Table Of ContentMONEY, PRICING, DISTRIBUTION AND ECONOMIC
INTEGRATION
Also by Philip Arestis
INTRODUCING MACROECONOMIC MODELLING: An
Econometric Study of the United Kingdom (with G. Hadjimatheou)
POST-KEYNESIAN ECONOMIC THEORY: A Challenge to Neo
Classical Economics (editor with T. Skouras)
POST-KEYNESIAN MONETARY ECONOMICS: New Approaches to
Financial Modelling
CONTEMPORARY ISSUES IN MONEY AND BANKING: Essays in
Honour of Stephen F. Frowen
THEORY AND POLICY IN POLITICAL ECONOMY: Essays in
Pricing, Distribution and Growth (with Y. Kitromilides)
BIOGRAPHICAL DICTIONARY OF DISSENTING ECONOMISTS
(with Malcolm C. Sawyer)
RECENT DEVELOPMENTS IN POST-KEYNESIAN ECONOMICS
(with V. Chick)
THE POST-KEYNESIAN APPROACH TO ECONOMICS: An
Alternative Analysis of Economic Theory and Policy
ON MONEY, METHOD AND KEYNES: Selected Essays by Victoria
Chick (editor with Sheila C. Dow)
MONEY AND BANKING: Issues for the 21st Century (editor)
THE POST-KEYNESIAN APPROACH TO ECONOMICS: An
Alternative Analysis of Economic Theory and Policy
HANDBOOK OF RADICAL POLITICAL ECONOMY (with Malcolm
C. Sawyer)
FINANCE, DEVELOPMENT AND STRUCTURAL CHANGE: Post
Keynesian Perspectives (with V. Chick)
THE POLITICAL ECONOMY OF FULL EMPLOYMENT:
Conservatism, Corporatism and Institutional Change (with M. Marshall)
Money, Pricing,
Distribution and
Economic Integration
Philip Arestis
Professor of Economics
and Head of Department of Economics
University of East London
©Philip Arestis 1997
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Introduction
This book concentrates on the post-Keynesian school of thought in
economics. This is a relatively new approach to economics and is
very different from the orthodox neoclassical economics. As such,
the book will begin by providing a comprehensive overview of
post-Keynesian economics (PKE) and then elaborate on a number
of key issues of this approach. The number of issues discussed is
determined by the usual constraints of a book-length study and by
the number of papers available for inclusion. All the essays have
already appeared in print (as indicated in the notes to each chap
ter), but they have been rewritten for this volume and in some cases
the amount of revision is substantial.
Any attempt to put forward a new economics should begin with
methodology, and this is precisely what is intended here. This is
particularly important where the new school of thought is based on
methodological principles that differ from the mainstream. The
remainder of the book will attempt to show the consequences of
this alternative approach, concentrating on money, pricing and
distribution, and on issues that have emanated from recent attempts
to create economic unions. Thus European and North American
developments are fairly new interests explored by this book. An
other topic to be considered is the economics of developing coun
tries, albeit with a narrow bias in that we only consider those aspects
that are related to what is known as 'financial liberalisation'. Two
issues that can be thought of as widening the PKE panoply of
interests are gender and peripheral countries.
This book provides a reasonably comprehensive analysis of what
comprises PKE, with appropriate applications to illustrate the
relevance of the school's insights. It concerns itself with the main
aspects of PKE, including recent developments in this area. As such
it attempts to provide an in-depth analysis of certain key aspects of
this school of thought rather than merely make a case for it. This
book therefore belongs to that category of PKE contributions
that reflects the more recent phase in the development of the
PKE approach, which is to provide its own distinctive existence,
rather than the earlier phase, which was identified as one of
opposition to neoclassical economics (see also Arestis and Chick,
1992, p. xi).
2 Introduction
We begin with an overview of PKE. Chapter I. 'The Theoretical
Framework', reviews PKE and attempts to show that this school of
thought represents a positive statement of methodology and con
tent. Its most important distinguishing characteristic is realism, so
that PKE can be said to be of particular relevance to real economic
problems and is therefore in an excellent position tG analyse and
explain current economic phenomena. It will also be shown that the
main aim of PKE is to complete the unfinished Keynesian revol
ution. It is an attempt at a generalisation of the General Theory, and
it is possible to show that the principle of effective demand is the
backbone of PKE, as it was in Keynes' General Theory.
Chapter 2, 'Methodological Aspects of PKE', is concerned with
certain issues that underpin the emergence of post-Keynesian eco
nomics. To begin with, it has been helped by the development of
the system or cybernetic framework, which models the economy as
a group of dynamic subsystems. The behaviour of these groups in
historical time, where the past is immutable and the future is
uncertain and unknowable, is the focus of the analysis. The institu
tional framework within which the economic groups operate is of
paramount importance. Furthermore, theories should represent
economic reality as accurately as possible and should strive to
explain the real world as observed empirically. PKE theory begins
with observation and proceeds to build upon 'realistic abstractions'
rather than 'imaginary models', thus clearly distinguishing it from
neoclassical theory. The realist methodological approach is adhered
to by PKE analysis. This chapter will explore these and other
methodological issues and will discuss the attitude of PKE towards
formalism and quantitative analysis.
