Marc Lavoie’s New Book


Marc Lavoie’s new book on the foundations of Post-Keynesian economics is out entitled Post-Keynesian Economics: New Foundations. I learned a lot from the last version of this book and Marc has told me that he’s been working hard to update the new one in light of more recent developments in both Post-Keynesian and mainstream economics.

The first chapter is available on the publisher’s website. It looks pretty good too. It contains discussions of the SMD theorem. He also discusses the fact that tests for the aggregate production function have recently been exposed as being based on regressing national accounting identities on the national accounts data. If that sounds like gobble-dee-gook to you it basically means that much of the empirical results of mainstream economics since the 1960s is hokum — i.e. it’s a big f-ing deal! Lavoie writes:

Neoclassical economists are claiming to measure something, but are really measuring something entirely different. Their theories, such as the necessary negative relationship between real wages and employment, seem to be supported by the data, whereas the negative relationship arises straight from the identities of the national accounts, with no behavioural implication for the effect of higher real wages on employment. I have discussed these issues with a few of my neoclassical colleagues. The most genuine answers have been that without these elasticity estimates they could no longer say anything. But they would rather continue making policy proposals based on false information than make no propositions at all. In other words, they would rather be precisely wrong than approximately right. (p36)

Lavoie also discusses the empirical claims of the mainstream. Through a survey of a variety of literature, especially the literature of so-called ‘meta-regressions’ which seeks to find data manipulation, conscious or unconscious. The findings are damning and support the claims often made on this blog: econometric regressions run on models is largely meaningless the vast majority of the time.

Most post-Keynesians demonstrate scepticism when it comes to empirical and econometric research. Still, one cannot but be impressed by the huge quantity of empirical work that seems to provide support for orthodox theory. This section has shown that this cynicism with regard to orthodox econometric research is largely justified, as many of the studies that appear to verify or confirm orthodox theory are just artefacts. What is an ‘artefact’? The most common definition, relevant to science, says that an ‘artefact’, or ‘artifact’, is a spurious finding caused by faulty procedures. Meta-regression analysis has certainly demonstrated that many of the empirical proofs of orthodox theory were phoney and arising from defective procedures. The word ‘artefact’ is also used in the fantasy and sorcery literature. There, an ‘artefact’ is a magical tool with great power, like a magic wand. This definition seems to be particularly relevant to neoclassical production functions since all the predictions that can be drawn from a model of perfect competition cannot be refuted, even when we know that the required conditions do not hold. (p70)

Lavoie stops short of saying that the techniques should be given up altogether. But it seems to me difficult to draw any other conclusion. In High Finance these techniques, applied to macroeconomic models, are known to be GIGO (Garbage-In, Garbage-Out) which is why they are not taken seriously when there is money on the table. Why is it that policymakers and academics continue to insist upon using them? Perhaps because there is a certain amount of magical thinking going on in the highest echelons of the profession and the practitioners are not being honest about what they can and cannot say with relative surety?

This book will probably turn out to be a key reference text for the growing student movement against current economic teaching.

Post-Keynesian Economics New Foundations


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Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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28 Responses to Marc Lavoie’s New Book

  1. Pontus says:

    “Their theories, such as the necessary negative relationship between real wages and employment, seem to be supported by the data, whereas the negative relationship arises straight from the identities of the national accounts”

    Huh? I thought it was quite well known that both real wages and employment have risen dramatically in the past 100 years. Does that violate national accounts?

    • Wow! Good point! I’ll let Lavoie know. Hopefully the book has yet to hit the presses… Stop the presses people!

      • Pontus says:

        Well, you thought the passage was so important that you decided to quote it. And now you can’t even defend it properly? It’s all about being a believer I guess.

      • What you say doesn’t make sense. I can’t respond. You’re not speaking to the point. Maybe read the chapter and try again?

      • Pontus says:

        Ok let me put it like this: Can you please tell me why you think that “[Neoclassical] theories, such as the necessary negative relationship between real wages and employment …]” it’s an appropriate reflection of neoclassical theories. Can you perhaps provide with at least a citation where some neoclassical economist has made this claim? Does that make sense?

      • You’re taking it out of context. Read the chapter. This has to do with estimating elasticities. That is the key. Lavoie is just sumarising which is why I quoted him. Read the chapter. It is linked to for a reason.

      • Pilatus says:

        I can leave you a whole bunch of quotations, from the founding fathers of neoclassical economics to more recent ones. However, since I’m very lazy, I’ll leave just one article.
        Just because people, mainly neoclassical economists but heterodox ones as well, have decided not to discuss theory, that doesn’t mean that there’s no theory behind their propositions. It justs puts one in a position to avoid theoretical complications and reasonable criticism. It may also act as a way to say something better w/o having to change your whole conception, which is not totally bad but does not change the initial problem.
        I hope I’ve made myself clear.

      • Pontus says:


        From Blanchard’s notes: “Higher unemployment can may then come from one of three sets of causes: […] It may come from an increase in the markup, which shifts labor demand down, leading to lower wages and higher unemployment”.

