Yearly Archives: 2023

R.I.P., Anthony Thirlwall

Posted on by
Leave a reply

Anthony Thirlwall has passed away. His work is highly important in Post-Keynesian economics. Here is what one of his ex-students Mohammed Nureldin Hussain said about the Thirlwall Law in The Implications Of Thirlwall’s Law For Africa’s Development Challenges in the book Growth And Economic Development: Essays In Honour Of A.P. Thirlwall:

The Professor started to work out the mathematics of his manuscript. The good old blackboard notwithstanding, the identities and equations of the model were animated, left-handedly, in a manner that competes easily with Bill Gates’ PowerPoint facilities. The model contained three basic equations representing the growth of imports, the growth of exports, and a dynamic expression of the overall balance of payments equilibrium. He substituted the first two equations into the third and the model was solved to yield an elaborate expression of the growth rate of real gross domestic product (GDP). When the terms of trade were assumed to be constant the elaborate equation collapsed into an expression containing three symbols: y = x/π. ‘The rate of growth (y) of any developed country in the long run is equal to the growth rate of the volume of its exports (x) divided by its income elasticity of demand for imports (π)’, he explained.

Our eyes were fixed on the blackboard, attempting to digest the meaning and internalize the implications of this tri-legged animal. That job was not easy. For the animal distilled volumes of legendary work in economic development, encapsulating all of them in a small-sized anti-underdevelopment pill. The teaching of Engel’s law, which implies that the demand for primary goods increases less than proportionally to increases in global income; the Harrod foreign trade multiplier which put forward the idea that the pace of industrial growth could be explained by the principle of the foreign trade multiplier;3 the Marshall– Lerner condition which implies that a currency devaluation would not be effective unless the devaluation-induced deterioration in the terms of trade is more than offset by the devaluation-induced reduction in the volume of imports and increase in volume of exports; the Hicks super-multiplier4 which implies that the growth rate of a country is fundamentally governed by the growth rate of its exports; the Prebisch–Singer hypothesis which asserts that a country’s international trade that depends on primary goods may inhibit rather than promote economic growth; the Verdoorn–Kaldorian notion that faster growth of output causes a faster growth of productivity, implying the existence of substantial economies of scale;5 Kaldor’s paradox which observed that countries that experienced the greatest decline in their price competitiveness in the post-war period experienced paradoxically an increase in their market share and not a decrease; the literature on export-led growth which asserts that export growth creates a virtuous circle through the link between output growth and productivity growth – all of these doctrines were somehow put into play and epitomized within this small-sized capsule. Not only that but the capsule was sealed by the novel and powerful ingredient of the balance-of-payments constraint: ‘in the long run, no country can grow faster than that rate consistent with balance of payments equilibrium on current account unless it can finance ever-growing deficits which, in general, it cannot’.

The time for class discussion came and all the debate seemed to linger around one basic query: if growth could be explained by a rule which contained two variables only, what was the relevance of the many other socio-economic variables that could also influence the growth process? What about the role of policies and economic management? What about the role of capital, labour and technical progress? The answers of the Professor were convincing to some students, but confusing to many others. In an attempt to relieve our baffled faces he concluded the discussion by saying, in a pleasant fusion of smile and speech: ‘Simple laws make good economics’. And as he was leaving the classroom, his smile turned gradually into a laugh that engulfed his remark: ‘if this rule came to be known as Thirlwall’s Law, I will retire’. Less than one year after the publication of the manuscript in 1979 the rule was crowned as ‘Thirlwall’s Law’. But, retire? He did not. I suppose genuine philosophers like this man will never retire even if they wanted to.

…

NOTES

…

  1. See Kaldor (1978).
  2. See McCombie (1985).
  3. See Kaldor (1975).

…

REFERENCES

…

Kaldor, N. (1975), ‘Economic Growth and the Verdoorn Law – A Comment on Mr. Rowthorn’s Article’, Economic Journal, 85(340), December, 891–6.

Kaldor, N. (1978), ‘The Effects of Devaluation on Trade in Manufactures’, in N. Kaldor, Further Essays on Applied Economics, London: Duckworth.

