Why is Keynesian theory not considered as a theory of economic growth?

Economic growth is defined as an increase in the production of goods and services in a country. Four forces that drive economic growth are improvements in the education and skills of the labor force, improvements in technology, increased usefulness of tools, and a larger workforce. Because economic growth measures the value of the goods being produced, rather than just the quantity, metrics like Gross Domestic Product (GDP) are often used. Usually, increases in aggregate production correlate with increased marginal productivity from each resident, leading to increased average incomes, greater consumer spending, and an improved standard of living.

In this sense, Keynesian economics is a theory of growth, but monetarism has substituted it in the late 1970s, due the NIxon shock.

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The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is generally understood. Indeed, the world is ruled by little else.

John Maynard Keynes

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Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth. Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

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Economic growth may one day turn out to be a curse rather than a good, and under no conditions can it either lead into freedom or constitute a proof for its existence.

Hannah Arendt

Thank you very much, Professor Stephen I. Ternyik

Countries differ in relying on Keynes or Friedman for economic growth, and each has a specific application that is compatible with its economy.

I would like to benefit from your information, Doctor. Which theory are you with, and which one is mostly the best? Stephen I. Ternyik

Thank you very much, Doctor Salam Hashim

The main problem Salam Hashim Mohammed Asseel with economic theory is the primate of politics in macro-decision-making, which is much guided by informed guesses, methodical intuitions and the banking sector (central and commercial).

The shift from Keynes to Friedman was the full political introduction of fiat money in the 1970s, i.e. the post-WW2-boom cycle came to an end and it was this fiat monetary turn that kept the leading Western economies on track, with respect to enhanced consumer fiat credit expansion.

Personally Salam Hashim I do prefer the AustrIan School of Economics:

https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp, with respect to a social market approach, i.e. market capitalism needs a social policy order to function (But: keep in mind that financial monopolies are never friends with functioning markets as they try to eliminate competition).

You may also find the following links as helpful:

Totally agree with you my friend Stephen I. Ternyik

The process of economic policy is a complex process in every country, and even the ability of the country to apply any theory is difficult to apply because the decision is not linked to the local decision makers of the country, but is linked to external parties, for example if an oil country follows a specific theory, and this theory has a negative trend for the United States of America in The use of the dollar, because there is a strong economic link between the countries of the world, so that it became difficult for the country to make a major economic decision, such as following any monetary or Keynesian theory, and this happened after the Nixon shock.

We hope that there will be a meeting like Bretton Woods that will take place and that the meeting will have a sincere reform intention, far from personal interests, to adjust the economic path, reduce the domination of countries, and leave complete freedom for countries to follow what they want.

My greetings Stephen I. Ternyik

Thank you very much my friend Mohammed Asseel

Am in support of your positive hope for a new Bretton Woods,

along the lines of a new Westphalian peace system Salam Hashim

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The Keynes Bancor plan envisioned a global central bank called the Clearing Union. This bank would issue a new international currency, the “bancor,” which would be used to settle international imbalances. Keynes proposed raising funds of $26 million for the Clearing Union. A sizable increase in domestic spending on President Lyndon Johnson's Great Society programs and a rise in military spending caused by the Vietnam War gradually worsened the overvaluation of the dollar. The Bretton Woods system dissolved between 1968 and 1973.

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“[There are] absurdities associated with the use of national currencies as international reserves.”

- Economist Robert Triffin to the Congressional Joint Economic Committee, October 1959

The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted.”

- People’s Bank of China Governor Zhou Xiaochuan, statement on reforming the international monetary system, March 2009

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Thank you Doctor for the information and sharing ideas

Very happy to talk to you and make the most of your proposal

My greetings Stephen I. Ternyik

The Keynesian view about the determinants of the GDP level -- and hence of its growth -- is opposed to the Neo-classical one. In the Neo-classical theory, saving is understood as the engine of economic growth. On the contrary, according to Keynes, private and public consumption is the main determinant of GDP level.

I think you should also keep in mind the extension of Keynes' ideas to the long-run. In particular, I refer to the contributions of Robinson, Kaldor and Pasinetti. The so-called "Cambridge equation". Or even to Samuelson's multiplier-accelerator model.

The Keynesian theory arises to solve the problem of depression and unemployment of the 1930's and was very successful through aggregate demand: private and public consumption and public and private investment. These variables drive economic growth measured through the Gross Domestic Product.

According to Keynesian theory, government intervention is necessary to moderate booms and busts in economic activity.

Keynes broke with the paradigm of classical economics, pointing out that the economy had to be regulated through government intervention.

Keynesian Theory, per se, as you read it in Keynes' book deals with depression and the failure to see that full employment is just a special equilibrium case . You should read Post Keynesian authors, like Pasinetti, Joan Robinson, Schackle, Nell, Minsky, Weintraub if you wish to learn about keynesian related theories of growth. There is Kalecki too, but calling him keynesian, when he wrote at the same time that Keynes is not adequate. He studies growth problems too.

I recommend answers from Martha Pantoja and Cecilia Garavito . This said, as long as you consider that economic growth is more than a year to year positive variation in GDP but involves long term structural changes in production technologies and human capital, you will have to look elsewhere: For Keynes, we are all dead in the long term while Post Keynesian were more interested in distributive issues and in fighting against neoclassical economists.

This question page became interesting, because three different opinions were expressed: Stephen I. Ternyik stated that he preferred to Austrian economics, while Cecilia Garavito mentioned Post Keynesians and Hubert Escaith recommended that we should look elsewhere.

I am very suspicious if Austrian economics (i.e. the economics of Austrian school) can be a good theory of economic growth. It is a subjective theory as Mary Hall summarized in her short paper on Austrian economics. A small part of economic growth may be subjective like will to economize and spirit for innovations, but growth is restricted by various material constraints. It is hard to believe that Austrian economics can provide a good theory of growth.

As for Post Keynesian economics, it is true, as Hubert points it, that majority of Post Keynesians are more oriented to distribution questions than to economic growth. Even though, Post Keynesians like Pasinetti and Kalecky have developed more elaborated theory of growth than others, including neoclassical economics. So, I want ask Hubert what is (or are) lacking in actual Post Keynesian growth theory. We may start our discussion by trying to fill that lacuna.

Being focused on distribution is part of growth theory. I teach History of economic thought, among other things like microeconomics. While Smith said that growth came from labor division, the Austrians claimed it came from individual knowledge. Quite subjective.

Yoshinori Shiozawa Dear Yoshinori, once again I must start with the traditional statistician's warning: "When you ask the wrong person, you get the wrong answer".

Yet, as you asked me --the wrong guy--, here goes my wrong answer.

The main issue I have with all macroeconomic approach to economic development (or growth from a long term perspective) is that they do not have an explicit agent of change. Most P.K papers I have seen on the topic deal with reduced form equations (e.g., the heterodox three gap models or Thirlwall's Law that put an emphasis on saving constraints; structuralist models that put an empahasis on, well, structural constraints inherited from history; etc.) Most use aggregate macroeconometrics (reduced form equations) to model growth dynamics, and "forecast" the future based on the past.

To look at the factors that promote changes in technology and production, we need an actor. You don't like the Austrian school, but I humbly pretend that for the time being, nobody has done better than J. Schumpeter (having been a minister of finance may have helped him understanding the actual mechanisms of economics). Weber, from the sociological aspects, has also proposed his solution: no development is possible in very conservative societies, one again you need agents of change (in his case, the Calvinist protestants in Europe).

One you have the micro fondations, you have to build a more holistic model (I am not sure Schumpeter did it, but --again-- I am no more an economist). In my opinion (but, remember, I know close to nothing on this topic, even if I wrote several papers on growth and development :-) )I see "Evolutionary economics" as an attempt to build a comprehensive theory on the way and causes of economic processes that encompass both micro and macro considerations, including institutions.

My two cents...

Hubert Escaith ; just a couple of remarks. Firstly, although Schumpeter was surely Austrian, I am not sure he can be considered among the members of the Austrian school. Secondly, the description of the working of the economic system by means of agents' decisions (the microeconomic foundations) is a neoclassical/marginalist way of thinking. Whereas in a Classical and post-Keynesian approach, the behaviour of social classes is relevant.

@saverio. I never said the neo-classical approach was irrelevant. At the contrary. Anyone seriously interested in long-term growth theory should read, in my opinion, the pioneers (Solow, Denison, Kutznets) and their offsprings (Romer in particular, for the endogenous theory). Lewis has also important things to say, even if this is not a theory (By the way, forthe young scholars: Interesting to read Kutznets after Lewis, especially today in view of the debate between growth and unequality: a cause? A consequence? Atransitory situation, as both authors concluded…).

Then, but only after then, a true scholar may look for alternatives.

