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The Supermultiplier. A Cornerstone of the New Macroeconomics

October 16, 2023


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Eladio Febrero (E.F.)  Universidad de Castilla-La Mancha, Spain) interviews Óscar Dejuán (O.D.) about The Supermultiplier

E.F. On the book’s cover, we find these statements: “The Supermultiplier is a wonderful and much-needed book” (E. Nell); “It offers a new perspective on macroeconomics based on the surplus approach” (J.M. Bricall); “The book arrives at a time when the topic is gaining prominence across all heterodox approaches” (L.P. Rochon). Could you summarize the meaning and working of the supermultiplier?

O.D. The supermultiplier mixes two old, straightforward ideas: multiplier and accelerator. The third element is the vector of autonomous demand. It encompasses the expectations of persistent demand for exports, public expenditure, residential investment, and modernisation investment.

The SM model takes for granted the dominant technology and one distributive variable. Then, it computes the induced demand corresponding to the expected evolution of persistent autonomous demand. The traverse to a faster expansion conveys a structural change led by the supermultiplier. The income share of capacity-creating investment and business savings are supposed to increase. 

The SM ensures the validity of the Keynesian principle of effective demand both in the short term (equilibrium level of income) and in the medium term (fully adjusted growth paths acting as a gravity centre).

E.F.  You have raised an issue that has always worried me. If the multiplier-accelerator model is so old, why was it not accepted and popularised earlier?

O.D. Harrod’s warning about the extreme instability of the multiplier-accelerator model frightened most economists. Yet, such a hypothesis clashes with the ordinary working of capitalist economies and lacks a convincing rationale. In our view, Harrodian instability stems from an inappropriate correlation between capacity utilisation and demand expectations, a correlation that does not respect the autonomy of “autonomous demand”. Notice that our position does not imply a perfect foresight of entrepreneurs. We only require “prudence”, the key virtue that Adam Smith attributed to entrepreneurs. They will only invest if demand expectations prove to be persistent. Short term capacity adjustments do not affect the expected growth of persistent demand.

The supermultiplier is not only a stable mechanism but also a stabilising one. This can be seen in the “traverse” between two growth paths. The supermultiplier drives a change in the structure of the economy until the shares of induced consumption, induced investment, and autonomous demand ensure a new, fully adjusted path of growth. Even the “warranted” rate, derived from the supply side, is bound to adjust to the autonomous trend. To be efficient and competitive, firms are supposed to use the best technology in the most efficient way (i.e., at full capacity utilisation).

E.F. The Keynesian multiplier has been criticised for ignoring monetary and financial factors. Does the same criticism apply to the SM?

O.D. Your question involves a misconception. Money and finance are essential in both the multiplier and the supermultiplier. Post-Keynesian economists support the money endogeneity hypothesis summed up in Moore’s statement: “Money is credit driven and demand determined”. Graziani distinguishes between initial and final finance. In his examples, initial finance refers to the short term loans that finance variable capital, particularly wages. The eflux phase introduces the means of payment to purchase final goods. After selling them, firms can pay back the loans. This is the reflux phase that he calls “final finance”. In the supermultiplier model, we should consider the part of autonomous demand financed by long term loans and debt. Banks are supposed to reabsorb the liquidity injected in these ways.

The supermultiplier can be computed from three different perspectives. (1) The geometric progression that captures the induced demand for consumption and investment (c+h). (2) The inverse of the share of uncommitted income (s=1-(c+h)); it coincides with the value of autonomous demand as a share of income (z). (3) The inverse of the income share of the money collected to pay for autonomous demand (d). The last variable varies according to the autonomous expenditure under consideration. Regarding residential investment, it would be the inverse of the unit financial commitments. An increase in the indebtedness ratio and interest rates reduces the value of the supermultiplier and may lead to a massive default of households. The explanation of the financial crises is more appealing when explained by the supermultiplier model. In the book, we inspect the global financial crisis of 2008.

E.F. You are trying to build macroeconomics from “the surplus approach.” Can you explain the pillars of such a synthesis?

O.D. The theoretical building blocks are three. (1) The Keynesian-Kaleckian principle of effective demand and money. (2) The classical political economy of value and distribution, conveniently restated by Sraffa. (3) The Schumpeterian emphasis on innovative entrepreneurs and the institutions that channel economic decisions.

E.F. To the best of my knowledge, economists usually refer to the “Sraffian supermultiplier”  while Schumpeter is never mentioned.

O.D. In my opinion,  the adjective conveys an is an overstatement. Sraffa talks little about demand and nothing about the multiplier. It is true, however, that the term surplus approach was coined by Sraffa’s disciples (Pasinetti, Garegnani, Eatwell, Nell), and the supermultiplier mechanism was introduced by Sraffians like Serrano in Brasil, Bortis in Sweetzeland,  Cesaratto in Italy …  

To your second observation, I must clarify that my book is not intended to describe the current state of the SM studies. It transmits my own perceptions, hoping to contribute to a future synthesis when the issue is mature enough. In my opinion, some Schumpeterian observations should be part of the final synthesis. (1) Capitalist economies tend to stagnate. (2) Innovative entrepreneurs dynamize demand by introducing new goods, new forms to produce traditional goods and new markets. (3) Modernization investment (that transforms capacity instead of increasing it) is the key element of autonomous demand and the ordinary vehicle of technological change. (4) The second task of innovative entrepreneurs is to convince banks to finance the project. (5) Major innovations usually lead to long waves of prosperity.

E.F. What adds the SM model to Keynes’ economics?

O.D. The most important contribution is the validation of the Keynesian principle of effective demand both in the short run (the equilibrium level of output in a given period) and in the long run (fully adjusted path of growth).

It provides Keynes’s macroeconomics with a coherent theory of value that marks the gravity centers forged by competition.

It offers the necessary equilibrium between the objective and subjective forces that influence economic decisions and the formation of expectations. The SM gathers the objective elements: technological parameters and propensities determining induce demand (usually more than 80% of aggregate demand). The “multiplicand” collects the expected levels and growth rates of the autonomous elements driving the economy. Such expectations, however, are not extremely volatile and arbitrary. They also depend on objective factors like the potential market of the elements of autonomous demand driving the system.

The SM model enhances the structure of the economy, usually hidden in Keynes aggregation. The SM connects with the Kaldorian models that emphasise the competitive advantages associated to particular structures of production; with Latin American structuralism and developmentalism; and with Leontief’s input-output analysis. In the last chapter, we build a disaggregated SM to study the decarbonisation process.

The SM model corrects some misconceptions about fiscal policies based on the traditional income multiplier. It provides a better foundation for export-led growth and balance of payment constraints (Thirlwall and McCombie).

E.F.  A last question. Who is the target audience of the book?

O.D.  First of all, postgraduate students of macroeconomics who search for an alternative to mainstream textbooks. Our didactical priority shows in the attempt to present my ideas as much as possible and to accompany the theoretical presentation with a collection of simulation exercises. The second target audience would be heterodox researchers on dynamic macroeconomics. Hopefully, the interest in the supermultiplier model will expand and eventually conceive a new macroeconomics that integrates the theories of value, distribution, demand, and money into a coherent “surplus approach”.

The Supermultiplier: A Cornerstone of the New Macroeconomics
Óscar Dejuán, