Philip Arestis (University of Cambridge and University of the Basque Country) and Malcolm Sawyer (University of Leeds)

Title of Paper: The ‘New Economics’ and Policies for Financial Stability

Abstract: The over-all objectives of economic policy, which are closely involved with the ‘New Economics’, are sustainable (environmental and otherwise) and equitable economic development and growth. The major objective of macroeconomic policy is identified here as the achievement of full employment of the labour force (rather than, for example, achieving an inflation target). The achievement of that objective requires appropriate fiscal and monetary policies with regard to aggregate demand and financial stability and the provision of sufficient productive capacity to enable that full employment, where sufficient is to be interpreted in terms of quantity, quality and geographical distribution. Full employment is (provisionally) defined as the number of people seeking work equal to the number of job vacancies (that is frictional unemployment) with the addition that no one should be without work for more than 6 months. It is though necessary to go further and articulate who should be taken as seeking employment (e.g. age of retirement) and the average hours of work. This question is related to the relationship between material well being and ‘happiness’ (e.g. do longer hours of work which bring additional production add to ‘happiness’). The pursuit of the objectives of sustainable and equitable growth has to address, inter alia¸ the questions of: (i) the structure of production (that is, for example, the shifts to less environmentally harmful forms of production, the development of ‘green technology’); (ii) how far environmentally sustainable growth will mean a lower rate of growth than recently experienced, and the macroeconomic implications of a lower investment rate for levels of demand, employment and savings; (iii) the relationship between equity, equality and growth, and policies to develop a less unequal economy.


Sheila C Dow (University of Stirling)

Title of Paper: Policy in the Wake of the Banking Crisis: Taking Pluralism Seriously

Abstract: The purpose of this paper is to explore a pluralist approach to policy with respect to the financial system in the wake of the crisis (where policy encompasses both monetary policy and the regulation of the financial system). We consider first what is involved in a pluralist approach to policy more generally and how this may be justified. This includes a pluralist stance with respect to different approaches to economic theory, pluralism in the sense of interdisciplinary enquiry, pluralism in terms of range of methods employed, and pluralism with respect to recognition of the plurality of culture and values in society. The implications are drawn for how the banking crisis is framed, how it is explained by theory and thus how policy is designed. It is argued that changing market sentiment and the breakdown of trust were important factors in the crisis which require treatment by economic theory in order for economists to guide policy. In addressing these issues, current mainstream theory focuses on a narrow definition of rational behaviour which, within competitive markets, generates a socially-optimal outcome. This approach is governed by a mathematical formalist methodology, and encourages policy to incentivise this kind of rational behaviour, with respect for example to inflation targeting and addressing moral hazard. New mainstream theory would instead recognise the socio-psychological foundation of money and banking, such that policy needs to focus on rebuilding confidence and addressing moral (including distributional) issues. The relevant analysis would require a range of methods and would address pluralities within society.


John McCombie (University of Cambridge)

Title of Paper: Rethinking Economic Growth

Abstract: The standard neoclassical approach towards economic growth relies totally on the concept of the aggregate production function. This is true for the ‘growth accounting approach’, the augmented Solow growth model and endogenous growth theory. However, the aggregate production function is so deeply flawed that the no reliance can be put on it. The problems that arise relate to aggregation problems so that even if well-defined micro-production functions cannot be aggregated to give a well-behaved production function. Also to the traditional defence that the effect of aggregation problems must be small because econometric estimations of production functions give good statistical fits is also untenable. This paper briefly summarises these arguments and then goes on to consider alternative ways that avoid these problems. These may be divided into macro and microeconomic explanations. The former includes the evolutionary approach with an emphasis on lock-in and path dependence. History is important in explaining how the rich countries got rich and it has important implications for developing countries. The alternative macroeconomic approach also emphasises the importance of international and national institutions and the role of exports and globalization. The microeconomic approach looks at the insights from international firm matched-pairs studies and the role of multinational corporations and technological transfers between firms. A “bottom-up approach” considers the drivers of national productivity growth using Porter’s concept of industrial clusters (a policy approach widespread in both the developed and developing countries). These alternative approaches still form a somewhat ad hoc collection, but it is shown how they make the beginnings of a coherent ‘New Economics’ alternative approach.


