Financial Instability and Economic Security after the Great Recession

240 Pages·2011·1.251 MB·English

by  Charles J. Whalen

Financial Instability and Economic Security
after the Great Recession
‘Whalen and his colleagues explore the close relationship between Institutional and Post
Keynesian economics, thereby contributing greatly to our understanding of the recent –
indeed,still ongoing – crisis in the US economy and global financial markets. Together those
schools of thought provide coherent diagnoses and prescriptions that are wholly lacking in
conventional economics. We are reminded that institutions matter, unregulated financial
markets are not self-correcting, economies stall at equilibriums far below potential, and
activist government is the only path to rebuilding a stable and balanced economy. This book
will help greatly in the important task of rethinking economics and pointing us in the direc-
tion of reform and recovery.’
– Timothy A. Canova,Chapman University School of Law,USA
‘For those who take the work of Minsky seriously, this collection provides a refreshing
examination of economic reality. It also demonstrates how fruitful a conjoining of Post
Keynesian and Institutionalist theory can be. Whalen has chosen his authors wisely, and,
taken as a whole,their contributions provide an illuminating inquiry into what Minsky called
“money-manager capitalism”. The authors continue in the Minsky tradition,complementing
his theoretical work and driving it forward. I highly recommend this book to all who are
looking for a way out of the theoretical impasse posed by conventional economics.’
– John Henry,University of Missouri–Kansas City,USA
‘Charles Whalen has been the torch-bearer for Post-Keynesian Institutionalism for many
years. The fruit of his thought and time is reaped in the publication of this valuable work. It
should be of interest to all economists,particularly those concerned with the macroeconomic
workings of the real economy. While there are multiple authors, Whalen wrote or co-
authored half of the chapters,giving the book coherence not usually found in a collection of
essays; a first-rate book.’
– Charles K. Wilber,University of Notre Dame,USA
‘The end of the Great Moderation (a period characterized by moderate business cycles) and
the demise of its intellectual underpinnings opens the door to fresh thinking about the evolu-
tion of the US and world economies. This volume responds with insights that grow out of
Post-Keynesian Institutionalism. It provides a persuasive basis for reconstructing macroeco-
nomics and developing policies that could lead to greater world prosperity.’
– Kenneth P. Jameson,University of Utah,USA
‘This book makes a major contribution toward an economic framework that addresses the
policy failures precipitating the recent global financial crisis and slowing recovery from the
Great Recession. It begins with clear analyses of the influence of earlier non-classical
economic thinkers upon Keynes and Minsky – and then uses insights from that tradition to
critique economic thinking that failed to anticipate the crisis. It also identifies policy options
capable of preventing future crises and ensuring a more rapid recovery. The result is a solid
foundation for refashioning economics and securing broadly shared prosperity.’
– Jane D’Arista,Political Economy Research Institute,USA
‘Institutionalists and Post Keynesians have a great deal in common,so much so that it is
surprising how little cooperation there has been between them. This innovative and engag-
ing volume will help to put that right. These essays deserve to be widely read; they will have
important consequences.’
– John E. King,La Trobe University,Australia
Financial Instability
and Economic Security
after the Great
Recession
Edited by
Charles J. Whalen
Congressional Budget Office, USA
Edward Elgar
Cheltenham,UK • Northampton,MA,USA
©Charles J. Whalen 2011
All rights reserved. No part of this publication may be reproduced,stored in
a retrieval system or transmitted in any form or by any means,electronic,
mechanical or photocopying,recording,or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing,Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number:2011926845
ISBN 978 0 85793 483 3
Typeset by Cambrian Typesetters,Camberley,Surrey
Printed and bound by MPG Books Group,UK
3
0
Contents
List of figures and tables vii
List of contributors viii
List of abbreviations xi
Preface xii
Introduction:instability,prosperity and economics after the
Great Recession 1
Charles J. Whalen
PART I FOUNDATIONS
1. Subverting Say’s Law:Harlan McCracken and the
Commons-Keynes connection 15
Steven Kates
2. Towards a synthesis of Institutional and Post Keynesian
economics 28
W. Robert Brazelton and Charles J. Whalen
3. Futurity:cornerstone of Post-Keynesian Institutionalism 53
Glen Atkinson and Charles J. Whalen
PART II THE AMERICAN ECONOMY
4. Understanding and preventing financial instability:Post-
Keynesian Institutionalism and government as employer of
last resort 77
Fadhel Kaboub
5. Towards a more rapid recovery:incorporating subsidiarity into
macroeconomic policy 93
David A. Zalewski and Charles J. Whalen
6. Financial stability,regulatory buffers and economic growth
after the Great Recession:some regulatory implications 114
Éric Tymoigne
v
vi Financial instability and economic security after the Great Recession
PART III THE GLOBAL ECONOMY
7. Regulating for stability:bank capitalization and the emergence
of an international lender of last resort 143
Jan Toporowski
8. Evolution without fundamental change:the Washington
Consensus on economic development and its significance for
Post-Keynesian Institutionalism 153
John Marangos and Charles J. Whalen
9. Money-manager capitalism,capital flows and development in
emerging market economies:a Post-Keynesian Institutionalist
analysis 179
Yan Liang
PART IV CONCLUSION
10. The future of Post-Keynesian Institutionalism 205
Charles J. Whalen
Index 211
Figures and tables
FIGURES
4.1 Household debt as a percentage of disposable income 81
4.2 Credit default swaps 83
6.1 Real Gross Domestic Product and Genuine Progress Indicator
per capita,USA 134
9.1 Global fund management of conventional assets,1999–2008 181
