Post-Keynesian School (L8) Flashcards
What is the Post-Keynesian critique of mainstream equilibrium models?
Key Points:
Equilibrium rarely exists in reality due to uncertainty and market inefficiencies.
Post-Keynesians emphasize path dependence and continuous adjustment rather than static equilibrium.
Economic analysis should account for historical time and real-world complexities.
How does Minsky’s Financial Instability Hypothesis explain economic crises?
Key Points:
Stability leads to increasing financial fragility through speculative and Ponzi finance.
Small shocks can trigger a cascading series of defaults in a fragile system.
Boom periods sow the seeds for subsequent busts due to over-leverage and risk-taking.
What is the Post-Keynesian view on money and its role in the economy?
Key Points:
Money is endogenous: created through the banking system in response to loan demand.
Non-neutrality of money: changes in money supply affect real variables like output and employment.
Central banks should focus on financial stability and act as lenders of last resort during crises.
How do Post-Keynesians view the role of government in the economy?
Key Points:
Government intervention is essential to stabilize demand and prevent crises.
Fiscal policy should address demand shortfalls, especially during recessions.
Regulation is needed to limit financial fragility and speculative behavior.
How does Post-Keynesian economics explain business cycles?
Key Points:
Business cycles driven by volatile investment decisions and financial dynamics.
Booms fueled by optimistic expectations, credit expansion, and rising risk tolerance.
Busts occur when defaults rise, confidence collapses, and demand falls.
What are the policy recommendations of the Post-Keynesian school?
Key Points:
Use fiscal and monetary policy to stabilize demand and employment.
Strengthen financial regulation to limit systemic risk and speculation.
Focus on counter-cyclical measures like public spending during downturns.
How do Post-Keynesians differ from mainstream economists in their view of the long run?
Key Points:
Mainstream: Long run is an idealized state where rigidities disappear, and equilibrium is achieved.
Post-Keynesian: The long run is a sequence of short-run periods; historical time matters, and path dependence shapes outcomes.
Keynes: “In the long run, we are all dead.”
What is the Post-Keynesian critique of monetary policy?
Key Points:
Interest rates have asymmetric effects: Raising rates limits investment, but lowering them doesn’t guarantee demand increases.
Monetary policy alone is imprecise and insufficient; fiscal policy is more effective during recessions.
Central banks should focus on financial stability, not just inflation targeting.
How do Post-Keynesians explain the role of income distribution in the economy?
Key Points:
Kalecki’s focus on social classes and power dynamics:
Higher wages increase consumption and demand, benefiting economic growth.
Profit-led growth: In some economies, higher profits boost investment and growth.
Income distribution affects aggregate demand and investment decisions.
How does the Post-Keynesian view of money differ from the mainstream?
Key Points:
Mainstream: Money is exogenous and neutral; central banks control its supply.
Post-Keynesian: Money is endogenous and non-neutral.
Created by banks in response to loan demand.
Influences real variables like output and employment.
Explain Minsky’s taxonomy of financial positions and its relevance to financial crises.
Key Points:
Hedge Finance: Cash flows cover both interest and principal.
Speculative Finance: Cash flows cover interest but not principal; relies on refinancing.
Ponzi Finance: Cash flows insufficient for both; depends on asset appreciation or borrowing.
Crises arise as economies shift from hedge to speculative and Ponzi positions during booms.
What is the Post-Keynesian perspective on fiscal policy?
Key Points:
Fiscal policy is crucial for stabilizing demand, especially during downturns.
Budget deficits are necessary to counter private sector saving and prevent mass unemployment.
Public investment can complement private sector activity and reduce economic instability.
How do Post-Keynesians explain financial fragility during booms?
Key Points:
Prolonged periods of growth foster optimism, leading to riskier financial behavior.
Speculative and Ponzi finance increase, making the system fragile.
A small shock can trigger widespread defaults and a crisis (Minsky’s Financial Instability Hypothesis).
How does the concept of endogenous money shape Post-Keynesian policy recommendations?
Key Points:
Money supply adjusts to demand, not directly controlled by central banks.
Central banks should set interest rates to guide demand for loans and limit financial fragility.
Policy focus on regulating credit creation and ensuring financial stability.
How do Post-Keynesians critique the neoclassical concept of equilibrium?
Key Points:
Equilibrium is unrealistic; economies operate in continuous disequilibrium.
Market-clearing does not occur due to uncertainty, rigidities, and power dynamics.
Analysis should focus on processes of adjustment and historical trajectories.