L. Alfonso Palacio-Vera (Universidad Complutense de Madrid, Spain)

Title of Paper: Debt monetization, inflation, and the 'neutral' interest rate

Abstract: The current global economic crisis has dramatically highlighted the limitations of traditional Keynesian aggregate demand policies to tackle deep recessions when economies exhibit high government debt to GDP ratios. In this paper, we claim that, particularly in the context of currency unions, a new approach to coordination between monetary and fiscal policy inspired by current theoretical developments within the ‘New Economics’ and that stresses the role of active debt management is needed. According to us, this new approach should incorporate two additional (albeit not new) instruments, namely (i) the systematic monetization of government debt that aims to prevent an excessive government debt to GDP ratio from paralysing expansionary fiscal policy and (ii) the occasional creation of inflation to help alleviate the process of deleveraging in heavily indebted economies. In order to support this claim, we present a theoretical framework that places trade and financial flows among countries at the centre of the stage. In particular, we develop a simple macroeconomic model for an open economy that considers two countries and two periods. In the first period Country A (e.g. Southern member of the Eurozone or the US economy) absorbs the trade surplus generated by Country B (e.g. Germany or China). In Country A, the corresponding trade deficit results in a growing foreign debt stock vis-à-vis Country B. Period 2 starts when, having the debt to GDP ratio in Country A reached a certain benchmark level, the process of deleveraging starts off while the absorption of the trade surplus of Country B has not ceased. At that point in time, and as a result of the ensuing downturn, monetary policy eventually becomes ineffective. Likewise, the operation of automatic stabilizers brings about a rise in the government debt to GDP ratio in Country A that, particularly in the case of currency union members, may raise perilously the risk premium required by international investors. The standard solution to this problem is that, at the beginning of period 2, Country B should experience a real appreciation vis-à-vis Country A so that the former now becomes a net importer thereby letting the latter successfully reduce its foreign debt stock. However, as the current crisis reveals, it is unlikely that this solution will be politically acceptable to net-exporting countries like, for instance, Germany or China, thus making standard Keynesian macroeconomic policies politically unpalatable. By contrast, both the monetization of debt and the occasional creation of inflation aimed at alleviating debt burdens may help us get around this undesirable scenario and restore vigorous economic growth. Finally, we conclude that the application of these policy instruments in the Euro area would require a deep reshuffle of both the Growth and Stability Pact and the political mandate of the ECB but this, in turn, may inevitably require further political integration in Europe.


Ozlem Onaran (Middlesex University) and Engelbert Stockhammer Kingston University)

Title of Paper: Rethinking the Role of Wage Policy in Europe: Implications of the Wage-led Demand Regime

Abstract: Mainstream economics focuses on wages merely as a cost item, and ignores the role of wages as a source of demand. This caveat in modeling has also serious policy implications: in the EU the main policy tool for international competitiveness is defined as productivity increases combined with wage moderation. The aim of this paper is to bring in the dual role of wages into the new thinking about economic modeling and policy. The analysis is inspired by a post-Kaleckian macro model that allows for wage-led as well as profit-led demand regimes. An increase in the wage share has ontradictory effects on aggregate demand. Private consumption expenditures ought to increase, because wage incomes typically are associated with higher consumption propensities than capital incomes. Investment expenditures ought to be negatively affected. Net exports will be negatively affected, because an increase in the wage share corresponds to an increase in unit labour costs (ULC). Therefore, aggregate demand can be either wage-led or profit-led depending on the relative size of the consumption differential, the sensitivity of investment to profits, the sensitivity of net exports to ULC, and how open the economy is. The paper builds on the stylized facts that the EU as a whole is likely to have a wage-led demand regime, although some individual member states are likely to be in a profit-led regime. We highlight, first, that ‘beggar my neighbour’ wage policies of individual member states are unlikely to stimulate employment in the EU overall. Second, we discuss the role of wage coordination and the macroeconomic policy package.


Terry Barker (University of Cambridge)

Title of Paper: A New Economics Approach to Modelling Policies for Climate Change Mitigation

Abstract: This paper will explore a Post Keynesian, new economics approach to climate policy, assessing the opportunities for investment in accelerated decarbonisation of the global economy to 2020 following the Great Recession of 2008-2010. The risks associated with business as usual growth in greenhouse gas (GHG) concentrations in the atmosphere suggest that avoiding dangerous climate change will require that GHG emissions must be almost eliminated from human activity. The implication is that the world’s energy-economy system requires accelerated decarbonisation, through wholesale switching to low-carbon technologies and lifestyles. The crucial question is how fast GHG emissions can be reduced, while maintaining and even accelerating economic development, and ensuring that the most vulnerable countries, and groups in society, are protected. Following the Copenhagen Consensus of 2009, governments have proposed targets for reductions of GHG emissions and of the carbon-intensity of GDP by 2020. It appears unlikely that these reductions will be sufficient to achieve the global reductions implied by the 2 degree Celsius target for increase in temperatures above pre-industrial levels. This paper will explore how climate change mitigation policies can be designed to achieve these targets and shift the global economy following the recession of 2008 to a more sustainable path in terms of energy demand and emissions of pollutants. The scale of the investment required and its implications for employment and public finances will be assessed using E3MG, an Energy-Environment-Economy (E3) Model at the Global level. E3MG is an annual simulation econometric model, estimated for 20 world regions 1972-2006 adopting a new economics approach.