Thus, even if I have my doubts about the contribution of purely macro-economic approaches to understanding the evolution of economic system, I agree that purely holistic perspectives (macroeconomics, or interactive behaviour of representative agents, or social struggles, etc) bring some valuable inform. But they won’t explain why some societies in the 18th century started industrialising while others remained under feudal or theological modes of reproduction.

Even if you are heterodox oriented by design, without a deep knowledge of orthodox theories, it is difficult to grasp the contributions of each school of thought to the debate (a traditional example is the discussion between neo-classical and Keynesian economists on the existence of a natural path of growth or the inevitable succession of crisis). Same for classical economists: Marx was very pessimistic about long-term growth perspective because demand was expected to plummet due to historical forces; utopian socialists, Keynesians regulationists and Henry Ford-type of capitalist entrepreneurs proved him wrong.

But first, one needs to read the classics, then the neo-classics, then... I personally stopped doing it as a job because all new papers open more new questions than they bring new answers...

In practice, since resources need capital to find and develop them, since technological improvement can be applied to production only via capital investment, since entrepreneurial skills act only through investments, and since an increased labor supply is rela­tively independent of short-run economic considerations, the only viable way to economic growth as rise in living standards is through increased saving and investment. Either more and better resources can be found, or more and better people can be born, or technology is improved, or the capital goods structure is lengthened and capital multiplied. In the Austrian or psychological view of human economic action, what brings about improvement comes not by economic growth or by stability, but through economic transformation that is guided by the freedom of private initiative within an open market system, i.e. instead of its fixation on economic growth and stability, a non-interventionist system would favor the space that is given for the individual to demonstrate and actively pursue his preferences.

The current interventionist approaches , in contrast, put the individual under a modern kind of serfdom where "output" or rather "expenditure" becomes the statistical criteria.

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It is your mind that matters economically, as much or more than your mouth or hands. In the long run, the most important economic effect of population size and growth is the contribution of additional people to our stock of useful knowledge.

Julian Simon

Every school of thought is like a man who has talked to himself for a hundred years and is delighted with his own mind, however stupid it may be. (J.W. Goethe, 1817, Principles of Natural Science)

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Mohammed Asseel

Good (Q)uestion:

Sorry, but obviously the Keynesian theory is also a theory of economic growth! When we talk about the Keynesian theory of growth, we always have to extend the circle beyond Keynes himself and his ideas and theories. In fact, in the sacred time of Keynes, the great economists were more Keynesian than Keynes himself, or post-Keynesian!!! Not to quote and mention that Harrod, Domar, Kaldor, Joan Robinson, Hansen or Kuznets (the oldest of the Keynesian camp) these economists attached particular importance to the subject of economic growth! Their thinking was to focus on ways to pull economies out of the post-war turmoil ... if you will; it was the first generation of Keynesianism. The second generation, the great economists who lived after his death (also the old Keynesians: James Tobin, Mundell, Don Patinkin ....) focused their thinking on the monetary question of economic growth, especially after the introduction of the Phillips curve (relation) in 1958 and the introduction of expectations hypothesis into macroeconomic theory on the eve of the first oil shock in the early 1970s ... this was a major scientific popularization of Keynesian theory. This history of the theoretical development of Keynesian theory experienced a new breath after the coup de grace (K.O) of the theory of rational expectations à la Lucas, the breath came first from the disequilibrium macroeconomics thought, also known as non walrasian theory or le non tâtonnement walrasien, (Edmond Malinvaud, axel leijonhufvud, robert clower, Jean-Pascal Benassy), then the New Keynesians (NKE) (Gregory Mankiw, Joseph Stiglitz, George Akerlof, David Romer...) who form a third generation of Keynesianism. Indeed, this last generation works on the inflation-unemployment dilemma and also on the question of the microfoundation of Keynesian macroeconomics in an attempt to find the right paths of economic growth within a Keynesian framework.

Sorry to be so long!!

The economy of a country is all about the actions and benefit to the individuals of the country. ``interventionist approaches'' are done by governments. So far, such approaches have proven destructive in that periods of crisis/downturns have lasted longer (>3 years as the norm established in the US in the 1800s). IMO this is because the intervention has a goal of supporting the weaker individuals and particularly the ``too big to fail'' that should fail. This, IMO, is the reason Keynesian economy of big government and all their re-thinking after failure will continue to fail. It also answers the question - economies do not grow while supporting those that should pass. But economies do grow, but at a much reduced rate and in spite of government economics.

So, until Keynesian economics can allow the weak to fail, government economic policies will underperform the potential of the individuals.

New Bretton Woods? Bretton woods was a edict from the US government which had a partial goal of combatting USSR. It also included the US being the contributor (and market) to help member nations recover/grow. This latter was done at some expense to the US. Which nation would provide the major contributor role, now that the US can no longer do it?

Dear Saverio Maria Fratini ,

You wrote:

I have an objection on the possibility of "microfoundations." I am a Sraffian and one of authors of a book Microfoundations of Evolutionary Economics (2019, Springer). As my colleague Kazuhisa Taniguchi wrote in the Preface, our theory, we believe, serves not only as microfoundations of evolutionary economics but also as microfoundations of Post Keynesian economics.

Heterodox economics must have its own microfoundations and we have presented one. Ricardo had his own microfoundations (cost-of-production theory of value) and Marx had his own microfoundations. Post Keynesian economics has been split into two groups at an almost non-conciliatory level. Remind what happened in the Trieste Simmer School in late 1980's. In my understanding, the deep reason of this split was that we had no good microfoundations. American Post Keynesians relied on neoclassical framework, either Walrasian or Marshalian. The other group including Sraffians were dissatisfied with it. Sraffians had their own weakness and could not respond to the demand of developing e.g. growth theory.

Please check by yourself whether our microfoudnations are simply rationalistic, methodologically individualist theory that is a variant of neoclassical theory like Arrow and Debreu general equilibrium. If you like, I will send you the PDF of our book. If you have no time to spend reading a book, please read Subsection 3.7.4 (pp.190-91) of the Second edition of Marc Lavoie's Post-Keynesian Economics (2022). It counts only two pages.

Dear Sofiane Abouderaz

you have given a good concise history from Keynes to New Keynesian economics, except for small details. It seems to me that non-walrasian group that started from Clower and Leijonhufvud emerged much earlier than Lucas critique (1972). They surely influenced French non-tâtonnement or rationing group. The two currents (i.e. rational expectations and rationing) existed parallelly side by side in 1970's. By 1980, the cul-de-sac situation of rationing group became clear and mainstream flooded into rational expectations and DSGE, from which New Keynesian economics emerged.

Another small point in history. You have skipped Post Keynesians. I doubt if New Keynesians are providing a good theory of economic growth. Paul Romer's endogenous growth theory (or New Growth Theory) introduced human capital as the third factor at the side of labor and capital. But the structure of the model remained the same as Solow's Classical Growth theory (in fact a neoclassical theory). They depend much on so-called "growth accounting" that draws totally on aggregate production functions. The latter is severely criticized by Anwar Shaikh (the Hambug production function) and Herbert A. Simon ("On parsimonious explanations of production relations" in Scandinavian Journal of Economics when he received Nobel Prize in Economics). Felipe and McCombie ridiculed it (aggregate production function) in the title of a book on Aggregate Production Function as "Not even wrong."

This does not mean that we should neglect (or forget) all researches made at the time of classical growth theory. Hubert Escaith raised two statisticians: Kutznets and Denison. I want to add the name of William D. Nordhaus, although he is much younger than the first generation of growth theory. He got his Nobel Prize in 2018 by his contribution to economics of climate change, but he is rather a historian who tried to incorporate change of quality into growth and is very critical to Solow.

Economic growth is a long-run economic phenomenon, all wages and prices are flexible.The key of economic growth is the supply side.Changes on the demand side do not increase potential aggregate output in long term

Thank you very much dear professor Yoshinori Shiozawa for your answer and your clarifications on the subject. Indeed, I was a little short on a few points, because I think that a more exhaustive explanation on the subject will pass through a broader debate with researchers like you. Now that you've completed my points, I think the picture is clearer for dear Mohammed Asseel .

Dear Yoshinori Shiozawa

thanks for your message, I would be pleased to give a look at your book.

Anyway, it depends on what you mean for "microfoundations". If you think that we should start from the maximizing decisions of economic agents, namely households and firms, I am rather against this point of view. In my view, in a capitalist system, most of the relevant decisions are taken by capitalists (both at an individual level and as a social class), and firms are nothing else that tools used by capitalists for the organization of production processes. Perhaps we agree on that.

Just to give an example, according to the Classical standpoint, capital accumulation does not come from the households' saving decisions -- as in Solow's model, but rather from capitalists' investment decisions.

