This note provides a response to criticisms advanced by Gahn (2023) regarding the aggregate demand externality framework. Gahn criticizes the framework's assumptions, questions the robustness of the results when independent investment functions are introduced, and expresses skepticism about the empirical results in Petach and Tavani (2019). We show that none of these critiques survive scrutiny.
This paper provides the first empirical assessment of the assumption that total profits-wages ratios (TPWR) are neutral in the long-run determination of international relative prices (IRP). According to Shaikh's theory of IRP based on 'Real Competition', the long-run behaviour of the IRP of any pair of tradable commodity bundles is determined exclusively by their relative total unit labour costs (ULC). By accounting inspection, the authors show that this thesis requires industrial TPWR to be sufficiently similar across countries. Using data from the World Input-Output Database for 42 countries over the period 2000-2014, the authors document strong statistical regularities in the distributions of TPWR, capital intensities and wage shares, characterised by clustering around central values with limited variability and asymmetry. However, Bayesian hypothesis tests of mean overlap reveal that, for the vast majority of country pairs (e.g. Spain-Germany, Mexico-United States), mean TPWR values are statistically distinct, leading to a rejection of the condition required for IRP to equal relative total ULC. These findings challenge the foundations underlying the use of relative ULC as indicators of international price-competitiveness and point to the need to incorporate additional determinants in explanations of IRP and price-and cost-competitiveness.
Open-economy demand-led growth models have focused on two main subjects: the impacts of income distribution on international competition, highlighted by the Neo-Kaleckian tradition, and the balance of payments as a constraint to growth, highlighted by the Kaldor- Thirlwall tradition. The combination of both features in the same dynamic modeling framework presents compatibility issues. This paper develops a common framework to analyze and compare these different growth models, showing that the incompatibility between model closures stems from two underlying assumptions of the canonical Neo-Kaleckian open-economy model: (i) that exports follow the same growth rate as domestic capital accumulation and (ii) that countries may continuously accumulate foreign debt. Simply dropping the first assumption by taking exports to follow foreign and not domestic income leads the model's closure to become that of the open-economy supermultiplier model, as in Nah and Lavoie (2017). Moreover, the inclusion of a maximum indebtedness level, dropping the second assumption, leads the model to a balance-of-payments-constrained growth rate of equilibrium. Under these new assumptions, the model still reaches the main results from both traditions while allowing for domestic autonomous-demand components to be introduced as relevant drivers of long-run growth.
The revival of economic nationalism poses a challenge to neoclassical orthodoxy, which claims that liberalized international trade is (subject to a few recognized and important exceptions) inherently cooperative and mutually beneficial. Post Keynesian open-economy models demonstrate that international trade relations can be conflictive under certain conditions. In the short run, changes in either cost- or quality-competitiveness can shift output, growth, and employment from some countries to others. In the medium run, positive feedbacks from growth of exports to growth of labor productivity create self-reinforcing gains in external competitiveness for some countries that may come at the expense of slower growth for others. In the long run, changes in the real exchange rate or terms of trade can favor some countries'growth at the expense of others'. The Post Keynesian approach also implies that coordinated fiscal expansions can mitigate these conflicts and foster more cooperative outcomes, while industrial policies are generally superior to protectionism.
The interwar period, particularly the 1930s, is often characterized as a decade of chaos. Conventional wisdom, grounded in orthodox monetary theory, frequently refers to bilateral clearing agreements of the time as a form of barter. First, orthodox monetary theory creates a myth surrounding the gold-sterling standard, portraying it as an automatic system with exceptional results that deserved to be restored. Subsequently, it discredits clearing agreements as primitive barter. In contrast, heterodox monetary theory, which focuses on currency hierarchy and monetary circuit theory, acknowledges that the gold-sterling standard is actually asymmetric, gold does not move and there is no automatic mechanism for stability. This paper offers a heterodox perspective on the 1930s, demonstrating that clearing agreements are undoubtedly not barter and that inconvertible money still qualifies as money.
This article assesses Mexico's economic and social performance under MORENA governments (2018-2025), examining the extent of the promised demise of Neoliberalism during the 'Fourth Transformation'. Through a comparative analysis of policies implemented under Lopez Obrador (2018-2024) and Sheinbaum (2024 to present) against the Neoliberal period (1983-2018), the authors scrutinize continuities and ruptures in macroeconomic, sectoral, and social policy. The findings reveal a starkly contrasting panorama. A historic reduction in multidimensional poverty is documented, accompanied by a decrease in Gini coefficient. This achievement is predominantly attributable to a minimum wage policy rather than to cash transfer programs. Conversely, economic growth proves disappointing. Investment remains stagnant below, and productivity continues declining. The text concludes that, contrary to official rhetoric, monetary, exchange rate, financial, and fiscal policies remains orthodox-evidenced by the procyclical response to COVID-19. The sole significant departure from Neoliberalism is identified in labor policy, particularly wage determination. The authors caution that wage-led redistribution combined with economic stagnation and fiscal fragility is unsustainable, raising fundamental questions concerning the viability of maintaining social gains without substantial revision of the development agenda.