…

McCombie, J.S.L. (1985), ‘Economic Growth, the Harrod Foreign Trade Multiplier and the Hicks Super-multiplier’, Applied Economics, 17(1), February, 55–72.

…

Appreciated/referrred by Anthony Thilwall himself in his article Balance Of Payments Constrained Growth Models: History And Overview from the year 2012.

Trump Proposes A Ring Around The Collar

Posted on by
Leave a reply

In a recent interview with Larry Kudlow, Donald J. Trump has proposed a 10% tariff on all goods and services produced by nonresident economic units which he calls “a ring around the collar”.

Trump has a chance to be reelected the President of the United States and it’s noteworthy not just because of that but because there is hardly anyone proposing the same. I think that the US balance of payments and hence its financial position is in an unsustainable path and it has to take such measures.

It is important to realise that Trump was using protectionist measures in his Presidency, he faced ridicule from supposed experts. But soon when Joe Biden became the President, Biden not only continued Trump’s policy but also did more to try to improve the US’s net international investment position.

But instead of acknowledging this, the expert class obviously has its narrative. It’s partly to do with the fact that they don’t want to acknowledge that they were wrong and the rest with the fact that they want to return to the old world order of free trade once the US presumably improves its economic/financial position.

Paul Krugman has a Twitter thread and an article in The New York Times on this. It’s a tribe defense, plus a plan to keep this as it is after a small change, with the assumption that it will succeed.

The Euro Area Crisis As A Balance-Of-Payments Crisis

Posted on by
Leave a reply

In a recent blog post Revisiting The Euro Crisis, J. W. Mason argues that the current account imbalances in balance of payments isn’t a/the cause of the Euro Area crisis.

This is completely wrong!

Current account deficits have an effect on the government budget balance and a higher current account deficit would lead to a higher budget deficit than otherwise. This is not just a matter of accounting but true behaviourally. The large current account deficits ultimately caused a large public debt and investors in government debt became nervous and there was a crisis in the government bond markets of the Euro Area. Since lot of government debt is held by foreigners, as it is difficult for residents to hold all that debt (when there’s large net international indebtedness), the sale and the movement of funds abroad after the sale also resulted in a banking crisis, as banks went heavily overdraft at their NCBs and didn’t have sufficient collateral.

The crisis in banking and government bond markets caused more crisis in private debt markets and fiscal retrenchment, fall in GDP and that leading to more crisis!

As simple as that!

One of Mason’s arguments is that since lending by foreigners needn’t arise out of prior saving, the result liabilities owed to foreigners isn’t really debt. But how does it follow that one thing implies the other? If foreigners transfer a large amount of funds to accounts in their home countries, there would be a banking crisis as banks would find it difficult to post collateral to their NCB (National Central Bank). The government would have to rescue banks adding to public debt and making investors nervous.

Greek banks endogenously creating money doesn’t mean that a purchase of a German product by Greek residents doesn’t reduce Greek’s net asset position or increase its net indebtedness to Germany.

Mason says:

 Many people with a Keynesian background talk about endogenous money, but fail to apply it consistently

Perhaps he is the one failing?

Take a simpler example: loans make deposits. But it’s also true that deposits are funding banks. The fact that banks created funds doesn’t imply that the created deposit isn’t a liability or debt.

Mason also discusses how the TARGET2 system works with the ECB/NCBs. The NCBs have  unlimited and uncollateralised overdrafts with each other and unlike the arrangements prior the formation of the Euro Area, there isn’t an equivalent worry about central banks running out of reserves. But unlimited overdrafts for the NCBs does not imply unlimited overdrafts for the whole country! It’s just that the crisis is seen elsewhere, like in banking and the government bonds markets.

Mason also takes issue with phrases such as “capital flight”. But investors can sell assets and move funds to another country and that can put pressure on banks. How is the phrase not helpful in describing what is going on?

The problem with the Euro Area is that with exchange rates fixed irrevocably and with governments prevented from making overdrafts at their NCBs, governments cannot devalue their currency or take independent fiscal action than allowed by markets. Fixed or floating, the problem is there, and the Euro Area setup makes it worse. Doesn’t remove the problem altogether!