Dear Saverio Maria Fratini and other readers,

Methodological arguments may not be very interesting for the general followers of this page. The best way to answer Mohammed Asseel 's question is to show that theories inspired by Keynes's economics can well serve as a theory of economic growth. Please read my paper:

The principle of effective demand: a new formulation

As this is published in an open-access journal, every reader can read or download it.

In analyzing economic growth problem, as Hubert Escaith pointed it, Schumpeter and his school, now known as Evolutionary Economics, should not be neglected. Please read the last section of the above paper. We have now a prospect of synthesizing Keynes, Sraffa, and Schumpeter.

Sad news! Luigi Pasinetti has passed away. He died on January 31, 2023.

He was one of greatest thinkers of economic growth on the extended line of John Maynard Keynes.

Oh no. That is very sad news!

Dear Yoshinori;

@Luigi Pasinetti

It is unfortunately a loss for economics, for all economists in the world, and especially for post-Keynesian economists. He was a great pioneer.

Xie Chaofeng

Dear Chaofeng, do you know that you are arguing against Keynes? Imagine that almost all industries are deficient of enough demand and operating at low rates of capacity utilization. Do the owners or managers of firms want to invest to increase their production capacity? There would be no economic growth.

Keynes inaugurated a theory of how the output as a whole changes, although we could not say that he has succeeded in his revolution. Luigi Pasinetti, who passed away two days ago, left a deep reflection, from all aspects, why Keynes revolution failed. But he thought that the revolution must be accomplished (Pasinetti, 2007, Keynes and the Cambridge Keynesians: A 'revolution in economics' to be accomplished). It is on the shoulders of ours.

Infatti Keynes afferma che lo stato deve correggere le ondate psicologiche che determinano i flussi economici mediante una politica regolatrice anticiclica

I guess, since keynes Dissaccociated himself from the concept of growth by advocating that in the long run we are all dead, Growth being a long run concept is hard to be associated with Keynesian theory.

Aamir Teeli I tend to agree with you, as far as standard Keynes is concerned. And I also tend to strongly disagree with Post Keynesian economists who believe that demand and taxes (to fund public spending and redistribution) are the main drivers of long-term growth. If it was true, my country (France) would be the richest country on Earth.

But if what differentiate (Neo-) Keynesians from Neo-Classics is the the "ergodic hypothesis" (a neoclassical belief in unique long-run equilibrium independent of initial conditions), I would side with the Neo-Keynesians. Not on ideological grounds, but just because growth-accounting practitioners (most of them using neo-classical concepts) working on long-term growth recognise that capital is putty-clay: once invested, you cannot move it to other uses. Putty-clay type of productive investment calls for dynamic hysteresis and path-dependent growth patterns. At least up to the point where you find a Schumpeterian entrepreneur who launch a new technology that destroys existing capital and reset the whole process. But even from a Schumpeterian perspective, I am not sure the new growth pattern after destructive creation is as ergodic as pure neo-classic theory believes.

In my opinion there is a mistake in not considering the Keynesian Theory as a Theory of economic growth. The application of this theory in most countries until the mid-70's boosted economic growth. It can be said that the application of the theory implied growth.

Currently, the application of this theory has marginal effects on economic growth.

Dear Martha Pantoja

Thank you for judging the importance of keynesian growth theory, at least as you put it: up to the mid 1970s. Just that I disagree with you about its marginal influence today! Keynesianism as a theory of economic growth or as a monetary theory has not finished satisfying us since the 1970s.

Look at all the planets (economic thougt, the names of great economists too) that revolve around this thought, the post-Keynesian the Sraffian too, or if you like the evolutionary economics, like my dear friend professor Yoshinori Shiozawa , school of disequilibrium (the non-walrasian equilibria) or even the new keynesians with their micro-foundation of keynesian macroeconomics. ... Keynesian theory is evolutionary thought.

greetings to you.

Dr. Abouderaz Sofiane.

Dear Xie Chaofeng

>My opinion is the view of mainstream economics. Robert Solow’s 1956 essay, “A Contribution to the Theory of Growth,” was widely understood to have demonstrated the irrelevance of aggregate demand.

I can not understand what you want to say. Robert Solow is an old Keynesian. Although his growth model has little relevance with the aggregate demand, it does not signify that Solow denied the role of aggregate demand. His growth model succeeded not because his model was a good theory of economic growth, but it only reflects the fact that American economy at the mid-20th century was growing fast. As Herbert A. Simon pointed it out, when he was given a Nobel Prize in economics, Solow's growth model is a kind of mirror image of accounting identities. It contains a grave theoretical problems.

It is true that Keynes's principle of effective demand is a theory for a short run. (Please see my paper: https://www.jstage.jst.go.jp/article/revkeystud/3/0/3_67/_article/-char/en ) You are right to think that, in economic growth in the long run, supply side is much more important than the demand side. However, you should keep in mind that long run is many repeated short runs. To keep a suitable aggregate demand is necessary in order not to fall in a deep recession. As for long run, as Solow's growth model detected, the most important factor in long-run economic growth is the technological development. Solow's "classical" growth theory and Romer's new or endogenous growth theory are both unsatisfactory in the sense there is no real analyses of how technological change induces economic growth. With this regard, please read my paper:

If you have any difficulty in downloading it, please send me an e-mail asking the PDF. Demand side is argued only in Section 6, but, as economic growth is a synthetic phenomenon, the relative short treatment does not mean it is negligible.

Dear Yoshinori Shiozawa . Let me side with Xie Chaofeng in this discussion.

My main point is on the short term and the long term. With all due respect for Lord Keynes and the Keynesians, be they Old style, Neo style or Post style, if we discuss growth models, we refer to long period of time.

In the short term, it (always) true that demand drives GDP, if only because GDP is defined as the sum of domestic and net external demands : Y= C+I+(X-M) Just an accounting identity, not to be discussed.

From a growth perspective, the discussion is not if demand is driving GDP, but if a shock affecting demand has long term effect or is only temporary. You are right to say that if there is no additional demand to satisfy, firms won’t invest. But this is a micro-economic answer, not sure our Keynesian colleagues like it. From their macroeconomic perspective, the question is: are short-term demand shocks long-lasting? It is an empiric issue solved by looking at time series, typically with an error correction term (if the effect of a shock is only temporary, the time series will regress to its previous trend). Better left it to Statisticians, because this field of time series analysis is fast evolving and requires special knowledge .

Economists may be more interrested in analysing the (micoreconomic) difference of nature between a shock affecting domestic demand and a shock affecting exports. All the literature on export-led growth is based on the supposingly superior nature of external demand when the country is not fully industrialised yet and/or is subjected, from a macroeconomic perspective, to balance of payment constraints (the Thirlwall law, a Post Keynesian economist by the way).

Supply-side economists will tell you that external demand has the virtue of being based on exporting firms, which are competitive at international prices, while import substitution runs the risk of subsidizing white elephants.

This said, export-led growth has its limits and to avoid the middle-income trap, it is advocated to shift towards domestic demand. Easier said than done, as the Chinese government came to realise.

In brief, (i) long periods of time are not a collection of short periods, at least if we want to make some rational contribution to the debate. Determining the long run effect of short term shock is mainly an empirical discussion; (ii) even for Post Keynesians à la Thirlwall, demand is only effective if it is sustainable in the long run; (iii) how firms react to a shock in demand and invest to be competitive is a determining factor to determine if external demand is more effective than domestic demand, in other words, it is a micro-economic discussion.

Dear Dr. Abouderaz Sofiane:

Economic thought and therefore economic policy has not evolved, they have stagnated in the first half of the 20th century. On the other hand, the local and world economy have changed and the problems have increased, the causes are multiple: the increase in population, unemployment, inflation, recession, migratory flows, economic cycles have been shortened. Practice has shown that economic policies that were successful in the past no longer work or their positive effects are minimal.

Best regards

Hubert Escaith raised a very interesting question: How are the short runs related to long run. He also talks about very different point that is the effectiveness of international trade. I heartily welcome these two topics, because the latter is rather what I have been working long time. It was also the main concern for Hubert. In this post, I argue only the first question, i.e. short and long run relations. In the next post, I will argue international trade.

I wrote in my post to Xie Chaofeng that "long run is many repeated short runs." Hubert raised a question:

I have no intention to argue that a demand shock has a long term effect. When I wrote that "long run is many repeated short runs," I only wanted to point out that a long run effect is cumulated effects of small technological changes. In these changes, I include an introduction of new product (it may be no epoch making new product) and an introduction of small improvement of productivity. Most of economic growth is an accumulated result of these technological changes. Solow was right in finding the importance of technological change, but his research was defective in the sense that he did not discovered no mechanism through which an economy grows.

