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ECONOMIC ISSUES

Volume 4 (1999)

Part 1, March

Please select from the titles below:

Part 2, September

Please select from the titles below:

Part 1, March

The Contemporary Relevance of Post-Keynesian Economics: Editors' Introduction

by P J Reynolds and P Downward

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`The End of a Perfect Day': `Horses for Courses' and Policy Proposals (p.7)

by G C Harcourt

Abstract: I `retire' in September 1998; so, in this paper I try to put a structure on my approach to economics, especially when formulating policy, and relate it to the various influences on my development over the years: religious, political and economic. I call the approach `horses for courses': each issue is treated as situation-specific, that is to say, there are no preconceived ideas or general theory about underlying structural relationships and their interrelationships. I illustrate the approach by reference to various policy proposals and political activities with which I have been associated over the past 40 years and more.

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Forms of Life and `Horses for Courses': Introductory Remarks (p.21)

by F Comim

Abstract: The object of the paper is to discuss Geoff Harcourt's `Horses for Courses Approach' (HCA) to economics in conjunction with Wittgenstein's concept of `Forms of Life'. It addresses the problems of coherence and arbitrariness in post-Keynesian thought, suggesting the HCA as an explanation for coherence among diversity of practices and activities. The coherence is found not at the level of substantive or methodological elements but at a philosophical level. A Wittgensteinean reading of the HCA suggests the argument that theories are different not because they are incoherent but because theories express elements comprised of different activities and contexts.

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The Macroeconomics of New Labour (p.39)

by P Arestis and M C Sawyer

Abstract: This paper focuses on two particular aspects of economic policy pursued by the new Labour government, which we label one of new monetarism. The first concerns the role of the operational independence of the Bank of England and the use of interest rates as the major instrument of economic policy and directed to the control of inflation rather than any regard for the level of unemployment. The second concerns the policy focus on the labour market with an apparent acceptance of the notion of the non-accelerating inflation rate of unemployment and the neglect of the role of aggregate demand and of the creation of productive capacity. Policies on fiscal rectitude, adoption of the so-called golden rule, the virtual abandonment of fiscal policy and the handing over of monetary policy to the Bank of England represent a comprehensive rejection of Keynesian economic policies. The thrust of policy forgets two essential requirements for full employment, namely sufficient aggregate demand and adequate productive capacity.

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Labour's Fiscal Policy: Which Horse for Which Course (p.59)

by D Mair and A J Laramie

Abstract: The publication of the Code for Fiscal Stability (CFS) sets out the principles on which the Labour Government intends to conduct fiscal policy. However, there are major weaknesses in the orthodox public finance theory on which much of the CFS is predicated. In particular, there is a lack of congruence between its micro- and macroeconomic elements which raise doubts about the ability of fiscal policy to achieve stated policy objectives. This paper sets out the framework of a dynamic Kaleckian macroeconomic approach to taxation in which the micro- and macroeconomic elements are fully integrated. Kalecki's theory of taxation is integrated with his theories of investment and business cycle. Recent changes in income distribution are seen to have been important in influencing the level of investment. Without a radical change in the thinking behind it, the authors are pessimistic about the scope for fiscal policy in the UK.

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Wage Formation and the (Non-) Existence of the NAIRU

by P Skott

Abstract: The influence of NAIRU theory on economic policy is both puzzling and unfortunate, especially in a European context. This paper shows that standard rationality assumptions and objective functions may fail to generate a well-defined NAIRU in a unionized economy. It then presents two simple models with endogenous wage aspirations. One version of the model produces a unique long-run NAIRU while the other implies the presence of aspiration-induced hysteresis in the employment rate. The hysteretic version seems preferable on theoretical grounds and - at a stylized level - this version also fits the empirical evidence better than the non-hysteretic version. The argument implies that an expansionary aggregate demand policy combined with temporary incomes policies may reduce European unemployment permanently without adverse inflationary consequences.

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Investment Performance, Capital-Widening and Economic Policy (p.93)

by C Driver, E Karakitsos and M Bunyard

Abstract: Fixed investment as a share of GDP has declined over a long period in many G10 countries. The aim of the paper is to provide a theoretical framework for explaining this. The model emphasises the negative effect on investment of uncertainty about the effects of a policy response to an output gap. When government contracts demand to close an output gap that is the result of an initial decline in fixed investment, it tends to exert a cumulative depressive effect on capacity and growth. Since this involves a dynamic process the mechanisms at work are illustrated through a theoretical simulation approach.

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The Source of Endogenous Money (p.101)

by P G A Howells

Abstract: In the post-Keynesian approach to money, endogeneity has its origin in the demand for loans which in turn arises from firms' requirements for working capital whenever the cost and/or volume of planned output increases. Banks meet all creditworthy demand for loans and the central bank supplies the necessary reserves. Thus, bank lending (and the supply of new deposits) depends critically upon the `state of trade'.

However a number of institutional changes have recently taken place in the UK which call this sequence into question. Household demand has taken over from corporate demand as the major component in the aggregate demand for bank credit. Furthermore, we know that total transactions (including those on assets, intermediate and secondhand goods) have grown much more rapidly than GDP during the 1980s. If credit is required for all types of transactions, we might therefore expect the demand for loans to depend more directly on total transactions than on those related to output alone. This paper documents those institutional changes and considers some of the implications.