Jesus Ferreiro and Felipe Serrano (University of the Basque Country)

Title of Paper: Expectations, Uncertainty and Institutions. An Application to the Analysis of Social Security

Abstract: The international financial crisis has generated dramatic effects in the retired population that had accumulated their savings in private funded pension schemes. This dimension of the crisis has led to place in the centre of the academic and political analysis the reconsideration of the reforms implemented in the public pension systems. However, this reflection needs a previous neat and precise analysis of the risks faced by the pension systems. The neoclassical paradigm cannot make this analysis, since its conclusions about the working of pension systems depend on the assumptions of the theory of general equilibrium, that is: perfect information, instrumental rationality and efficient capital markets allocating resources in the long-term. However, reality shows that the main problem economic agents face in the long run is uncertainty. We also can see that individuals have bounded rationality and that the efficiency of the markets is simply a belief held by mainstream economics. The objective of our paper is to present, on the one hand, the limits of neoclassical economics to provide a rigorous analysis of the problems face by pension systems. On the other hand, we wish to give an explanation of the existence and workings of these systems and of the risks they face. In this explanation we combine variables of an institutional nature (evolving in time depending on the interest conflicts of the agents) with the necessity to overcome the problems generated by the existence of uncertainty and bounded rationality. The analysis is firmly within the confines of ‘New Economics’.


Diane Elson (Centre for Research in Economic Sociology and Innovation and Human Rights Centre, University of Essex)

Title of Paper: Reduction of Budget Deficits: A Human Rights Perspective

Abstract: This paper argues for an ethical framework for economic policy based on a human rights perspective rather than on a utilitarian calculus. It identifies the key economic and social rights obligations of governments, stemming from the Universal Declaration of Human Rights, and treaties such as the International Covenant on Economic, Social and Cultural Rights, and shows how these are relevant to fiscal policy. It explains the key human rights principles that should guide fiscal policy: progressive realization of rights; use of maximum available resources;  avoidance of retrogression; satisfaction of minimum essential levels; equality and non-discrimination; participation, transparency and accountability. This framework is used to assess the deficit reducing budget introduced by the UK coalition government in June 2010. The paper argues that this budget is not in compliance with the government’s human rights obligations and will lead to violation of some important economic and social rights. It concludes with a discussion of how the discourse of human rights can help mobilization for alternative fiscal policies.


Valpy FitzGerald (Oxford University)

Title of Paper: Global Capital Markets, Direct Taxation and the Redistribution of Income

Abstract: This paper is concerned with a central issue of international economic policy. The creation of a single global capital market without an international regulatory system has clearly had the unfortunate consequences for macroeconomic stability (and thus full employment) foreseen in the debates on the establishment of the Bretton Woods system. However, free capital movement also sharply curtails the ability of governments to tax effectively capital income or asset values, adding a further motivation for liberalisation. Standard principles of international taxation suggest that the tax burden should fall most heavily on those factors of production which are least mobile, in order to maximise government income and minimise the disincentives to economic growth. There has been a corresponding shift in the incidence of taxation from capital to labour as governments have tried to maintain levels of both fiscal revenue and private investment. However, this shift in the burden of taxation towards labour incomes worldwide severely limits the ability of governments to redistribute income through the fiscal system and thus underpin the social contract. The first part of this paper sets the scene by examining empirical evidence on the shift of the tax burden from capital to labour, drawing on tax incidence data by sources of income and income groups for OECD countries and approximate estimates for developing regions. The second part contains a critique of current standard ‘textbook’ theory on capital taxation in terms of its models of investor and governmental behaviour. The third part examines the potential for effective cooperation between national jurisdictions, primarily through information exchange rather than rate harmonisation, and thus the restoration of progressive taxation of capital incomes.


Robert Wade (London School of Economics)

Title of Paper: New Thinking on Industrial Policies

Abstract: As economics slowly awakes from J.S. Mill's ‘deep slumber of a decided opinion’, ‘industrial policy’, a forbidden phrase for the past 30 years, has come back into currency on the margins of the discipline. Justin Lin, the chief economist of the World Bank since 2007 and its first non-G7 chief economist, has begun talking about it, in the larger context of ‘new structural economics’ - an important development in view of the World Bank's importance as a legitimiser and delegitimiser of ideas. This contribution will assess Lin's and other recent attempts to ‘bring industrial policy (or ‘sectoral policy’) back in’. It will draw attention to Akamatsu's ideas about the ‘flying geese’ pattern of economic evolution (intra-industry within a national economy in terms of imports, production and exports, and inter-industry within a hierarchy of economies as industries or segments are passed down), as the starting point for the supply side of industrial policy. And also examines the (even more neglected) demand side.



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