Neoclassical economics assumes that there is input substitution when relative prices of inputs change. This is already wrong! Please read my paper (already cited above in my post 20 hours before): The Principle of Effective Demand: a new formulation. In Section IV "Questions regarding Price Changes and Choice of Production Techniques," I have shown that substitution thesis does not hold even if the economy has a continuum of production techniques like Cobb-Douglass or CES (constant elasticity of substitution) production functions often assumed in neoclassical growth theory (including Solow and others). Their theory is based on the assumption that each firms responds to a change of prices and changes the input proportions (the act of substitution). This is true for a behavior of firms when they have e.g. CES production functions. But, even in such a case, what I call minimum price theorem holds and there is no change of prices that induce input substitutions.

The minimum price theorem is a dual version of Samuelson's non-substitution theorem. If anyone doubts if it holds when there are many primary input factors or when there exist joint productions, please read Chapter 2 of our book: Shiozawa, Morioka, and Taniguchi (2019) .

A simple but very strong corollary follows if once we admit the above minimum price theorem: As log as (1) wage and primary factors price rates remain constant, (2) the markup rate of any products does not increase, and (3) the set of production techniques does not change, the real wage level of workers does not increase. (In particular, if markup rates remain constant, the real wage remains constant.)

In almost all countries, the income of workers occupy a large part of the gross domestic income (roughly more than 2/3, for example), the above corollary signifies that there is no real growth unless technological change occurs. (In other words, if there is no technological change, the possible growth rate cannot exceed the population growth rate.)

If I return to Hubert's arguments, technological knowledge is cumulative in the sense that we do not easily forget the product and production techniques if they are once obtained. In this sense only, it has a long-run effect.

Among technological changes, there are various kinds. There are technologies that Lipsey and his colleagues called t-GPT (transforming General Purpose Technologies). On page 132 in Lipsey, Carlow, and Bekar (2005) Economic Transformations: General Purpose Technologies and Long Term Economic Growth, Oxford University Press, we can find a list of t-GPTs. In the ten thousand years of human history, they count 24 t-GPTs. The list contains technologies like domestication of plants (the origin of agriculture), of animals (the origin of live-stock farming) to lean production, internet, and biotechnology. They have a long effect for the development of technological change. There are other kinds of technological change: for example, labor productivity improvements. The main impact of Toyota production system (lean production) was this kind of improvements. (This is the main theme of my paper that is also cited above:

)

So, the question of short and long run relations is not whether a shock (in demand or others) has a long-run effect. The real question is that inside of a short run (say a year to five years span) has an internal structure that induces long-run change. Economic growth is an effect of this cumulative causation. It is true that Keynes had no such recognition. It seems that Kaldor and Pasinetti had a much better understanding on the nature of economic growth, although they thought they owe much to Keynes. This is the question of Keynesian revolution on which I cannot write much in this post. (I hope I can pick up this topic again.)

The second point of arguments in Hubert Escaith 's comment (the post that starts with "Dear Yoshinori Shiozawa . Let me side with Xie Chaofeng in this discussion.") on February 13 is the role of a nation's export in economic growth. (As for his comment, please see the page 4 of this question and answer page.)

Hubert made an interesting point of argument: Is external demand more effective than domestic demand? I have never read this kind of arguments or problems. Hubert made a big contribution to our discussion in this point alone. Do someone know whether similar problems were raised in the past by someone?

As I have declared many times, I am a Sraffian and in this sense a Post Keynesian, although there are many Post Keynesians who refuse to admit that Sraffians are Post Keynesians. As Hubert pointed it out, many Post Keynesians argued on the basis of Thirlwall's law. This expresses an unfortunate state of the art of Post Keynesian economics. International economics for Post Keynesian economics practically means two topics. One is international monetary reform arguments. Another is the arguments around Thirlwall's law as Hubert referred it. The latter is sometimes called balance of payments constraint growth theory. Although it must be a great contribution to development theory from the part of Post Keynesian economics, it also represents its retarded state of the art. Except the half-failed trial in 1970's by Sraffians like Ian Steedman, Stan Metcalfe, and others (See Ian Steedman ed. [1979] Fundamental Issues in Trade Theory, MacMillan Press), Post Keynesian economics lacks a theory of international trade. There was a bold attempt by Sussex technology policy group (See G. Dosi, K. Pavitt, and L. Soete [1990] The Economics of Technical Change and International Trade, New York University Press), which remains an isolated attempt. Even the authors of the book rarely mention it.

Even if we see mainstream economics, international trade theory remained in a very primitive state. It is often told that there are four generations of (mainstream) trade theory: Ricardian theory of trade [textbook version], Heckscher-Ohlin-Samuelson theory, the New Trade theory (à la Krugman), and the New New trade theory (à la Melitz). But all of them are defective in the sense that (1) they cannot treat technological development, (2) they lack the theory of input trade, (3) they assume off unemployment by assumption (it means all analyses are done under the assumption of full employment).

As for point (2), there are some studies like R. Jones (2000) Globalization and the theory of input trade, The MIT Press. But these assume specific pattern of international trade and explain the gains from trade. In brief, they are not trade theory that can argue how international division of labor emerges and works. A logical result of this state is that economics was the last participants in the Global Value Chain (GVC) analyses (its emergence, mechanism, and consequences). Point (3) is no less important. Many governments pursued (or are obliged to do so) full employment and balance of payments. Without a trade theory that can treat unemployment, their policies were a navigation without compass. But, point (1) seems the most important among the three when we want to argue economic growth or development, because (as I have argued in my post on February 14) technology (set of production techniques) plays the decisive role for the true economic growth (i.e., an increase of real wages of workers).

Although it is not widely known, a new trade theory already exists. See my papers:

[1]

[2]

[3]

Readers who learn about the new theory of international values are recommended to read [2] (mainly sections from 2 to 7), because it is written for non-specialists in trade theory. [1] gives a general theory including major applications but it contains a defect. The regular value defined in [1] assumes full employment for all countries. This defect was adjusted, after the publication of [1], by an introduction of a new definition of regular value.

This new definition is given in [2] and [3].

In the next post (International Trade in Economic Development (2)), I will argue how the new theory of international trade can contribute to the growth theory of less developed countries.

Let us take a typical case: China in 1978, when Deng Xiaoping's Reform and Opening Up started. We should note the economic condition of China at that time. It had a large human power, highly disciplined, and with rather good scientific knowledge. It also had a good public security. The market economy had started to work again. By the open-door policy, foreign capital, first firms in Hong Kong and Taiwan, and then Japan, Korea and American firms, started to invest in China to build factories to sell the products overseas. Why did those firms want to invest in China? Because it had a very cheep wage. In 1990, Chinese workers worked at a wage of one twentieth of American workers. As China has an enormous work force, there was little risk that the wage rate increases rapidly. These foreign firms gave a good example to Chinese people and emulated them to work in a similar way as foreign firms. Commercial spirit was re-created (Max Weber would have said spirit of capitalism).

A long history continues but I do not repeat it. I want to ask why managers in Hong Kong, Taiwan, Japan, and the USA want to invest in China? The answer is simple: cheep labor. Why? It is seldom asked as such, but this is the question of technology transfer. A production method can be transferred to other countries but it is no simple transfer of a commodity. Importing machines and appliances are not sufficient to run the plant in the transferred country at the same efficiency as the transferring country. There are always a certain loss of efficiency. A certain condition is necessary so that transferring a production process from a country to another is to be profitable. Please see Section 13 (explanations of Figure 3 in particular) of my paper

Greater the discrepancies of wage rates between transferring and transferred countries, easier to make the transfer profitable. Chinese in Hong Kong and Taiwan knew this quickly and Japanese, Koreans, and Americans understood the mechanism easily. So a big wave of investment into China occurred. This gave a good chance for Chinese people full of commercial spirit to learn from those foreign capitals and started to exploit the chance that was opened to them. This process was important and requires various conditions. Now, China is an economic power that endangers the USA.

Why did this process take the form of Export Oriented Industrialization (EOI) instead of Import Substitution Industrialization (ISI)? The answer is simple. Before 1990, Chinese workers and others were still very poor (remember that they worked at 1/20 wage rate of American workers.) There was no market open to new products. It was necessary to export almost all products to foreign countries. Now China possesses a large population who are rich enough and the domestic demand became much important.

Hubert referred to middle-income trap. Why have many countries a tendency to face such a trap? When the wage discrepancy between developed and developing countries narrow, the chance of successful transfer of production process becomes more and more difficult by the same mechanism explained in Section 13 of The New Theory of International Values. Then, chances of successful imitation become narrowed for such middle income countries. They must be more original in creating new products and discovering more productive methods.

All these stories are rather a banal story. Almost all people easily understand it, except perhaps economists who want to think in terms of factor proportions and allocative efficiency. The new theory of international values seems difficult. Mathematically it is (at least for first learners)! But it comprises a content that is quite close to common knowledge. I hope all those economists who are interested to work in development economics would try to learn this new theory.