You can see from the data from Eurostat that Euro Area countries with the worst net international investment position were the ones seeing the worst crisis. The net international investment position is accumulated current account balance plus revaluations/holding gains/”capital gains”.

Of course, the solution of the crisis isn’t wage deflation (sometimes referred to as internal devaluation), but the formation of a central government. With the central government, there are fiscal transfers with some Euro Area countries receiving more from the government than what they send in taxes. This would improve the current account balance of those countries, keeping imbalances in check. A central government would both be able to take independent action and keep imbalances in check.

Michael A. Landesmann On Nicholas Kaldor On The Centrifugal Forces At Work In The Euro Area

Posted on by
Leave a reply

I have noted many times since the Euro Area crisis started how Nicholas Kaldor foresaw it much earlier than anyone else. The year: 1971 ‼

I came across this article Nicholas Kaldor And Kazimierz Łaski On The Pitfalls Of The European Integration Process by Michael A. Landesmann, published in Dec 2019, which is really good. I like the phrase centrifugal forces in the abstract, as the Euro Area is designed to cause countries in it to fly apart.

An interesting snippet:

In sum, Kaldor’s analysis of the pitfalls of the Common Market comprises three components:

  • the almost unavoidable processes leading to ‘structural external imbalances’;
  • the detrimental impact of the Common Agricultural Policy (CAP), for a country like the UK …
  • the fact that external imbalances would result in a ‘deflationary bias’ in the deficit countries … This tendency would be strengthened in a fixed exchange-rate regime and, even more so, in a monetary union that would not be complemented by a fiscal union.

…

Kaldor’s analysis points to an issue that is of central importance in the set-up of the EC (and continues to be of great relevance in the EU): the likelihood of what he calls the emergence of ‘structural (external) imbalances’. He refers in this respect to G. Myrdal’s ‘circular and cumulative causation’ processes … Which are the cumulative processes that Kaldor alludes to when predicting that integrated groups of countries will experience ‘structural external imbalances’?

Economists On US Manufacturing And Trade

Posted on by
Leave a reply

Recently, Paul Krugman wrote two articles in The New York Times on recent surge in US manufacturing: Making Manufacturing Great Again (June 6, 2023) and Making Manufacturing Greater Again (April 20, 2023).

Post-Keynesians stress the importance of manufacturing and exports/international trade. Before the economic and financial crisis which started in 2007, Wynne Godley was worried about all this and proposed to improve exports and take measures such as imposing non-selective protectionism, as he thought—rightly—that a crisis would happen and fiscal policy should be used and would be used but that alone will not be sufficient. In other words, the market mechanism won’t do the trick.

The reason manufacturing is important is because of the potential for expansion of exports.

Economists however have been denying all this. Especially with the rise of Donald Trump when attempts to improve the US balance of payments/international investment position were looked upon as clownish. But now the establishment has accepted that it needs to be addressed. But they don’t want to accept that they were behind. At the same time, Joe Biden has gone beyond measures that Trump has taken.

However, there are many economists who still live with old dogmas. For example, see Adam Posen’s article America’s Zero-Sum Economics Doesn’t Add Up for Foreign Policy.

So we have two types of mainstream economists: a) those who grudgingly accept that they were wrong and b) who are still wedded to dogmas.

There’s of course a limit to this, so the solution to the problems lie in disbanding the system of free trade and move toward a system of balance-of-payments targets.

Marc Lavoie On The Shortcomings Of The Profit Inflation Theory

Posted on by
Leave a reply

Marc Lavoie has an article, Some Controversies In The Causes Of The Post-Pandemic Inflation at the  blog, Monetary Policy Institute Blog.

From the article:

In the post-Keynesian tradition, firms usually operate in an area where marginal costs, or unit direct costs, are constant. Taking into account overhead labour costs and other fixed costs, unit costs are thus decreasing up to full capacity. This means that with a given markup rate over unit direct costs (or with a given markup rate over normal unit costs), profits will be rising for two reasons … First, as firms produce and sell more units, their unit cost drops, and hence their realized profit per unit gets bigger, and secondly since they sell more units, they will make more profits.

A lot of heterodox authors have endorsed the profit inflation theory and there are even research reports from the Wall Street claiming the same! But according to Marc Lavoie’s argument they just explain it in only some industries like the oil industry.