The US dollar is the most widely used cross-border means of payment. Countries require access to US dollars to pay for most of their balance-of-payments-related transactions, and restricted access to them can constrain their growth possibilities. Yet, the literature about the mechanisms behind the creation and distribution of US dollars across borders is fragmented. Based on the endogenous money and Minskyan perspectives, this paper theoretically explores how internationally accepted US dollars are created through global banks' credit operations. The credit conditions of these operations ultimately influence the countries' costs and ability to participate in cross-border transactions. In particular, this paper explores how global banks determine cross-country US dollar credit conditions based on two main factors: their general pricing decisions, determined by their desired balance-sheet structures, and their assessments of the borrowers' creditworthiness, which are based on their expectations regarding borrowers' future access to US dollars. Fluctuations of these factors can act as exogenous sources of pressure for the balance of payments of countries across the world.
This paper empirically analyses the relationship between investment share and growth in five major LatinAmerican economies-Argentina, Brazil, Chile, Colombia and Mexico-from 1993 to 2017. The analysis draws on the Sraffian supermultiplier (SSM) framework, which establishes business investment as fully induced by the level and trend of effective demand and identifies long-run drivers of economic growth as non-capacity-creating autonomous expenditures. Business investment follows the capital stock adjustment principle, implying that investment share adjusts to different levels of economic growth. In the fully adjusted position, investment share is a positive function of autonomous expenditures growth rate. Our econometric analysis implements two Granger causality tests in dynamic panel models: first examining the investment share-output growth relationship, and second testing the investment share-autonomous expenditure growth rate relationship. The results suggest a unidirectional Granger causality relationship between autonomous demand and output growth rates and the investment share, supporting SSM results. These findings show that the SSM approach holds when extended to a broader range of countries, indicating the pervasiveness of such dynamics across diverse economic contexts.
The paper investigates key issues within the literature on demand-led growth from the standpoint of the less-explored problem of calibration in macroeconomic models. The role of autonomous demand, the long-run convergence on normal utilization and the utility of steady-state analysis are considered by means of a multi-commodity simulation model of demand-led growth. The model brings with it the challenge of calibrating sectoral capital to output ratios consistent with reported estimates of the aggregate output to capital ratio. Key complexities are the dependence of the measured aggregate ratio on relative prices, the implied lower limits on sectoral ratios and the upper limits required for stability. The model simulates responses to an autonomous demand shock in two different settings: for a once-over shock in the rate of growth of autonomous demand and where this rate is subject to random fluctuations with a shock to its mean rate of growth. For the latter case, a simple Monte Carlo experiment is performed to enable comparison of the two different settings. Simulation results provide a basis for discussion about expectations in the context of demand-led growth and the significance of long-run divergences of actual utilization in relation to a normal rate.
This article examines the role of 'conventional beliefs' in economics, defined as shared expectations about how the economy functions. These beliefs significantly influence decision-making by the agents and affect the response of the economy to shocks. The article specifically considers a Walrasian Conventional Belief (WCB) and a Keynesian Conventional Belief (KCB). Under the WCB, agents take price and quantity changes to signal adjustments toward the optimal equilibrium. Under the KCB, agents take price and quantity changes to signal changes in demand. The article shows that if a KCB takes hold in a neoclassical context, it shapes economic responses to shocks and leads to Keynesian outcomes (in terms of aggregate resource uses). It also shows that if the same shock were to hit the same economy, the shock would be more persistent and intense under the KCB than under the WCB. The article suggests that policies promoting nominal stability can help stabilize expectations and support full employment; however, it cautions against over-reliance on fiscal and monetary interventions in structurally weak economies. The article concludes by contrasting the theory of conventional beliefs with key concepts from New Classical and New Keynesian economics, along with remarks on the formation and evolution of conventional beliefs.
In the post-2020 aftermath of the COVID plague depression, the Powell Fed appropriately balances risks ex ante, and compared to counterfactual alternatives, the ex post outcomes are good. Historically, most inflation episodes ebb without adaptive spirals; the 2020s follow that pattern; thus, the Fed's moving late but then moving fast to the Wicksellian neutral rate is a successful policy. Powell's FOMC makes prudent, data-dependent judgments under our immense uncertainty about the state of the economy and our extremely limited understanding of how the macroeconomy actually works.