Just now everybody, it´s very important economic growth: due to the situation faced by most countries after the Covid 19 Pandemic low growth and inflation.

Economic policy should be focused on inclusive economic growth, considering the strategies that have worked in practice. I don't know if the term is correct, a type of hybrid economic policy.

Economic models are a simplified description of reality, designed to yield hypotheses about economic behavior that can be tested.

It is important not to deny the past (Adam Smith, David Ricardo, Marshall, Shumpeter, Keynes, Solow, Robinson Hayeck, etc. However, the world has already changed.

Best regards

The standard textbook answer to Asil's question is simply that in the General Theory Investment is considered only as a component of aggregate (effective) demand, but not as an addition to the stock of capital. In other word, Keynesian model is static and is confined to short period analysis.

Andrea Salanti , welcome to this discussion page. "The standard textbook answer" is not very interesting. What do you want to say after your first post?

Mohammed Asseel posed a question: Why is Keynesian theory not considered as a theory of economic growth?

How about converting the question: What are the theories of economic growth? Are we satisfied with those? Or, do we trying to find a more plausible theory?

I found that Andrea wrote a paper in 2000:

This is a short account (nine pages) of two economists who worked on growth theory in their own way. In this comment, Andrea was rather skeptical on both Old and New growth theory. After 23 years time, how are you thinking about the state-of-the-art of growth theory? How do you consider Post Keynesian growth theory if there exists one?

Yoshinori Shiozawa , indeed you pose a different question. Well, about the state-of-the-art of growth theory it is undisputable that it is dominated by models based on some sort of production function and some mechanism of intertemporal maximization by consumer(s). See, for instance, Acemoglu, Daron [2009], Introduction to Modern Economic Growth, Princeton University Press. After 23 years from that comment, I think that even if we might well conclude "nothing new in the neoclassical approch to the theory of growth", the growing bulk of applied research force even maintream economists to look for more realistic assumptions AND prediction, See, for instance, Acemoglu, Daron and Fabrizio Zilibotti [2001], Productivity Differences, Quarterly Journal of Economics, 2, 563–606.

By the way, Zilibotti is an author, in my opinion, worthy of attention.

Thank you, Andrea Salanti .

I started to read Acemoglu and Zilibotti (2001). It will take me some days because I have heavy duty until the end of February.

If you let me say something before reading the paper, I feel that the second phrase of the Abstract is already very problematic. It reads

Is the true problem a mismatch? I believe we should grasp the problem as a learning process, or a lack of learning process. Acemoglu and Zilibotti seem to be thinking in terms of input proportions. We should change the point of view.

Daron Acemoglu y Fabrizio Zilibotti (Productivity Differences 2001), this article is very important, because it realize that in most developing countries used tecnologies developed in The Organisation for Economic Co-operation and Development (OECD) (countries). The result is a low productivy in Less Developing Countries (LDC). There is a Mismatch between the requirements of these tecnologies and workers´skills in developing countries. In most cases workers need training and a higher level of education.

Hmmm. Re the debate on advanced vs. adequate technologies (Small is beautiful, remember?) I am afraid today's central issue is to deliver good quality products at the most competitive price. But quality dominates. Low technology and rock bottom wages won't open foreign market if quality isn't there. And quality is often linked to advanced technology.

Martha Pantoja

I wrote in my last post that

> we should grasp the problem as a learning process, or a lack of learning process.

Originally, I wrote this sentence as follows:

> We should grasp the problem as a learning process instead of the mismatch between technology and workers.

Mismatch is a static concept. It does not help much to solve the development problems of less developed countries. The trouble of New Growth theory (NGT) and analysis based on that theory is that they gain only superficial understanding of growth phenomena. Low productivity and lowness of productivity growth rate are observations. Lacking a good understanding of growth process, NGT people give pointless advices. Economists of less developed countries must learn much more in order to understand the shallowness of NGT.

Dear Hubert:

"quality is often linked to advanced technology", not necessarily some countries and companies that have advanced technology, produce and export low quality products.

Best regards

@Martha. Indeed, but this should not be considered as a general trend. For example, México exports a lot of Corona beer, which is way below in terms of quality and taste compared to what the Mexican domestic producers can offer... Pathetic as it is, it is the law of supply and demand. But if you go towards more sophisticated industrial products than agrofood, I suspect you as a consumer will be able and willing to demand more total quality (from production to after sale services) from a German company than from a Sudanese one. If just to justify the difference in prices. My two cents

Hubert:

There is now a great demand for high-quality beer products from Mexico. Mexico exported many products with high quality: Vehicles; Electrical machinery, equipment; Machinery including computers and many more products.

On the other hand, I didn´t want to mention, the example of chinese products. China, after reformed its economy, it quickly became a global leader in manufacturing. For a long time products made in China have been considered of a low quality.

Yoshinori Shiozawa , The mismatch might be also the other way round, that is too much "human capital" with respect to fixed capital. In that case we should observe migration of skilled labour.

Thanks Chuck to share this interesting article ¿What Is Keynesian Economics?, International Monetary Fund (

First, The authors mention that is a school of thought,

Second, "Keynesian economics gets its name, theories, and principles from British economist John Maynard Keynes (1883–1946), who is regarded as the founder of modern macroeconomics".

Economic growth could be implicit in the Keynesian Theory, when Keynes argued that "inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries)" Source: -FINANCE & DEVELOPMENT - September 2014 Ł Volume 51. pág. 1.

Best regards

Simply because govermwnt executives deeply believe that a double digit growth driven by the private sector is definitely a corruption. They always interpret the business and the financial booming as part of missregulation.

Yasser:

Government executives (they are politicians) in most cases do not have the time or knowledge to promote results-oriented public policies. Public investment is a key factor in economic growth as it allows increasing the productivity and competitiveness of the economy.

Yes it is. Here: https://www.excedente.org/wp-content/uploads/2020/07/supermultiplier_dissertation.pdf

Santiago José Gahn , Thanks, it's an interesting work.

you are welcome

Keynesian theory is not considered as a theory of economic growth because it focuses on short-run changes in the economy and does not have a unified or agreed macroeconomic model. It emphasizes the role of effective demand, uncertainty, social conflict, and institutions in determining economic performance and distribution. Keynesian economics is a macroeconomic theory of total spending in the economy and its effects on output, employment, and inflation. It was developed by British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. The central belief of Keynesian economics is that government intervention can stabilize the economy.

Keynesian theory is not considered as a theory of economic growth because it focuses on short-run changes in the economy and does not have a unified or agreed macroeconomic model. It emphasizes the role of effective demand, uncertainty, social conflict, and institutions in determining economic performance and distribution. Keynesian economics is a macroeconomic theory of total spending in the economy and its effects on output, employment, and inflation. It was developed by British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. The central belief of Keynesian economics is that government intervention can stabilize the economy. Governments generally try to keep inflation within an optimal range that promotes growth without dramatically reducing the purchasing power of the currency. In the U.S., much of the responsibility for controlling inflation falls on the Federal Open Market Committee (FOMC), a Federal Reserve committee that sets monetary policy to achieve the Fed’s goals of stable prices and maximum employment. I hope that helps!

Chuck A Arize has a good understanding what Keynes's theory is. His main book was published in 1936, nearly 90 years ago. His principle of effective demand is still valid and we can reformulate it in a more modern form. His original formulations was defective in various ways. See my paper: The principle of effective demand: a new formulation. https://www.jstage.jst.go.jp/article/revkeystud/3/0/3_67/_article/-char/en

The biggest defect of Keynes's economics is that he had no idea to incorporate technological change. As Arthur Lewis, one of founding fathers of development economics, wrote in his Theory of Economic Growth (1955), economic growth is the increase of income per capita. If we adopt Lewis's definition of economic growth, many theories of economic growth is not a theory of economic growth. A typical example is von Neumann's growth path. We may included most of Morishima's works. There are expansion of economic variables, for example, the gross national income, but the income per capita remains constant.

Neoclassical and endogenous growth theories (Robert Solow and Paul Romer, both Nobel Prize winners for their "growth theory") are difficult to define they are growth theories, because (1) they draw on Aggregate Production Function (AGF) and Total Factor Productivity (TFP), but (2) AGF is a concept "Not even wrong" after Felipe and McCombie (2015) and (3) what is measured as TFP is only a confirmation of the growth facts. At the deep background of these Neoclassical and Endogenous growth theories, there is the General Equilibrium Theory (Arrow and Debreu 1954). It is essentially a theory that "initial endowments" determines the production possibility set. In this sense, Neoclassical and Endogenous growth theories are often called supply-side theory, but they do not elucidate what the technology change is. They are at best a parable of economic growth. But they do not clarify the true mechanism of economic growth.