9.2 Shares of components of capital inflows to emerging market
economies,1999–2009 184
9.3 Estimate of market share of foreign institutional investors in
emerging markets 184
9.4 Growth of assets and leverage in the hedge fund industry,
1990–2008 191
TABLES
5.1 Composition of the American Recovery and Reinvestment Act 97
8.1 The Washington Consensus 155
8.2 The New Agenda 157
8.3 The Amended Washington Consensus 161
8.4 Main differences between the original Washington Consensus
and its successors 164
9.1 Global capital inflows to emerging market economies,
1997–2007 183
vii
Contributors
Glen Atkinsonis Foundation Professor Emeritus at the University of Nevada,
Reno. He served as editor of the Journal of Economic Issues from 2000 to
2006, and as president of the Western Social Science Association, the
Association for Institutional Thought, and the Association for Evolutionary
Economics (AFEE). Atkinson received AFEE’s Veblen–Commons Award in
2010. He currently volunteers as director of the Center for Regional Studies at
the University of Nevada,Reno.
W. Robert Brazeltonis Professor Emeritus at University of Missouri–Kansas
City (UMKC). He was introduced to Institutional (Evolutionary) economics as
a graduate student at the University of Oklahoma (after completing an under-
graduate degree at Dartmouth College). At UMKC, he became interested in
Post Keynesian analysis as a result of ongoing contact with Hyman Minsky
and, later, Paul Davidson. He firmly believes that Institutional and Post
Keynesian economics are compatible and has contributed much work pointing
towards their integration. He also believes economics can learn much from
sociology and psychology,especially as those fields have developed since the
emergence in economics of the neoclassical synthesis.
Fadhel Kaboub is Assistant Professor of Economics, Denison University,
Granville, OH, and Research Associate at the Levy Economics Institute of
Bard College, Annandale-on-Hudson, NY; the Center for Full Employment
and Price Stability, Kansas City, MO; and the International Economic Policy
Institute, Ontario, Canada. His research integrates the Post Keynesian and
Institutionalist traditions and focuses on macroeconomics,monetary econom-
ics, and economic development, with a particular emphasis on job creation
programmes. He has published in academic journals including the Journal of
Economic Issues,Review of Social Economy,International Journal of Political
Economy, and International Labour Review. From 2006 to 2008, he directed
the Wall Street Semester Program at Drew University,Madison,NJ.
Steven Kates is Senior Lecturer in the School of Economics, Finance and
Marketing, Royal Melbourne Institute of Technology University, Melbourne,
VIC,Australia. He spent most of his career working in the private sector as
chief economist of Australia’s national employers’ association. His primary
interest is the history of economic theory,especially the classical theory of the
viii
Contributors ix
business cycle. His Free Market Economics:An Introduction for the General
Reader (Edward Elgar, 2011) is about how market economies operate and
interact with governments.
Yan Liang is Assistant Professor of Economics at Willamette University,
Salem,OR. She specializes in international trade,capital flows,and develop-
ment with a focus on China and from a Post-Keynesian Institutionalist
perspective. Her articles have appeared in International Journal of Political
Economy, Journal of Economic Issues, The Chinese Economy, and China &
World Economy. Before moving to the Pacific Northwest, she served on the
faculty at University of Redlands,Redlands,CA,and Bard College at Simon’s
Rock,Great Barrington,MA.
John Marangos is Associate Professor of Political Economy in the
Department of Economics, University of Crete, Greece. His research focuses
on transition economics, international development, and innovative methods
for teaching economics. He is editor of the Forum of Social Economics and
section editor for the Global Business and Economic Review.
Jan Toporowski is Reader in Economics and Chair of the Economics
Department at the School of Oriental and African Studies, University of
London,England. He has worked in fund management,international banking
and central banking. He is author of Theories of Financial Disturbance
(Edward Elgar, 2005) and co-editor, with Daniela Tavasci, of Minsky, Crisis
and Development (Palgrave Macmillan, 2010). He is currently completing a
book of essays on finance and financial economics,to be published by Anthem
Press.
Éric Tymoigne is Assistant Professor of Economics at Lewis and Clark
College, Portland, OR, and Research Associate at the Levy Economics
Institute of Bard College, Annandale-on-Hudson, NY. His areas of teaching
and research include macroeconomics, money and banking, and monetary
economics. He is the author of Central Banking, Asset Prices and Financial
Fragility (Routledge, 2009) and has published articles on macroeconomics,
financial reform, and the history of economic thought in edited books and in
journals such as Journal of Post Keynesian Economics and Journal of
Economic Issues.
Charles J. Whalen is Principal Analyst in the Macroeconomic Analysis
Division of the US Congressional Budget Office (CBO),Washington,DC. In
1986, he was the first recipient of the Wendell C. Gordon Doctoral Research
Fellowship at The University of Texas at Austin and his doctoral research
explored the compatibility of Institutional and Post Keynesian economics.
Much of his career has involved work in academia,most recently as executive
x Financial instability and economic security after the Great Recession
director (associate dean) of business and economics at Utica College, Utica,
NY; he also served as associate economics editor at BusinessWeekas the dot-
com boom unravelled. In the mid-1990s, he was a colleague of Hyman
Minsky.
David A. Zalewski is Professor of Finance in the School of Business at
Providence College, Providence, RI. His research interests are in Post-
Keynesian Institutionalism,political economy,and economic history. His arti-
cles have appeared in the Journal of Economic Issues, Forum for Social
Economics,The Journal of Economic History,Review of Business,andEssays
in Economic and Business History.