result of mainstream economists clinging to unjustified theoretical assumptions about the economy.

Unfortunately, post-Keynesian economics highlights the importance of uncertainty - the inability to even develop a probabilistic estimates for the future events. Additionally, the text is focused on economic theory, and not building predictive models. That said, if your underlying theory is gibberish (for example, loanable funds), you stand little chance of building a useful economic model upon it. Therefore, reading this text will not make you into a star economic forecaster. The best it can offer is an increased chance of avoiding making the same errors as the consensus.

Concluding Remarks

Post-Keynesian Economics: New Foundations is an excellent resource for understanding the breadth of post-Keynesian economics. It provides a reliable, scholarly background on a wide range of topics, with a hefty set of references for further study. That said, it may be imposing for a new reader.

I should note that I did not necessarily agree with everything within the text; given the size of the text, that is not surprising. I expect that I will return to those topics later, and discuss them at greater length.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Comments

[thomaswhite]

Maybe Congressman can afford book and not average American.
It would take the combined wealth of more than 18 American households to equal the value of a single federal lawmaker’s household, the Center for Responsive Politics’ latest analysis of congressional wealth finds.
The median net worth of a member of Congress was $1,029,505

[Mark Humphrey]

Central bankers who engage in monetary policy under the guise of following Keynes, are in fact, following Keynes.

Keynes argued that the cause of depression is the liquidity trap, caused in turn by under consumption. Aside from the fact, easily demonstrable, that macro "under consumption" is a logical fallacy of composition, printing gobs of money is done for the purpose of stimulating consumption to make economic growth. Again, aside from the fact that consumption does not cause economic progress, but is instead afforded by the act of capital accumulation and rising output, trying to make the mare run by printing money is consistent with the Keynesian outlook--including of post Keynesians.

The exception to this outlook is the Anglo-Austrian economics of George Reisman.

[Shock Exchange]

Mark Humphrey,

It's a nuance. These governments and central bankers are not following Keynes. They are using "smoking mirrors" and giving the impression of spurring economic growth. For instance, if the U.S. had been following Keynes and what he intended, the U.S. would not be in a period of deflation after trillions of QE and faux stimulus.

SE

[Brian Romanchuk]

Mark Humphrey,

On a technical note, post-Keynesians and Keynes himself did not make a big deal about the liquidity trap - that's a bugaboo of mainstream Keynesians, and New Keynesians like Paul Krugman.

But yes, all Keynesians reject Say's Law, and so all view underconsumption as being possible. But note that most post-Keynesians argued that the Fed policy of quantitative easing would not work. If the government wants to create jobs, it has to directly target job creation. And note that many post-Keynesians, like Minsky, rejected the standard "Keynesian" solution of infrastructure spending as a means to create jobs.

[Mark Humphrey]

Well, your points are taken, although I don't necessarily agree with them. The large issue is the Keynesian notion that slumps and depressions are caused by "under consumption".

Not to be condescending, but it really is a logical fallacy that is almost entirely overlooked in our time. A business can experience a deficit of demand, and so can an entire industry. This occurs, as we all know, when conditions change, either in micro demand or in macro adjustments during the business cycle. But economy-wide permanent under consumption is impossible, except by way of low productivity. When people don't produce much, they become poor. Everything Keynesians advocate causes lower productivity.

The changes within the business cycle, of relative prices, is alien to a free market economy. Of course, that statement is alien to the ears of nearly all contemporary economists. The cause of false booms and curative busts is central bank/fractional reserve inflating, that misallocates scarce capital.

The misallocation grows from new money bidding higher prices of a plethora of capital goods, including of stocks and bonds, out of line with the reality of scarcity. By the reality of scarcity, I mean the limits to wealth available to fund long term capital intensive projects, the building of which require forgoing more immediate, urgent needs.

The bust occurs when money printing slows down for a considerable time, because its unsustainable influence on relative prices dissipates, and so the structure of production reverts back toward normality. When this happens, the demand for money to hold rises a lot, because households and firms had become too illiquid during the false boom. So there is a temporary slowdown in spending generally, and in particular among the formerly booming capital goods sectors that had been pumped up by money printing.

With the forgoing as context, the reason that economy-wide "under consumption" is not possible, is because people must buy things to live. To live and to buy things, people must produce goods. Doing so requires buying materials, machines, labor and so forth. In fact, contrary to Keynesian misconceptions about consumption driving employment and "growth", by far the greatest source of spending is saving. For wages are paid from the savings of firms, and those wages pay for most consumer goods. The entire spectrum of goods, parts, machines, buildings, mines, farms, and so forth--all these and more are funded by business savings. That's why most spending is productive expenditure by business, not consumptive spending by wage earners, governments and business people.

(GDP is based on confusion about the nature of entities, so that consumer and most capital goods are conflated by Keynesians. This leads them to exclude from gross domestic product most capital goods transactions. So they imagine that 70% of the economy is consumption spending, which, if true, would mean we would be struggling to survive in a primitive subsistence economy).

Jean Baptiste Say explained that the source of all spending is production. Keynesians imagine that consumption somehow is logically antecedent to production, that they try to demonstrate with all sorts of abstract nonsense. There could never be a permanent deficit of demand, because it is a consequence of the activity of human life. Keynesians think recessions are evidence of "under consumption", when in fact they are caused by disruptions to relative prices, demand and output; meaning disruptions to the structure of production. The disruptions are inflating by central banks through the fractional reserve bank system.

For anyone with a serious interest in understanding economics, I suggest reading George Reisman's Capitalism. It's a major undertaking, not light reading. It is masterful and illuminating, the most powerful book I have ever read.

[Shock Exchange]

Brian,

This is an excellent review. The book is prescient because so many politicians and central bankers engage in monetary policy under the "guise" of following Keynes' example when in actuality, they have been politically motivated to do so.

SE

[hahaha48]

I try to order one and found out it is $189.
I have never seen a book that is that expansive.
No thanks

[Brian Romanchuk]

Hello,

As I noted, it is not cheap. This is unfortunately standard for university textbooks. This is why I tried to outline who is the best audience. If it was $40, I would have been much more open-ended in my recommendation.

Lavoie has a cheaper introduction to Post-Keynesian thought, but I have not read it. "Monetary Economics" is available in softcover, and it was cheaper.

[Brian Romanchuk]

Additionally, there appears to be softcover version of this book (which looks like it is currently only available in the UK), which is cheaper than the hardcover. So the price may come down over time.