Post-Keynesian School: Key Words and Concepts Flashcards
Effective Demand Principle
Definition: Aggregate demand determines output and employment levels in the short run.
Relevance: Central to Keynes and Kalecki’s work; contrasts with supply-side emphasis in mainstream economics.
Fundamental Uncertainty
Definition: Future outcomes are unknowable and not subject to probabilistic calculation
Relevance: Key focus of PK economics, influences investment and financial behaviour
Chartalism
Definition: Money originates as a debt or liability issued by the state and gains acceptance through taxation.
Relevance: Contrasts with commodity theories of money (e.g., gold standard).
Endogenous Money
Definition: Money supply is demand-driven and created through the banking system as loans are issued.
Relevance: Opposes exogenous money theories that assume central banks directly control money supply.
Animal Spirits
Definition: Entrepreneurial confidence and optimism driving investment decisions.
Relevance: Explains business cycle fluctuations due to changing investor sentiment.
Minsky’s Financial Fragility Hypothesis
Definition: Stability creates fragility as prolonged periods of growth increase speculative and Ponzi finance, leading to crises.
Relevance: Key insight into how financial systems become prone to collapse.
Path Dependence
Definition: Economic outcomes are shaped by historical trajectories and cannot return to a fixed equilibrium.
Relevance: Post-Keynesians emphasize disequilibrium and historical time in economic analysis.
Non-Neutrality of Money
Definition: Changes in money supply affect real variables like output and employment, not just prices.
Relevance: Contrasts with the mainstream view of money as neutral in the long run.
Differences Between Mainstream and Post-Keynesian Views
Mainstream:
Focus on equilibrium and predictive power of models.
Long-run Walrasian equilibrium with price flexibility.
Post-Keynesian:
Rejects equilibrium as a realistic analysis tool.
Emphasizes disequilibrium, uncertainty, and historical time.
Investment and the Business Cycle
Key Ideas:
Investment depends on long-term expectations and animal spirits.
Economic expansions (booms) create optimism, leading to riskier investments and credit expansion.
Crises (busts) occur when defaults rise, confidence collapses, and demand falls.
Minsky’s Financial Taxonomy
Three Financial Positions:
Hedge Finance: Cash flows cover interest and principal payments.
Speculative Finance: Cash flows cover interest but not principal; relies on refinancing.
Ponzi Finance: Cash flows insufficient for interest or principal; depends on asset appreciation or borrowing.
Critique of Commodity-Based Money
Key Points:
Gold standard increases credibility but limits flexibility in money supply.
Commodity-based systems struggle to accommodate growing economic demands.
Fiat money provides flexibility but requires credibility of the issuer.
Post-Keynesian Monetary Policy
Key Ideas:
Central banks should act as lenders of last resort to prevent systemic risk.
Focus on financial stability, not just inflation.
Interest rate adjustments have asymmetric effects: raising rates limits investment, but lowering rates does not guarantee more investment.
Financial Instability Hypothesis
Key Ideas:
Stability fosters fragility as optimism leads to over-leveraged positions.
Boom periods increase speculative and Ponzi finance.
Small shocks in a fragile system can trigger widespread defaults and crises.
2008 Financial Crisis (Post-Keynesian Perspective)
Causes:
Low interest rates post-2001 encouraged excessive borrowing and risk-taking.
Financial deregulation facilitated Ponzi finance and malinvestment.
Housing bubble burst, leading to widespread defaults and a global financial collapse.
Recommendations:
Strengthen financial regulation.
Use government spending and monetary easing to stabilize demand during crises.