Do not worry too much. There are now much better theories in the name of Evolutionary Economics. Technological change is an evolutionary process. To see how technological change brings economic growth in Lewis's sense, see my paper: A new framework for analyzing technological change, J.E.E., 2020.

As I have mentioned before, the central core in Keynesian theory is the problem of inadequate aggregate demand. It is important to consider that the aggregate demand is made up of many variables and one of them is the salary of the workers for the volume they represent and that Marx considered to be inadequate, he called subsistence salary.

Martha,

What you say in the last post may be right by itself. But, do you remind of the question posed by Mohammed Asseel ? I answered to his question. The most important point is that any economic growth (in the sense of Arthur Lewis) necessarily includes technological change (or progress), but Keynes's theory lacks this core part.

Keynes's theory is not sufficient for theory of economic growth, although it may compose an important part for understanding the function of the market economy.

Martha Pantoja

Hello Yoshinori

The Theory of Economic Growth 1954, This theory is focused on developing countries, paradoxically, these countries did not have capital. You can say a theory very out of reality.

The assumption in the model is that the capital sector expands by absorbing unlimited labour supply in the subsistence sector (Hirota, 2002). In this model labour moves from the traditional to the modern sector with an infinite elasticity of supply (Lewis, 1979).

Dear Martha Pantoja ,

you made three errors of different levels.

First, the book I referred to (The theory of economic growth) is published in 1955 and it contents are much wider than the so-called Lewis Model. The latter is famous among the developing economists but it does not represent Lewis's whole idea about economic growth and development. This "model" is advanced in a paper "Economic Development with Unlimited Supplies of Labour" Manchester School, 1954, in which he distinguished capitalist sector (not "capital sector" as you cited) and subsistence sector.

Second, Lewis's model of economic development describes growth at a specific period of economic growth of a country, which arrives at a so-called Lewis point where the unlimited supply of labor with constant wage rate comes to an end. Lewis and other followers all know that the model cannot describe economic growth of well developed countries. (Determining Lewis point is not an easy work, but in the case of Japan it is supposed it came to the point somewhere either in 1930's or in 1950's.)

Third, although "Unlimited Supplies of Labour" paper is more popular than the book, The Theory of Economic Growth (1955) treats far richer topic than the 1954 paper. Lewis talks about institutions, knowledge, capital, and government, but he emphasized "the will to economize" (the title of Chapter II, before chapters on institutions, knowledge, and others). I cited the definition that Lewis made in this book. This notion of economic growth is, in my opinion, much better and truer than the expansionist concept (von Neumann "growth" model). The most serious error you made is to identify the theoretical concept and the description of the history or facts.

If you have never read Lewis's book, I strongly recommend you to read it. Economic growth and development is much more complex phenomena than the most of Keynesians (including Authentic, New, and Post Keynesians) imagine.

Keynesian theory is primarily concerned with short-term economic stabilization rather than long-term economic growth. While it offers insights into factors affecting growth, it's not considered a comprehensive theory in this regard. Keynesian economics focuses on aggregate demand and the role it plays in fluctuations in output and employment over the business cycle. It assumes that an increase in effective aggregate demand can lead to short-run changes in income and output. However, it doesn't explicitly consider the supply-side factors that drive sustained economic growth, such as technical progress, capital accumulation, and productivity growth.

For example, during economic downturns, Keynesian theory advocates government intervention, such as increased government spending and tax cuts, to stimulate demand and boost economic activity. It also emphasizes the multiplier effect, in which an initial increase in demand can have a larger impact on output and income. However, the theory doesn't provide a comprehensive framework for understanding long-run growth, which requires consideration of supply-side factors.

The neoclassical synthesis integrates the Keynesian and neoclassical perspectives and recognizes that both demand- and supply-side factors contribute to economic growth. For example, investment in physical and human capital is seen as critical to sustainable growth. Governments can promote growth by investing in infrastructure, education, and research and development.

Post-Keynesian economists emphasize the role of supply-side factors even more. They emphasize the importance of technological innovation and entrepreneurship for long-term growth. Countries that encourage innovation and create an environment that supports entrepreneurship are more likely to experience sustained economic growth.

The primary focus of Keynesian theory, then, is on short-term stabilization rather than long-term growth. While it offers insights into demand-side dynamics and policies, it's not a comprehensive theory of economic growth. To understand long-term growth, supply-side factors such as investment, technical progress, and entrepreneurship must be considered. Integrating Keynesian and other perspectives provides a more comprehensive understanding of the complex nature of economic growth.

Hello, Yoshinori, thanks for your feedback

I will read: W.A. Lewis, “Economic Development with Unlimited Supplies of Labour”* (1954).

Best regards

Dear Martha Pantoja

it is good that you read Lewis's "Economic Development with Unlimited Supplies of Labour."

Hirota (2002) does not seem to be a good paper. It is something like a master thesis.

Lewis's book The Theory of Economic Growth has much wider and deeper contents. If you really want to understand economic growth in depth, it is a must. However, as it is a thick book of more than 400 pages, you may read a good paper in which the writer reflected deeply on Lewis's theory of growth. One such paper is Voxi Heinrich Amavilah (2014) Sir W. Arthur Lewis and the Africans: Overlooked Economic Growth Lessons. You can find a PDF at

https://mpra.ub.uni-muenchen.de/57126/1/MPRA_paper_57126.pdf.

Amavilah is also a member of the ResearchGate. See

Dear Yoshinori:

It´s very important economic growth to reach economic development (It´s a condition; at this moment I don´t remember If Arthur Lewis mention it. However, for example Mexico's GDP grew 6.9 percent at constant prices in 2000. This product growth was the highest in the last 19 years, Which did not improve the development of the country.

Economic growth and economic development, These variables are very important since they measure growth and whether it leads to people's well-being.

I really appreciate the bibliography on the topic.It is very important to return to it to close the gap between economic theory and reality.

Best regards

Good afternoon . I was tempted to drop from this discussion, as it seemed to me going into ideological circles. But the exchange between Martha Pantoja and Yoshinori Shiozawa revived my interest. When paying my rent pretending I was a Chief Economist in Latin America, I was puzzled by the lack of interest my regional colleagues had in Lewis. Surprising, as this was the only regional guy who had a Nobel price, and in development economics, on to of that. I came to the conclusion that, beside being Caribbean, Lewis had another sin: he wasn’t (post) Keynesian. His reference to propensity to save, in particular, was iconoclastic for demand-driven heterodox. I suppose we can classify Lewis as a post-Classic, perhaps as a post-Marxian (not sure). But bringing propensity to think about the long term (proxied by the propensity to save, independently of the income level) is probably a key component in any theory trying to explain why some cultures in adverse environment prosper (Calvinists in Holland, Confucianists in Eastern Asia) and others don’t.

Dear Hubert.

Arhur Lewis, in his book The Theory Of Economic Growth, in his model he considers overpopulated economies with a labor surplus; he assumes that the supply of unskilled labor for the capitalist sector is unlimited. This gives rise to the possibility of creating new industries and expanding existing ones at the existing wage rate.

As Yoshinori mentioned, the key factor in the Lewis model is capital. In the Latin American experience, this group of countries that followedit, imported the technology, the result was after 20 years: indebtedness, high inflation rates and most of them continued to be exporters of raw materials. Mexico (oil) and Argentina (grain).

Best regards

Mohammed Asseel Martha Pantoja Hubert Escaith Yoshinori Shiozawa Ildefonso Gustavo Díaz Sandoval

Martha,

do not use your own interpretation of Arthur Lewis as my opinion. In my understanding, you are still mistaking Lewis and his book.

Readers of this question-and-answer page, please read (or re-read) my post on July 1 (number 65 in the file that you find at the bottom of this page, crick #6 and search my post by date). What I have emphasized there is that most of formal growth theories (including "classical" and endogenous growth theories) do not treat production techniques in a proper way. Without right understanding of technological change, one cannot understand economic growth.

The fact that Martha pointed out (indebtedness, high inflation rates and most of them continued to be exporters of raw materials) is well known. It is too hasty to understand that the capital deficiency (shortage of capital) is all that should be considered. I doubt if Martha has really read Lewis's book: Theory of Economic Growth (1955). Martha is still confusing Lewis's 1954 paper and 1955 book.

It seems that Martha is following the conventional distinction between growth and development. Lewis's book is about economic development in her understanding. Lewis considers about structural change and the mentality of people. "Will to economize" is an example.

Another important point is that theory and reality are no two independent entities that you can compare from above with an empty mind. Theory sets the framework through which you see the reality. Martha may be thinking that she can understand Latin American growth problems only by Keynes's theory (or post Keynesian theories). The original question set by Mohammed Asseel was to question this point.

Dear Yoshinori:

I really like the Chinese proverb: The best time to plant a tree was 20 years ago. The second best moment is now.

