Money and Macrodynamics Money and Macrodynamics Alfred Eichner and Post-Keynesian Economics Marc Lavoie Louis-Philippe Rochon Mario Seccareccia Editors M.E.Sharpe Armonk, New York London, England Copyright © 2010 by M.E. Sharpe, Inc. All rights reserved. No part of this book may be reproduced in any form without written permission from the publisher, M.E. Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504. Library of Congress Cataloging-in-Publication Data Money and macrodynamics : Alfred Eichner and post-Keynesian economics / edited by Marc Lavoie, Louis-Philippe Rochon, Mario Seccareccia. p. cm. ISBN 978-0-7656-1795-8 (cloth : alk. paper) — ISBN 978-0-7656-1796-5 (pbk. : alk. paper) 1. Eichner, Alfred S. 2. Economics. 3. Keynesian economics. 4. Money. 5. Pricing. I. Lavoie, M. (Marc) II. Rochon, Louis-Philippe. III. Seccareccia, Mario. HB171.M5584 2009 339.5'3—dc22 2009002602 Printed in the United States of America The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984. ~ IBT (c) 10 9 8 7 6 5 4 3 2 1 IBT (p) 10 9 8 7 6 5 4 3 2 1 Contents Introduction: Alfred Eichner and the State of Post-Keynesian Economics vii Part I. The Link Between Micro and Macro 1. Was Alfred Eichner a System Dynamicist? Michael J. Radzicki 3 2. Alfred Eichner’s Missing “Complete Model”: A Heterodox Micro-Macro Model of a Monetary Production Economy Frederic S. Lee 22 3. Macro Effects of Investment Decisions, Debt Management, and the Corporate Levy Elettra Agliardi 43 4. Pricing and Financing of Investment: Is There a Macroeconomic Basis for Eichnerian Microeconomic Analysis? Mario Seccareccia 59 Part II. Competition and the Globalized World 5. The Macroeconomics of Competition: Stability and Growth Questions Malcolm Sawyer and Nina Shapiro 83 6. The Megacorp in a Global Economy Matthew Fung 96 7. Pricing and Profits Under Globalized Production: A Post-Keynesian Perspective on U.S. Economic Hegemony William Milberg 116 Part III. Credit, Money, and Central Banking 8. Eichner’s Theory of Endogenous Credit-Money Robert P. Guttmann 139 9. Eichner’s Monetary Economics: Ahead of Its Time Marc Lavoie 155 10. Alfred Eichner, Post-Keynesians, and Money’s Endogeneity: Filling in the Horizontalist Black Box Louis-Philippe Rochon 172 About the Editors and Contributors 187 Index 191 Introduction Alfred Eichner and the State of Post-Keynesian Economics While Alfred S. Eichner is primarily known as the scholar who wrote The Megacorp and Oligopoly (1976)—a book mainly devoted to showing the link between growth in capital and research and development expenditures and the size of the pricing markup—his contribution to the modern post-Keynesian economics tradition goes much beyond his innovative microeconomic theory. Besides having helped to build the social network and institutions of post- Keynesianism in the United States, Eichner integrated in his books and articles most of the current fundamental or core ideas of post-Keynesian economics, which he helped to shape. At the same time, perhaps more than any other post-Keynesian economist of his generation, he recognized the importance of establishing intellectual links and integrating research pursued by those in other heterodox currents of thought, especially the institutionalist school, to which he also adhered. Alfred Eichner had a relatively short academic career. Although he be- gan teaching at Columbia in 1962, his post-Keynesian academic path truly started in 1969 with the publication of his PhD dissertation, The Emergence of Oligopoly: Sugar Refining as a Case Study, ending less than twenty years later when he passed away prematurely on February 10, 1988, at the age of fifty. Boldly announcing that a new paradigmatic theory was in the making, Eichner, along with Jan Kregel, wrote the rfi st survey article on post-Keynesian economics for the Journal of Economic Literature (Eichner and Kregel 1975). In their seminal article, they identified the key characteristics that came to be associated with post-Keynesians: the Keynesian reversed causality, in which investment determines saving; a concern with historical time, tied to the analysis of growth and cycles; an alternative theory of income distribu- tion; the importance of considering a monetized production economy; the role of incomplete information and fundamental uncertainty; the relevance of imperfect market structures with oligopolies facing near-constant marginal vii viii INTRoDUCTIoN costs. All in all, Eichner and Kregel contrasted post-Keynesian economics to neoclassical economics by claiming that the purpose of the former was to explain the real world as it could be observed empirically, rather than to construct models of an optimal imaginary economy. Calling attention to Leontief’s fa- mous assertion that the “king is naked” (Leontief 1983, vii), Eichner pointed to a discipline founded on neoclassical assumptions that was vacuous and devoid of empirically relevant presuppositions about the world. Economics was thus in desperate need of an overhaul premised on empirically based, post-Keynesian theoretical constructs (Eichner 1983a). As shown by Frederic Lee (2000a, b), Eichner was highly