        Thus, Blanchard brings up cases that directly contradict Lavoie’s claim and give direct support for what I’ve been saying.

        Yes, you made yourself clear. Any further supporting evidence?

        Phil: I think that anyone with half a brain would see that it was you, not me, who took anything out of context. Reading the chapter does not change my mind in any way. Claiming that mainstream theories predict a “necessary negative relationship between real wages and employment”, is neither true nor supported by the data.

      • Pilatus says:

        I’m sorry Pontus, but you’re are using a flawed argument. When someone says that there’s some kind of relation between real wages and unemployment, one is not implying any kind of relation between mark-ups, real wages and employment!
        Blanchard’s words a few lines below what you quoted: “It [higher unemployment] may come from wage push factors, that shift labour supply up, leading to higher wages.” In this passage you can clearly see the negative effect that real wages and employment, as long as you assume mark-ups (and all other things) as given!
        It is a basic feature of neoclassical models, and you can find it in any manual, that exists substitutability between labour and capital. In other words, as firms maximize, they will choose the “good” combination of those two factors. If one of then changes its relative price (i.e. real wages go up), firms as a whole will use less of this particular factor. I’m guessing that this set-up is well known, right? Going a little bit further, market imperfections does not change this in the long-run, it just messes-up a bit in the short-run when markets do not clear.

      • paul davidson says:

        What you should do is read chapter 12 of my textbook POST KEYNESIAN MACROECONOMIC THEORY. the chapter is entitled “The Demand and Supply of Labor”. It is based on the never read chapter 20 of THE GENERAL THEORY entitled “The Employment Function”. Keynes notes that the employment function ‘only differs from the aggregate supply function in that it is , in effect, its inverse function”. This inverse function permits analysis of real wages and employment , changes in the Lerner degree of monopoly, etc.

        Unfortunately no one reads Keynes or Davidson –).

      • Pilatus says:

        I’m not sure how others react to that, but in my understanding Keyne’s theory of employment is ok if not taken literally. As a matter of fact, I would rather stick to Sraffa’s or, better said, Garegnani’s classical reformulation.

      • Pontus says:

        When someone claims that mainstream economics implies a necessary negative relationship between real wages and employment which follows from national income identities, this cannot be defended by citing an article in which unemployment and real wages can both be positively related and negatively related. The statement from Lavoie is not ceteris paribus — it follows from national income identities, and should therefore hold always and everywhere. No exceptions.

      • Pilatus says:

        Well to be honest, I haven’t read the chapter.. I’ll get back to you as soon as I get time to do it.

      • It has to do with estimating elasticities Pontus. Why is it that when you are shown the woods you insist on commenting on the trees? Small minds, I suppose, small minds.

        But if you do insist on substantiation of the idea that real wages are inversely related to employment you might try an intro to economics class or the Wiki page. Yes, this may be supplemented at a higher level but this is the underlying framework.

        Also you write:

        When someone claims that mainstream economics implies a necessary negative relationship between real wages and employment which follows from national income identities… The statement from Lavoie is not ceteris paribus — it follows from national income identities, and should therefore hold always and everywhere.

        This was not the claim. And your comment, like your talk to the PKSG, is a muddle. You didn’t read Lavoie’s argument properly (as usual). And you didn’t understand it (I increasingly suspect from your public talk that you do not understand many things that people say and that is why you are on here).

        But really this is a secondary issue. The primary issue is whether you can estimate a production function without engaging in tautology. But this, I think, is way beyond your pay grade.

  2. American engineer argues that there has never been a sound theory of economics: critique welcome

  3. paul davidson says:

    I find the first chapter very discouraging.

    Among other things the author does not recognize the difference between Knight’s concept of uncertainty and Keynes’s. If Lavoie had read Knight he would have discovered that Knight ‘s uncertainty is an epistemological problem and Knight even specifies explicitly that one can not rule out the [probabilistic] stability of the cosmos over time, i.e, the economic system is ergodic’. but , according to Knight, people do not have the computing power to calculate the probability distributions.— an epistemological problem.

    Keynes concept of uncertainty is an ontological concept for , as Keynes specifically states in his criticism of Mr. Tinbergen’s method, economic data are not homogeneous over time. This nonhomgemity condition is a sufficient condition for a nonergodic stochastic process.

    Lavoie also might have at least cited Sidney Weintraub and his writings as a pioneer in the Post Keynesian literature. The omission of Weintraub and his basic contributions indicates the author’s lack of understanding of the development of Post Keynesian economics — and, if it becomes a guideline for students wanting a change in economics — it will provide a very poor– or distorted– guide indeed.

  4. Dylan Gowans says:


    Although it seems unlikely that you will given your poor review, if you were to read on to chapter 2 you would discover that Marc does in fact make the distinction between Ontological and Epistemic Uncertainty – albeit the latter is not directly associated with Knight.

    From Chapter 2:

    “Broadly speaking, we can say that there are two kinds of fundamental uncertainty: there is ‘ontological’ uncertainty and ‘epistemic’ or ‘epistemological’ uncertainty.This corresponds rougly to what Rod O’Donnell (2013) calls the ergodic/non-ergodic approach and the human abilities characteristics approach.”