Best regards

Indeed, this is a good proverb. However, it is doubtful if this is a Chinese proverb.

Dambisa Moyo, a Zambia-born economist, wrote a book Dead Aid: Why Aid is not Working and How There is Another Way for Africa (2009). At the end of her book, she dedicated a whole page to put the proverb. Moyo cited it as an African proverb.

I don't know the true origin of the proverb. As far as I know, this is not an old Chinese proverb, which had been cited also in Japanese from old times. However, it seems to be widely spread that this is a Chinese proverb.

In Chinese, there is a famous dictum, which comes from a book, named 管子

assumed to be written by 管仲 (Guan Zhong), in which we can read the following expression:

一年之計，莫如樹穀；十年之計，莫如樹木；終身之計，莫如樹人.*

(As a one-year plan, nothing is better than to plant cereals. As a ten-years plan, nothing is better than to plant trees. As a life-long plan, nothing is better than plant mens.)

It is possible that someone has confused this dictum and the proverb that Moyo cited.

Note: the third sentence is often cited as 百年之計，莫如樹人(As a hundred-years plan, nothing is better than to plant mens.)

Martha Pantoja

Dear Yoshinori

I appreciate the details on the proverb; the important thing is that economic theories have to be updated, because the causes of the problems are very diverse. Now, unemployment is an economic variable that has some causes that are different from those of the 1930's. Therefore, a diagnosis of the main causes that affect unemployment must be made.

It is important not to deny the past, to take the best of it. But the present requires other types of solutions, because the problems have increased and have taken on more intensity.

Best regards

Dear Martha,

you are misunderstanding the functions of (economic) theories and its development. Theories do not develop only because new phenomena come to be known. A new theory may be a degradation because it incorporates new phenomena but fails to explain the phenomena in an appropriate way.

Keynes's theory (General Theory) did not treat technological change, not because the importance of technological change was not known, but because Keynes was preoccupied with short term problems. A theory of economic growth must be a theory that grasps technological change, because it was always (since the [First] Industrial Revolution) the main driver of economic growth.

Please re-read my comment on July 1st (#65, please crick the number 7 in the bottom under, after all comments, and above the ResearchGate sign.) I posted there the following part:

The fact that "The biggest defect of Keynes's economics is that he had no idea to incorporate technological change" does not change whether Lewis's book was written in 1955 or in 2023.

The trouble with neoclassical growth theories like Solow's "classical" growth theory or Romer's endogenous growth theory is that they are almost tautology. There are no deep analysis on how the technological changes are interrelated with economic growth.

Mohammed Asseel Martha Pantoja Hubert Escaith Andrea Salanti Sofiane Abouderaz Pier-Paolo Saviotti

Dear Yoshinori:

I know that An economic theory is each of the hypotheses or models that seek to explain the functioning of economic reality.

As you know, just now low economic growth and inflation have different causes than those that occurred in the past; however, the same macroeconomic policies of 70 years ago continue to apply, because unfortunately new economic paradigms have not emerged.

I think a changing economy, economic thinking stagnated.

Of course, I will re-read your comment on July 1st.

Best regards.

Keynesian economic theory focuses on the role of aggregate demand in the short run and its effects on output, employment and inflation.

Keynesian Theory, is not It is not considered a theory of economic growth because it does not include 3 of the main factors that drive economic growth.: labor, capital, and technology. Although labor and capital are implicit in the principle of effective demand.

Thank you, DR/ Chuck A Arize

Keynesian economics is not a theory of economic growth because it focuses only on total spending in the economy and its effects on output, employment and inflation. It can still play an important role in promoting long-term economic growth by stabilizing the economy during periods of recession or inflation.

Please read <a href="https://rwer.wordpress.com/2024/01/09/with-one-word-economics-lurched-into-fantasy/#comment-201235">my comment</a> on Steve Keen's recent article in Real-World Economics Review #106. This is not a debate on Keynesian economics on growth. However, Keynesian economics (including Post Keynesian economics) has no good theory on production. In many cases, it is too much influenced by mainstream growth theories such as Solow's "classical" growth theory and Paul Romer and Robert Lucas's endogenous (or new) growth theory. First thing to do is to reject (aggregate) production functions. My post explained partly why.

In my previous comment on July 14, 2023 in this thread, I criticized that Keynesian economics lacks a good theory of technological progress. Please read my paper (2020)

Journal of Evolutionary Economics 30, 989–1034.

This is only a framework that can be compatible with Post Keynesian economics. In order to incorporate technological progress in your growth theory, it is absolutely necessary that you study the history of technological development in your countries. If you do not have one, you should inaugurate that new field.

Dear Chuck

It is a complex question (Paradox). Because Keynesian Theory contains the main macroeconomic variables that drive economic growth: consumption, investment and spending and It emerged as a remedy for the economic depression of the 1930s, which had unemployment as one of its main effects.

As you know the most influential economic growth theories are (classical growth), (neo-classical growth), and r (modern growth).

Best regards

Engaging question. Some have mentioned that Keynesian theory is not considered a theory of economic growth (EG) because it doesn't deal with its three main factors: labour, capital and technology. First, we should consider the critical question of whether Keynesian theory equates to Keynes's theory. I don't think it equates, and this dissimilarity matters more than people acknowledge.

But I'd like to examine the claim that Keynes did not deal with the three main factors anew and see whether this is relevant.

How should we integrate labour as an element of economic growth? Given the humane nature of economic production, we can't simply leave it out.

Now, look at the “best” theories of economic growth available. How elucidative is Sollow's treatment of labour? The labour force grows as fast as the population, and its growth determinants are exogenous. Treatment of “labour quality” is nowhere to be found.

Or look at neoclassical models. Treating labour as a productive factor, do these neoclassical models give us any insight as to why the quantity of labour may increase or decrease over long periods? It doesn't. If the main reason to pursue growth theory is to explain economic development over the “long run”, and if we are correctly told that labour is a productive factor, shouldn't these models have something to say about labour quantity and quality in this “indeterminate future”?

What about the “accumulation of capital”? Capital being another productive factor, these models should tell us why capital is produced in the first place. Believing that Keynesian theory is diametrically opposed to Keynes's theory, and knowing that the former is very close to the classical and neoclassical models of (EG), I don't think it explains why capital is produced, let alone accumulated, but neither does EG theories.

Technology. Since orthodox economic theory doesn't understand why “capitalism invests” unspeakable amounts of money in technology as a strategy whose purpose, in the end, is to generate monetary profit, it views technology as a “mana that falls from heaven”.

How good are the EG theories? They don't explain why the labour force increases or decreases. They don't understand why capital is produced as part of an economic process that occurs in calendar time, going from the irremediable past to the uncertain future in a context where “money matters in the short and long run.” They treat (or have treated for an absurdly long time) technology as a complete exogenous factor.

Did Keynes try to explain the “labour force question”? Of course not.

Did he occupy himself with the “technological question”? Again, he didn't; it was not the problem of his day. If anything, “an abundance of technology was one of the issues”, I don't think he would agree with this assessment. Anyway, sluggish technological progress was not his main preoccupation.

Did he try to explain the “capital question” (and with that, employment and income)? Absolutely, and in my opinion, he's got the best explanation for why capital is produced, accumulated and destroyed as an integral part of a capitalistic activity that involves time, money, uncertainty, institutions, and heterogeneity.

To finish off, I would rephrase the question, “Why is the (orthodox) theory of economic growth considered a (good) theory of economic growth? Should it be considered a theory of economic growth at all”?

Good argument, Felipe. It was rare to read this kind of deeply thought comments in this thread. Felicitations!

Felipe talks about the distinction between Keynes's theory and Keynesian economics. Yes, they are different. Fifty years ago (a half century ago!), to distinguish the two was sufficient, as did Axel Leijonhufvud in 1968. Now, it is insufficient to talk about Keynesian economics. We should at least distinguish New Keynesian economics and Post Keynesian economics. All three are different economics, although they have some theoretical links and resemblances between them.

As for existing theories of economic growth, Robert Solow is famous for his classical (in reality typically neoclassical) growth theory and Paul Romer for his new, endogenous growth theory. However, both Solow and Romer are based on aggregate production function, which is something "not even wrong" after Felipe and McCombie (2013) The Aggregate Production Function and the Measurement of Technical Change / 'Not even wrong.' Technical change was for Solow a "residual", and human capital for Romer. They have no true theory of technical change.