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Part 2, September

Economic Theory and Technical Progress (p.1)

by L Pasinetti

Abstract: Economists' recent outburst of interest in technical progress follows upon a widespread feeling of inadequacy of current economic theory. This paper traces the origin of this inadequacy back to the historical circumstances that led an influential group of English economists in 1815 to put forward the `law of diminishing returns' to land cultivation, jointly with the theory of rent. It shows how technical progress, though not denied in principle, was eliminated by assumption for analytical reasons. That choice - it argues - arose from historical circumstances specific to a particular country in a particular time. Yet it has influenced the development of economic theory ever since. Later on, neoclassical economists have further exacerbated the effects of that initial choice. The paper argues in favour of going back to the origin and reversing the Classical choice.

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The Cost of Insider Trading: Evidence from Defined Markets (p.19)

by L Vaughan Williams

Abstract: In this paper, two complementary markets for bets on UK horse races are examined for evidence of information inefficiency in the form of unexploited price differentials between these markets for the same product. It is shown that bettors could on average improve their expected return by shifting their betting patterns in a defined way. Evidence is adduced which supports the hypothesis that the apparent inefficiency is a consequence of perceived insider activity. In particular, in situations where there are likely to be limited opportunities for insider trading, the `inefficiency' disappears. Although the evidence produced here applies to a relatively unsophisticated market, it poses legitimate questions about the operation of more complex financial markets.

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On Austrian-Post Keynesian Overlap: Just How Far is New York from Knoxville, Tennessee? (p.31)

by P Wynarczyk

Abstract: The paper critically explores Davidson's axiomatic-based argument that Post Keynesian and Austrian economics lack meaningful analytical overlap. It challenges his dismissal of the Austrian perspective as little more than a poor relation of orthodoxy which offers little gains in intellectual trade for Post Keynesianism. It will be maintained that the Austrian approach shares all of the axioms, and more besides, highlighted by Davidson as the sole preserve of Post Keynesian economics. He concedes too little to the Austrians and too much to Keynes and the Post Keynesians. Davidson neglected the evolving intellectual affinities between these two research traditions by ignoring areas of commonality and exaggerating the extent of discord. He endeavoured to diminish the standing of Austrian economics by reducing it to a special `backwater' of neoclassicalism whilst at the same time promoting his own particular variant of Post Keynesianism as a general representation of the entire school partly in order to present a more unified and cohesive alternative to the mainstream than in actuality.

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Analysing Trends in UK Household Income Inequality: A New Approach (p.49)

by D Leslie and A Wharton

Abstract: Using data derived from 30 years of the IFS Households Below Average Income Data Set, this paper examines the impact that the UK social security system had on UK household income inequality between 1961 and 1991. It asks whether rising inequality during the 1980s was due to a greater proportion of households being in receipt of social security or whether it was due to the fact that the system became less generous to households on social security because benefits were index linked rather than being linked to average living standards. Using a new, systematic procedure for decomposing changes in income inequality, strong evidence is found for a rising inequality `numbers' effect, largely offset by an inequality-decreasing `generosity' effect, during the 1970s and an uncompensated inequality-increasing generosity effect during the 1980s.

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A Note on the Country Specific Nature of Asymmetric Adjustment: Australia and the United Kingdom (p.67)

by S Cook

Abstract: Recent research has shown consumers' expenditure in both Australia and the UK to display asymmetric behaviour, but of differing forms. In this note the asymmetric natures of Australian GDP and investment are examined and compared with recent results for the UK. These results highlight the country specific nature of asymmetric behaviour more forcefully than previous results for consumption. This leads to different conclusions over the presence of asymmetry in the two economies rather than just its form.

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New Evidence on Causal Relationships between Money Supply, Prices and Wages in the United Kingdom (p.75)

by M Hasan

Abstract: The paper re-examines empirically the causal relationship between money stock, prices and wages in the United Kingdom. Using a vector error-correction modelling technique with suitable diagnostics, such as Akaike's FPE statistics and `F' tests for under-fitting the causal model, the results indicate a feedback relationship between money and prices, prices and wages, and wages and money stock. The results are supportive of the expectations- augmented Phillips-curve view of inflation and the monetary accommodation hypothesis.

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Advertising and Firm Performance: Some New Evidence from United Kingdom Firms (p.89)

by D Paton and L Vaughan Williams

Abstract: In this paper we present new evidence on the relationship between advertising and firm performance using UK survey data. Advertising is found to be correlated with profitability for those firms operating mainly in consumer goods industries. We also adopt a new approach, which uses receivership as an unambiguous measure of firm performance, to clarify the direction of causality in the relationship. We find that, within consumer goods industries, firms who advertise are less likely to exit from the market due to receivership than those who do not advertise. The results are consistent with the hypothesis that advertising exerts a significant effect on firm performance.

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On the Cyclical Behaviour of Prices (p.107)

by I Moosa

Abstract: This paper puts forward the proposition that, contrary to the prevailing conventional wisdom, there is no stylised fact about the cyclical behaviour of prices. It is argued that the empirical evidence on the issue is mixed and that the cyclical behaviour of prices is ambiguous because of the randomness of the occurrence of shocks. It is also argued that both supply and demand shocks can cause prices to be either procyclical or countercyclical depending on the policy response. Finally, it is shown that the issue is complicated further by the problem of temporal aggregation bias.

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