    I tend to agree with Phil’s assessment that New Foundations deserves to be a key reference text for dissatisfied students. It is well written and extensive. Indeed it was reading Marc’s (1992) Foundations of post-Keynesian economics that first got me interested in heterodox economics, and later led me to pick up Post Keynesian Macroeconomic Theory.

    • paul davidson says:

      there are a lot of other things wrong with Marc’s first chapter that I am sure can not be corrected in latter chapters.

      Just one simple one is listing Hy Minsky as a Post Keynesian. HY has told me that he, never wants to be labelled a Post Keynesian— and, as John King, explicitly indicates on page 113 of his book A HISTORY OF POST KEYNESIAN ECONOMICS Minsky “did not regard them [Keynes’s aggregate supply and demand analysis or incomes policies] as especially interesting or important. He [Minsky] took no interest in the analysis of production, in the operation of product markets or in pricing theory” — all of which is important to Keynes and Post Keynesians.

      After all one of the essential properties of interest and money [chapter 17 of Keynes’s General Theory] specifically indicates that liquid assets have a zero elasticity of production. Minsky’s whole theory of financial instability never relies on this “essential ” property — and in fact the depresssion problem occurs in his model only because people make(deliberate?) errors in arranging how to pay off outstanding debt contracts— and not because these debts have an essential property of a zero elasticity of production.

      King goes on to quote Minsky as writing “without a cyclical perspective uncertainty is more or less an empty bag”.

      Yet uncertainty is essential to understanding Keynes as he clearly indicated in his 1937 paper on The General Theory

      John King states “Minsky’s “affinities were with the New Keynesians”

      thus Minsky does not follow Keynes’s “principle of effective demand” model of aggregate supply and demand functions intersecting to make the point of effective demand determines employment.

      Minsky believes that the capitalist system is essentially cyclical — even though Keynes did not —and Keynes even specifically warned Joan Robinson not to confuse uncertainty with instability (cyclicall movements). After all in the UK unemployment levels were double digit from 1922 until almost the beginning of the war– the level of unemployment was not cyclical but rather stable for almost two decades while Keynes was developing his General Theory
      Clearly Minsky’s analysis owes more to Irving Fisher’s debt deflation analysis — and little or nothing to Keynes’s General Theory. Accordingly Minsky should be labeled a Post Fisherian and not a Post Keynesian.[After all Keynes [p. 142 GT] had nothing good to say about Fisher’s distinction between real and money rate of interest — where the difference required being able to accurately foresee the future value of money by one group of people but not by another. [ The modern variant is the Asymmetric information model of Stiglitz] Keynes always argued that no decision makers can accurately foresee the future!!
      And that is only one of many problems — including some omissions and some simply wrong statements popping up in Lavoie’s Chapter 1

      • Pontus says:

        Post Keynesian science in the making. Who said what!? Did he or did he not label himself as X? Stay tuned.

      • Marginalist science in the making. How much can we manipulate data to get our results? Are we regressing national accounting identities on the national accounts data? Stay tuned.

      • NeilW says:

        You guys are way too interested in classification into sub-groups than is healthy.

      • paul davidson says:

        classification is the first stage in any development of science— for example, in biology the classification of species, or in chemistry ,the table of the elements. without coassification you have chaos.

      • Pilatus says:

        Classification is important. However, some branches of post-keynesianism try to over-classify and exclude itself, mainly the “fundamentalists”. I believe that Lavoie’s point is to avoid this, that’s why he considers Sraffians into the some big group (post-keynesians) – a decision that I think is justified.
        Otherwise, you can go around and say that post-keynesian analysis cannot lack some kind of “fundamental uncertainty”, but that’s your choice (a bad one in my opinion).

      • paul davidson says:

        you are entitled to your opinion — but if you read Keynes, especially his 1937 article where he explicitly makes uncertainty the focus of his general theory then it would be hard to comprehend why anyone who assumes away uncertainty — such as Sraffians, New Keynesians, or even Old neoclassical synthesis Keynesians are entitled to call their analysis “Keynesian”

        . It is as if “creationists” called themselves Creationist Darwinians!!

      • Pilatus says:

        That’s certainly one way to go, but I disagree with you when you put uncertainty in the “hard core” of the keynesian paradigm (the anachronism is intentional, as I cannot find in Kuhn’s theory a good alternative to the term). I would rather put effective demand in its place, which does not depend on uncertainty. The reason to do that is that I don’t take Keynes’ words as a bible, the same way I like Kalecki but wouldn’t use his pricing theory at all.
        The “fundamental uncertainty” group, as yourself, would be in the keynesian “safety belt”, as I think professor Lavoie would agree, at least partially.

        Paraphrasing your metaphor, darwinists today even use some of Lamarck’s arguments!! (well, most certainly not creationist arguments, that’s going too far haha)

  5. Stefan Voss says:

    Can anyone tell me now what “Post Keynesiasm” really is?

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