As for the acknowledgment that technical change was the principal driving force of economic growth, Nelson and Winter, founding fathers of modern evolutionary economics, had the great insight but lacked a theory how to treat technological change. They tried to analyze technological change as as population dynamics of several different production techniques. The discovering a general theory of technological change was first given in my paper . It is important to know that the new framework is based on a new paradigm which consists of three pillars:

(1) separation of prices and quantities

(2) a theory of prices (a kind of classical theory of value)

(3) a theory of quantity adjustment

Although the paradigm is new, (2) was vaguely known among classical economists such as David Ricardo and Carl Marx, (1) is a new insight, probably started from Sraffa (1960). The most difficult point was (3). The last was overcome by Masashi Morioka. See Chapters 3 and 4 of Shiozawa, Morioka, and Taniguchi (2019) .

The theory was mainly developed for a national (closed) economy, but there exists a theory of international trade:

The new theory of economic growth, the outline of which is given in , has in this way a sure microeconomics totally different from Léon Walras and Arrow and Debreu. The idea of aggregate production function is based on Arrow and Debreu. This is the reason why Solow is a veritable neoclassical economics.

Yoshinori Shiozawa, thank you, professor, for the kind words.

Keynes’s theory (which I prefer to designate Monetary Theory of Production after his 1933 paper, instead of General Theory) is profoundly different from what has come to be known as Keynesian theory. Economists from “all walks of science” have failed to draw the appropriate distinctions, so in my view, when Lucas “criticized Keynes” in the 70s and 80s, he aimed at Keynesian theory, an offspring of Samuelson’s Neoclassical Synthesis.

Some may say this is relevant only to historians of economic thought, but it has profound implications for economic methodology and policy. We could go on and on about the sources of those confusions; the literature is vast. But I tend to think of them as a result of the relentless efforts and incredible amount of energy economists dispensed to save the different notions of equilibrium (general or partial, Walras's or otherwise) and those associated with perfection and imperfection. Honestly, I think these terms have far outlived their usefulness.

We, qua economists, have a strange habit of superimposing upon reality our categories. It should not be a problem if we could “walk back” on our assumptions after being ostensibly shown to be wrong. It doesn’t seem to be the case.

Thank you also for correcting my impression. I may have implied that Solow’s model should be seen as classical, when it is better described as part of the neoclassical family.

Although I am far from being able to pass judgment on Professor SShiozawa’s paper (2020) — which I recommend because I just finished it —the proposed theory has an incredible virtue: it’s connected to the economy in which we happen to live. That is not the case with much of neoclassical theory, including EG and its subsequent iterations. The reason is straightforward and was exhaustively explored in the literature; this side of economic science (orthodox) doesn’t have the notion of an economy that progresses through time, in which commitments and decisions are intertwined with money contracts. It's interesting because Arrow and Hahn — General Competitive Analysis — already knew it in 1971!

"In particular, if money is the goods in terms of which contracts are made, then the prices of goods in terms of money are of special significance. This is not the case if we consider an economy without a past and without a future [their case]- Keynes wrote that 'the importance of money essentially flows from it being a link between the present and the future' to which we may add that it is important also because it is a link between the past and the present. If a serious monetary theory comes to be written, the fact that contracts are indeed made in terms of money will be of considerable importance."

It was already written; they had just quoted it, but the scientific community chose to ignore it and proceeded accordingly. Yesterday, I read Ingrao’s (2023) Two Open Questions on Lucas’s Research Program in the Early 1970s, and she’s got an interesting way to phrase these matters:

“The ‘theoretical barter economy’ is not a transparent construct, as Lucas seemed to take for granted. What is to be understood as a barter economy, the Arrow–Debreu economy a priori centralized by the auctioneer or any fictional economy, where trade goes on in sequences of uncoordinated, bilateral barters? Does a sequential barter economy work smoothly? In his last book on money, Hicks questioned the nature of a ‘barter’ economy, and gave a negative answer (Hicks 1989 [2017], p. 44; Ingrao, Ruggeri, and Sardoni 2022). Money requires some kind of sequential economy, where events disclose over time and the future is not all transparent today. Otherwise, it is just a conventional numeraire and, as such, is irrelevant.15 Monetary economies need change over time to be distinguished from ideal barter economies.”

My only disagreement with her is that it’s our sequential economy that needs money, not money that needs a sequential economy.

I want to get back to the question posed by Mohammed Asseel because this is getting too long. Whatever we think about economic growth theories, their determinants, their factors, their dynamics, etc., they should not be disconnected from the functioning of a monetary economy, and that was given by Keynes (1936).

Ah, just a "P.S.:" The question mentioned the supply and demand side. In Keynes's theory, in which he dealt with a capitalistic economy seen as a sequential production process, it is not easy to separate the supply and demand sides, they are much more intertwined than it appears at first in our models.

It´s an interesting question, because "Currie's growth theory proposes that this phenomenon is endogenous, driven by real demand and increasing macroeconomic returns, in which structural change does not lead to a particular or stationary equilibrium, and that it can be stimulated with the intervention of the State".

It´s important to point out thar Lauchlin Bernard Currie proposed demand as the main variable of economic growth, the same as Keynes.

Best regards

Keynesian economics theory is primarily a theory of total spending in the economy and its effects on output, employment and inflation.

He belief that government intervention can stabilize the economy.

Dear Chuck:

Laissez-faire advocates believe that the market regulates itself through demand and supply, Keynesian theory point outs that is not true, that´s why is necessary government intervention to boost the effective demand.

Best regards

So. ¿What is the conclusion about it?

Keynesian theory focuses more on short-term demand management and stabilization policies rather than long-term economic growth strategies, which are typically addressed by growth theories emphasizing factors like productivity, innovation, and capital accumulation.

The theory of economic growth includes three main factors: technology, capital and labor. The economic growth theory model of the American economist Robert Solow mentions that the factors that drive continuous growth in addition to capital and labor are raw materials (Solow-Swan model).

Keynesian theory is short-term. One of the most famous expressions attributed to John Maynard Keynes says “In the long term we will all be dead.”

It is important to consider the context: the great economic depression of the 1930s. The key idea in Keynesian Theory is that demand should be stimulated through consumption and public and private spending.

I want to add some comments on Felipe Rodrigues Sousa 's answer on January 22, 2024:

The conclusion seems simple. Reject all equilibrium framework, because it is this framework that enforces us to think in barter-economy way. Is the sequential economy difficult to build? By no means. A simple example is the framework we have adopted in our book Microfoundations of Evolutionary Economics (2019). We have not emphasized this fact very much. But Felipe has reminded us that our scheme is the monetary theory of production, although it is very different from Keynes's own formulation. He imagined to build an economics but he could not, because he was still captive of equilibrium framework.

I share Yoshinori Shiozawa 's concern for "sequential economics"; after all, this is obviously how the economy works. Late professor Paul Davidson has debated this element for decades. I just want to emphasise that Keynes was aware of this need, even though we can argue that he was still captive of equilibrium economics. On this latter topic, my position is that he was captive of this framework because of his objectives, plainly expressed in the Preface of the General Theory, to convince "his fellow economists". Now, to do that, he needed to speak their language, and their language was that of equilibrium economics. It is fair to argue that Keynes didn't have a grammar to deal with the real economy that would dispense with equilibrium, but that was an asset given his objectives, even if the theory turned out deficient.

But more to the point of question. I myself reject the notion that Keynes cannot be considered part of the theory of economic growth. He surely can't be put on the same team as Sollow, but that does not mean he wasn't concerned with growth in the long run.

People seem to misunderstand the quote, "We will be dead in the long run." For one, this is obviously true; I know of no one who has got to be 200 years old, but our grandchildren will obviously be alive in the long run, and "The economic possibilities for our grandchildren" were a serious concern for him.

Let me try to be less cryptic. Whatever the factors determining economic growth in the long run are, we cannot have an economy that consecutively shrinks for 149 years and expect it to be 20x bigger and more complex in the 150th year. The paradox of economic growth in the long run is that it depends on the growth in the short run, and that is obviously where he spent most of his energy.

This discussion is very interesting, with bright minds participating. I am afraid, nevertheless, that it drifted far away from its initial purpose. We all agree Keynes was a bright mind, that his contribution is of great importance, but… Not so bright minds like me tend to create simplistic and artificial distinctions between long-term growth theories and macroeconomics (monetary, fiscal, labour). Growth theories or models deal with creating the necessary conditions for economic growth, understood as a sustainable increase in per capita GDP. Hence, the emphasis on building stocks (of physical and human capital) and creating and maintaining a favourable climate (legal, institutional, or environmental). Macroeconomics is more concerned about flows, because without an adequate flow of demand, supply remains an unused potential. And unused potentialities are wasted if they remain idle for too long.

In that sense, but in that sense only, Keynes theories can be understood as contributing to realising the growth potentialities. But, unless words don’t mean anymore what they are supposed to describe, Keynesian models are not growth models.

Curiously, there is one economist who contributed to both supply and demand aspects: K.Marx who realised quite early that demand was necessary to “realise” the product (realise being understood as : making real something that was only a latent possibility).