The analysis in Chapter 3, 'PKE Theoretical Aspects of Money
and Finance', adopts the thesis that no general model can resolve
all economic problems at all times and in all situations. Particular
attention is therefore paid to monetary and financial institutions in
an attempt to highlight the emphasis put by PKE on this evolution
ary aspect. Institutional developments, however, reflect funda
mental characteristics of money, since the institutions of money and
of banking are inextricably linked to each other. The most import
ant characteristic in this respect is that money is credit-driven
and demand-determined. The result is that money is best viewed
as endogenous rather than exogenous. This chapter will extend the
analysis of monetary and financial developments to the open
economy as well as discussing closed economy issues.
Introduction 3
Chapter 4, 'PKE Theory of Wages and Inflation', is about
conflict in wage and price setting. PKE argues that the inflationary
process is embedded in the structure of mature capitalist economies
and is the consequence of a struggle over shares in national income.
It is thus a conflict theory of inflation. The conflict arises between
the wage-setting process and the price-setting process - the former
being used by labour, the latter by corporations - to attempt to
influence the share of wage and profit income respectively. The
chapter puts forward a synthesis of post-Keynesian theories of wage
and inflation determination. The synthesis is built around the two
interconnected relationships referred to above: the wage relation
ship emanating from conflict theory, and the pricing relationship
based on the mark-up hypothesis and the degree of monopoly. The
interaction between the two provides a comprehensive theory of
inflation that is fundamentally and substantially different from the
neoclassical approach. One further aspect of this chapter is its close
link to Chapter 3. As demonstrated there, PKE analysis maintains
that the supply of money is endogenous, responding to changes in
demand and thus allowing the cycle of money wage rise and price
rise to take place.
Chapter 5, 'Degree of Monopoly, Pricing and Flexible Exchange
Rates', turns to certain aspects of PKE pricing in an open economy
in a way that provides an extension of the theoretical principles
covered in Chapter 4. It builds on pricing theory as developed by
the degree of monopoly and by the mark-up hypotheses in the spirit
of Kalecki (197lb), Eichner (1976) and other PKE analysis, but
with one important exception. The analysis in this chapter is in the
context of an open economy. Questions relating to exchange rate
determination and the degree to which changes in this variable
translate into changes in domestic prices are thus considered. This
is important new ground in PKE analysis, and the material covered
in this chapter opens up a new area of research that is long overdue.
Chapter 6, 'The Independent European Central Bank: A PKE
Perspective', questions the economic assumptions underlying the
case for such a monetary institution as now envisaged for Europe.
The chapter also considers the extent to which payment imbalances
will be resolved and whether achievement of high levels of employ
ment and output growth will be given high priority. Control of
inflation is seen as instrumental to the achievement of these targets,
rather than being the single most important objective of policy. The
chapter deals with the changing views of the role of central banks
4 Introduction
in the determination of macroeconomic policy, and considers the
rationale for an international central bank along with the extra
difficulties associated with the idea of independence. It then moves
to the more specific question of the nature of a future independent
European central bank (IECB). The tendency towards independent
central banking (both at the national and the international level) is
seen as a rejection of the spirit of Keynes since it has become
associated with the idea that the control of inflation must dominate
other macroeconomic policy objectives.
Chapter 7, 'Towards a European Clearing Agency', discusses an
alternative to the IECB. It explores European monetary affairs, as
initiated in Chapter 6, but this time the focus is on the possibility
of new monetary institutions in Europe. It makes the case for a
European clearing agency, of the type Keynes envisaged for the
international economy, as the best way forward for the EU. It is
argued that whilst such an institution cannot by itself be a panacea
for the economic problems of the European Union, it would
nevertheless produce better results than the IECB. Alongside this
institution a number of other new institutions would be necessary -
the chapter speculates on the chances of these institutions coming
into being in the forseeable future. It concludes that the chance of
this is rather slim, to say the least, but that such institutions are
nonetheless vital.
Chapter 8, 'Economic Development and Financial Liberalisa
tion', examines the theoretical analysis of the need to regulate
financial systems, and then turns its attention to the more con
troversial topic of interest rate controls. McKinnon (1973) and
Shaw (1973) argued that such policies led to 'financial repression',
which was in turn responsible for hampering investment and eco
nomic growth by depressing the volume of financial saving and
preventing financial deepening. Financial liberalisation was viewed
as the antidote to the symptoms of financial repression. This thesis
is discussed and then criticised as seriously flawed from both a
theoretical and an empirical perspective. In terms of its theoretical
premise, we emphasise the role of institutional considerations,
effective demand, imperfect competition, distributional consider
ations and other aspects of financial markets that the liberalisation
thesis fails to consider. An overview of econometric work on the
liberalisation thesis is offered, as well as some lessons from actual
reforms. We conclude by suggesting that inappropriate financial
policies can stifle economic development.
