The Financial Crisis and Policy Response: A Post Keynesian Perspective
Dr Manjira Dasgupta
M.S. University of Baroda
Presented at the 12th International Conference on Post-Keynesian
Economics of the Levy Economics Institute, Kansas City, Missouri
THE CRISIS & NEOCLASSICAL
ECONOMICS: A FAILED PARADIGM?
SEEKING ANSWERS: BEYOND THE
CRISIS AND POLICY RESPONSES:
LESSONS FROM POST-KEYNESIAN
The Crisis and the shock: Mainstream
“This crisis … has turned out to be much
broader than anything I could have
imagined … (We) are in a state of shocked
disbelief … (The) modern risk
management paradigm held sway for
decades. The whole intellectual edifice,
[has] collapsed.” …..
…“I still do not fully understand why it
happened, and obviously to the extent that
I figure it happened and why, I shall
change my views.”
(Alan Greenspan, Testimony before Congressional Committee Oct 23, 2008, cited in King 2011 p 11).
Krugman (1997): “The unemployment rate will be what Alan
Greenspan wants it to be, plus or minus a random error reflecting
the fact that he is not quite God.”
Federal Reserve: capable of successfully managing aggregate
demand to the fullest and ensure price stability
Dominant consensus: fiscal policy could not, and should not, be the
instrument to correct fluctuations.
What were the defining features of this “structure”?
How and why did it fail to predict the Crisis?
Why was neoclassical thought unable to provide solutions to it?
What answers do heterodox approaches, Post-Keynesian economics
included, hold to the myriad problems thrown up by the crisis?
Neoclassical Structure: Defining Elements ..
… And their direct bearing on the unfolding of the
Crisis 2007 onwards:
Efficient Market Hypothesis
Neutrality of Money
Markets would clear themselves automatically.
How do such constructs lead directly to the Crisis?
Increasing “financialization” (Minsky, among principal
Increasing complexity, bewildering proliferation of
financial instruments and derivatives
Passing by the name of “sophistication”
Lack of regulation
lack of transparency
Money Manager Capitalism
Neoclassicals operated on the certainty (ergodicity)
That a crisis was brewing, and could in deed burst some
day, was beyond perception.
“There is no means of avoiding the final collapse of a
boom brought about by credit expansion. The
alternative is only whether the crisis should come
sooner as the result of a voluntary abandonment of
further credit expansion, or later as a final and total
catastrophe of the currency system involved.”
- Ludwig von Mises (1958)
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Direct corollary of the Ruling Mainstream:
Discrediting of fiscal policy.
Envisaged role of fiscal policy in the so-called “New
Minimum fiscal policy: “Great Moderation”
Attitude to fiscal policy:
Critical and crucial differences between the so-called
“New Economic Consensus” and post-Keynesians.
Difference with Heterodoxy:
“For Eichner (1985), a clear difference between neoclassical and
Post Keynesian economics is that Post Keynesians desire to
“explain the real world as observed empirically”. (Holt &
Pressman p 4)
Approaches like Post-Keynesian work in a non-ergodic
At core: the famous Minskian financial instability
Crisis are “embedded” (Dejuán 2013)
Role of government
Non-neutrality of money
(Question: Is there a single, coherent, “Post-Keynesian”
body of thought?)
Post-Keynesian Thought: Strands
Eichner (1973): At least two overlapping traditions
Marc Lavoie, others have identified at least five (5)
Finally, there are “cross-over” theoreticians who hae
comfortably traversed and straddled across the
(Prof. Lavoie himself considers himself to be such a
contributor and collaborator in diverse Post-
Keynesian themes). “cross-over”
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The Crisis: Critical Turning Points
Large-Scale and unprecedented Bail-out by
Government of Banks and Financial Institutions
Wray (2012): The unprecedented—and “possibly
illegal” nature of the Fed’s response by extending
the government’s “safety net” to the biggest financial
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THE RESPONSE: ONE REPRESENTATIVE
Source: Hossain et al (2009)
FROM STIMULUS TO
Policy Regime Change:
Two Major, vociferous demands
For one, what was deemed to be unproducive and unjustified
Simultaneously, concern with a mounting debt-GDP ratio as
Austerity: The Major Steps:
Immediate scale back of spending, prticularlt in areas deemed
as “no productive” enough
Large-scale reversal of tax cuts, a comeback to the
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Policy Responses: The Post-Keynesian
Austerity ill-advised on at least two critical rationales:
Its enormous social and human costs
Dramatic examples: Greece, Spain
More significantly, declining GDP growth has implied re-emerging
high debt-GDP ratio, the very reason why
austerity had been demanded in the first place.
What have we Learnt?
Policy Lessons to take home:
Re-instating fiscal policy
“Functional Finance”, as distinct from “Sound Finance”
Automatic stabilizers are no longer infallible
Greater, indeed, “Activist” role of Government
Orthodoxy must yield to Heterodoxy, including Post-
Keynesianism to show the way ahead.
… theoretical, methodological and pedagogical issues are still
being debated and discussed among Post Keynesians, but this
is what you would expect from a vibrant and dynamic economic
theory. This sort of discussion goes on within every economic
paradigm or perspective, including in the dominant
neoclassical paradigm. These … internal debates– (revolving)
around refining the paradigm and solving its internal puzzles—
do not detract from the more important point that most of the
key methodological and theoretical work has been done, and
that the foundation of Post Keynesian Economics is well
established. … it is time for Post Keynesians to take their work
beyond methodology and theory, … and enter a new stage
(focussing on) public policy and empirical analysis.” (Holt et
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