instrumental in setting up a post-Keynesian school in North America. Eichner devoted innumerable hours, especially between 1969 and 1981, to organizing and developing post-Keynesian economics. He organized sessions and dinners at the American Economic Association annual meetings, wrote a newsletter to keep social contact with other like-minded economists, compiled an ex- tensive post-Keynesian bibliography to help out new recruits, set up regular seminars on post-Keynesian economics, and corresponded extensively with Joan Robinson to keep her abreast of developments in post-Keynesian econom- ics in the United States. Moreover, with the help of Paul Davidson and Jan Kregel, he created for a while a permanent home for post-Keynesian scholars and students at Rutgers University. In addition, Eichner was a book editor for M.E. Sharpe Inc., where he promoted the publication of nearly twenty post-Keynesian or heterodox manuscripts. Eichner must thus be considered a builder, an architect, and a consensus-seeker as he worked tirelessly to develop the post-Keynesian “institution.” As such, he should be remembered along with other post-Keynesians, such as Paul Davidson, who also contributed to institution-building, especially with the founding of the Journal of Post Keynesian Economics. Eichner’s contribution to post-Keynesianism goes far beyond theory and organizational skills. While it is true that he worked hard at providing an alternative to neoclassical economics, he saw his role not only as providing some methodological vigor to post-Keynesian theory, but also as showing the policy relevance of post-Keynesian views by testifying numerous times before congressional and other legislative committees. He was convinced that post-Keynesian theory represented the real world more accurately than neoclassical theory, which he once called the “valley of darkness” (1983b). Perhaps more than any other post-Keynesians of his generation, Eichner not only became a magnet for young researchers seeking new ideas, but also actively fostered the growth of a new cohort of critical thinkers. Indeed, Eich- ner, always preoccupied by the future of post-Keynesian theory, wanted to convince students of all ages to “turn away” from neoclassical economics. For INTRoDUCTIoN ix him, it was not sufcfi ient merely to produce papers and models. He worked at convincing students that there was “something better” to look forward to (1985, 3). Hence, in his classic handbook, A Guide to Post-Keynesian Economics (1979), he assembled a number of articles written by various prominent authors of his generation, pieces that had previously appeared in Challenge magazine, also published by M.E. Sharpe. This book gave younger readers an easy and inexpensive access to some of the core ideas of post-Keynesian theory. Alfred Eichner is remembered as an honest, caring man whose dedication to his students is legendary. He was also extremely friendly with young scholars, as the two oldest of us can personally attest. The present book serves two pur- poses: to honor the man and his work, and also to show readers that his work is just as relevant today as it was when it first appeared—or, perhaps, even more so. In particular, his monumental work The Macrodynamics of Advanced Market Economies, left unnfi ished at his death, remains surprisingly accurate, refreshing, and remarkably relevant. The book was published posthumously by M.E. Sharpe in 1991, although Eichner had sent out a preliminary version to about 200 colleagues in December 1987, a few months before his death, in the hope of getting their feedback and thus improving the final version. The Economics of Alfred Eichner Eichner’s deep desire to promote a credible alternative to the deeply flawed neoclassical theory led him to work assiduously at proposing a complete, alternative model that would lead us all “toward a new economics.” This “integrated approach”—his “grand design”—is grounded in a contemporary setting he called the “corporate economy.” In this new economy, markets are dominated by large social and economic institutions—“large corporations or megacorps, industrial trade unions, credit money and the state” (Eichner 1983b, 1985, 1987, 5; Kregel 1990). These institutions have very different rules and behaviors, which ultimately affect how the economy performs. Eichner’s ambitious plan, as well as his empirical work dealing with various blocks of the economy, culminated in The Macrodynamics of Advanced Market Economies. The book, including some largely ignored chapters on money and monetary theory, proposes a new paradigm. At the core of Alfred Eichner’s vision is an attempt to describe the functioning of advanced, money-using, capitalist economies. This effort demands a complete rejection of neoclas- sical theory. Influenced by the approach of such prominent post-Keynesian economists as Luigi Pasinetti, Eichner argues that economic systems consist of a number of interrelated subsystems, each needing careful attention. This “systems approach,” according to Eichner, clarifies the study of the dynam- ics of the overall economic system. In fact, by emphasizing each subsystem,