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Post-Keynesian Developments in Economic Theory
1. Introduction
📌 Post-Keynesian Economics (PKE) emerged as an extension and critique of Keynesian economics, incorporating new insights on income distribution, market imperfections, and financial instability.
🚀 Why is it important?
✔ Challenges mainstream (Neoclassical) economic models.
✔ Emphasizes real-world complexities like uncertainty, power, and financial instability.
✔ Offers policy solutions to tackle unemployment, inequality, and economic crises.
🔹 Key Figures: Joan Robinson, Nicholas Kaldor, Piero Sraffa, Michal Kalecki, Paul Davidson, Hyman Minsky.
2. Key Features of Post-Keynesian Economics
🔹 1. Rejection of General Equilibrium Theory
✔ Unlike Neoclassical models, PKE argues that markets do not always clear.
✔ Disequilibrium and uncertainty drive economic behavior.
🔹 2. Importance of Demand-Side Factors
✔ Keynes emphasized aggregate demand, but Post-Keynesians extend this to long-run growth.
✔ Demand, rather than supply, determines output and employment.
🔹 3. Financial Instability and Endogenous Money
✔ Unlike traditional models where banks are passive, Post-Keynesians argue that banks create money through lending.
✔ Hyman Minsky’s Financial Instability Hypothesis:
- Booms create excessive risk-taking, leading to financial crises.
- Example: 2008 Financial Crisis.
🔹 4. Income Distribution and Class Struggles
✔ Wages and profits are not just determined by productivity but also by power dynamics.
✔ Focus on how economic policies affect wealth inequality.
🔹 5. Fundamental Uncertainty
✔ Future outcomes cannot be predicted with probability models.
✔ Investment decisions are driven by expectations, confidence, and uncertainty.
3. Major Post-Keynesian Theories
🔹 1. Kalecki’s Theory of Income Distribution
✔ Michal Kalecki developed a Marxian-Keynesian model of income distribution.
✔ Profits depend on investment and government spending, not just savings.
📌 Key Equation: Profits=Investment+Government Deficit+Exports−Savings by Workers\text{Profits} = \text{Investment} + \text{Government Deficit} + \text{Exports} – \text{Savings by Workers}
✔ If businesses don’t reinvest profits, economic stagnation occurs.
🚀 Example: In recessions, corporations hoard cash instead of reinvesting, slowing growth.
🔹 2. Kaldor’s Growth Model
✔ Nicholas Kaldor introduced a cumulative causation model of growth.
✔ Growth is path-dependent—higher investment leads to higher productivity, which further increases growth.
📌 Key Features:
✔ Verdoorn’s Law: Productivity grows when demand grows.
✔ Economic policies must encourage investment and technological change.
🚀 Example: China’s rapid industrialization followed Kaldorian principles—continuous investment drove sustained growth.
🔹 3. Sraffa’s Critique of Neoclassical Economics
✔ Piero Sraffa challenged the marginal productivity theory of income distribution.
✔ He argued that factor prices (wages, profits) are not determined by supply and demand but by institutional and social factors.
📌 Key Contribution:
✔ His book Production of Commodities by Means of Commodities laid the foundation for the Neo-Ricardian approach.
🚀 Example: In industries with monopoly power, wages and prices are set by corporate strategies, not by market forces.
🔹 4. Hyman Minsky’s Financial Instability Hypothesis
✔ Minsky argued that economic booms create financial fragility, leading to crises.
✔ Three types of borrowers:
- Hedge Borrowers – Can repay both principal & interest.
- Speculative Borrowers – Can pay interest but must refinance principal.
- Ponzi Borrowers – Must borrow to pay both interest and principal.
🚀 Example: The 2008 Financial Crisis followed Minsky’s model—excessive speculation led to a crash.
📌 Policy Implication:
✔ Governments must regulate financial markets to prevent speculative bubbles.
4. Post-Keynesian Policy Recommendations
📌 Post-Keynesians argue that economic policies should focus on demand management, employment, and financial regulation.
✔ 1. Fiscal Policy (Government Spending)
- Keynesian policies should be permanent, not just during recessions.
- Governments should invest in infrastructure, healthcare, and education.
✔ 2. Full Employment Policies
- Advocates Job Guarantee Programs (inspired by Keynes’ idea of government as an employer of last resort).
- Example: Argentina’s Jefes de Hogar employment program.
✔ 3. Financial Regulation
- Stronger banking regulations to prevent crises (e.g., Glass-Steagall Act).
- Control over speculative activities (e.g., Tobin Tax on financial transactions).
✔ 4. Progressive Taxation & Income Redistribution
- High incomes should be taxed progressively to reduce inequality.
- Universal Basic Income (UBI) and higher minimum wages to boost demand.
5. Differences Between Keynesian and Post-Keynesian Economics
| Feature | Keynesian Economics | Post-Keynesian Economics |
|---|---|---|
| Equilibrium | Focuses on short-run equilibrium | Rejects equilibrium, focuses on dynamic processes |
| Uncertainty | Less emphasis on uncertainty | Fundamental uncertainty drives investment |
| Money & Finance | Money supply is controlled by central banks | Banks create money endogenously |
| Income Distribution | Not a central issue | Key issue affecting demand and growth |
| Government Role | Intervene during recessions | Permanent role in managing demand and full employment |
| Crisis Explanation | Market failures | Financial instability and speculation |
6. Criticism of Post-Keynesian Economics
✔ Too much reliance on government intervention – Critics argue this could lead to inflation and inefficiency.
✔ Lack of a single, unified model – Post-Keynesianism includes multiple competing theories.
✔ Difficult to apply in policy – Some ideas (e.g., financial instability) are hard to quantify.
🚀 Counterpoint: Recent crises (e.g., 2008) validate Post-Keynesian concerns about financial instability and inequality.
7. Conclusion
✔ Post-Keynesian Economics extends Keynes’ ideas by emphasizing financial instability, inequality, and real-world market failures.
✔ It argues that demand, uncertainty, and institutions shape economic outcomes.
✔ Policy focus: Full employment, strong financial regulations, and income redistribution.
✔ Minsky’s insights on financial crises have gained recognition after 2008, making PKE more relevant than ever.