Nicholas Kaldor On Monetary Policy And Stability Of Financial Instituitions

Posted on by
Leave a reply

Via Eric Tymoigne’s blog post, I came across this quote from Nicholas Kaldor in 1982 (page 13) on stability/solvency of financial institutions, especially relevant in recent times:

Given the fact that most, if not all, types of financial institutions have short-term liabilities, the interest payment on which varies in strict relation to the Bank Rate, whilst their assets consist in a large part of bonds or mortgages, the income from which is (or may be) fixed, there must clearly be limits to the freedom of the central bank to use the interest weapon if the solvency and viability of financial institutions is to be preserved. This is only one aspect of a wider problem of the Bank of England in its policies of debt-management (regarded by the Committee as the ‘fundamental domestic task of the central bank’), which must be so conducted as to provide various types of debt in the amounts and proportions in which the public desires to hold them subject to the Bank’s powers to influence the public’s preferences by altering the relative yield on various types of debt.

‼

That’s from his book The Scourge Of Monetarism.

It’s a fantastic book and clearly shows how Kaldor is a monetary economist of rank 1.

A favourite quote from the book is (next page) and which I quote often in this blog:

… As it is, a highly developed banking system already provides such facilities on an ample scale, since it is prepared to accommodate the public’s changing demand between different types or financial assets by altering the composition of the banks’ assets or liabilities in a reverse direction. If the non-banking public wishes to switch its holding of gilts for interest-bearing bank deposits, the banks are ready to supply such deposits at the minimum of inconvenience, and at the same time to place their surplus funds into the gilts which were previously held by the public. Similarly the banks provide easy facilities to their customers for switching balances on current accounts into interest-bearing deposit accounts, or vice versa. Hence, while the annual increment in the total holding of financial assets of the private sector (considered as a whole) is nothing more than the mirror-image of the borrowing requirement of the public sector (in a closed economy at any rate), neither the Government nor the banks can determine how much of this increment will be held in the form of cash (meaning notes and current deposits) and how much in the near-equivalents to cash (such as interest-bearing demand deposits) or in various forms of public sector debt. Thus neither the Government nor the central bank can control how much or the total financial assets the public prefers to hold in the form of ‘money’ on one particular definition or another.

Marc Lavoie On Recent Controversies On Inflation

Posted on by
Leave a reply

There’s a new talk (from 22nd February) by Marc Lavoie (available on YouTube) on the recent controversies on relatively high inflation in recent times in North America.

Marc had already talked on this before.

Profits vs profits margins vs costing margins.

The above screenshot summarises Marc Lavoie’s points. The discussion appears around 16:00 in the video.

Lots of left-leaning economists have claimed the idea of profits being the source of high inflation. An example is a recent paper by Isabella Weber (and Evan Wasner) who claim that under conditions of supply constraints, firms can hike prices.

Link

FT Letter To The Editor On Current Account Imbalances And War

FT has published a letter to the editor from some post-Keynesian economists arguing for regulating imbalances in the current account balance of payments, and that such imbalances make wars more likely.

One of the signatory of the letter is Dimitri Papadimitriou, who along with Wynne Godley had been warning about imbalances since the turn of the millennium.

From the letter:

…

A new international economic policy initiative is therefore required to head off the threat of further wars.

A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.

…

The current system of free trade has created a deflationary bias in the world economy. A further bias is introduced because the United States is now a large debtor of the world and till the crisis which started in 2007 it was acting as the driver of the world, a role which it still plays but is not as big as before. With such a deflationary bias, countries try to use beggar-thy-neighbour policies, as world output is limited. That creates tensions between countries and the desperation to raise output exacerbates the tensions. So a new international order: a system of regulated/planned trade.

Link

Ashwani Saith Discusses His Book Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

There’s a webinar for the Review Of Political Economy where Ashwani Saith discusses his new book on Cambridge economics, hosted by Louis-Philippe Rochon and with discussion from Francis Cripps, Marc Lavoie and Maria Cristina Marcuzzo.

The event was held on Feb 2, 2023.

[The title is the link to the video on YouTube]