This paper presents a new formulation of conflict inflation in which the bargaining process is marked by opportunistic behavior by the dominant party. There is also full feedback of inflation expectations in the bargaining process. The model generates Phillips-styled inflation-unemployment dynamics that are a hybrid of Keynesian and NAIRU dynamics. Conflict inflation arises when economic activity rises above the consistent claims activity level, and it is subject to self-propelled conflict accelerationism. Immediately below that level, inflation holds constant at the expected rate. At low activity, accelerating disinflation can develop. That produces a family of pseudo-Phillips curves, each indexed by the expected inflation rate. The middle portion of the pseudo-Phillips curve is horizontal and stable. The outer portions are unstable, being marked by accelerating inflation and accelerating deflation. Conflict inflation is best addressed by unconventional policies, such as incomes policy.
This paper presents a model of inflation and distribution that features a structural difference between the wage Phillips curve and the price Phillips curve. The wage Phillips curve revolves around conditions in the labor market represented by the employment rate, while the price Phillips curve revolves around conditions in the product market represented by capacity utilization. Differences in the relative bargaining power of workers and capitalist firms give rise to stabilizing real wage dynamics that lead to normal capacity utilization. Wage-and price-setting are each benchmarked to a different reference rate of price inflation, and both are anchored by the central bank's inflation target. Price-setting by capitalist firms requires accurate projections (inflation expectations) of their competitors' prices, while the wage-setting reference rate reflects the delay in keeping up with past inflation that firms impose on workers, so that more anchoring represents the loss of working-class bargaining power. Greater anchoring of the wage-setting reference rate relative to the price-setting rate makes real wages vulnerable to erosion from inflation. Capacity constraints also generate inflation that erodes wages. The model sheds some light on the recent post-COVID inflation through these channels.
The article contributes to the discussion around export competitiveness in the context of the growth models perspective within the interdisciplinary research agenda of Post Keynesian Economics and comparative political economy. It claims that the Sraffian supermultiplier growth decomposition and the growth driver approach are complementary, assembling a solid framework for analyzing the political economy of growth and its determinants. The empirical investigation consists of two steps. First, demand-led growth accounting is employed to investigate the economic performance of a sample of emerging economies before and after the 2008-2009 global economic crisis. Exports were categorized as the primary source of growth for all these economies before the crisis. The overall decrease in exports following the crisis is accompanied by lower average growth rates, which highlights the importance of understanding export competitiveness factors to elucidate the growth dynamics in these economies. Thus, in the second step, panel data estimations examine export drivers. The results indicate that foreign demand, real effective exchange rate depreciation, and participation in global value chains positively impact export growth. Although these results emphasize the importance of price-competitiveness factors, additional estimates show that as economies reach higher levels of complexity, they transition away from relying on low relative prices, with non-price factors playing an increasingly important role in fostering exports.
The paper reconstructs the historical and theoretical evolution of industrial policy, highlighting its shifting rationales and practices across diverse economic paradigms and geopolitical contexts. It examines how industrial policy emerged as a pragmatic response to development challenges, gained legitimacy during the era of the mixed economy, and was later dismantled under neoliberal orthodoxy. Special attention is given to the resurgence of industrial policy in response to recent global crises and structural transformations needed to tackle contemporaneous challenges. The paper explores the current theoretical debate, contrasting traditional market failure justifications with more discretionary and transformative frameworks, such as the entrepreneurial state and mission-oriented innovation policies. It offers a critical assessment of the limitations inherent in neoclassical welfare economics when addressing contemporary global challenges, including the green transition, rising inequality and deindustrialisation. Building on the historical experience of state-led economic planning, this paper calls for a renewed, flexible and distribution-conscious industrial policy. This approach should combine demand-side and supply-side tools, prioritise social and environmental objectives and reassert the role of the state as a market shaper. Only through such a comprehensive rethinking can industrial policy regain its transformative capacity within capitalist economies.
To what extent has China over the past decade leapfrogged beyond f'actory of the world' (scaling up technologies developed elsewhere) to 'leading innovator' (starting up technologies developed at home to produce new-to-the-world products)? To what extent has China's size, economic development, and geopolitical influence reached the point where it is challenging the US for hegemony? The essay gives a qualified 'yes' to the first question, a qualified 'no' to the second.
This essay reviews the industrial policy initiatives of the Biden administration-the Bipartisan Infrastructure Law, the Inflation Reduction Act, and the Chips and Science Act-in the context of renewed enthusiasm for industrial initiatives among economists who may be described as holding center-left views. It concludes that the government of the United States, having lost decision-making and technical competencies over more than 40 years of neoliberal financialization, downsizing, and privatization of public functions, is largely incapable of industrial strategy equal to the challenge of competing with China and other rising industrial powers.
This essay traces a route to Keynes's General Theory, through his analysis of institutional rigidities in the British economy-and more generally in the capitalism of his day-and the policies for employment these suggested. The industrial policy favoured by this analysis is the forerunner of 'modern supply side theory', which links demand failures with institutional dysfunctions and thus offers a dynamic alternative to both traditional Keynesian demand policy and orthodox supply side policy.
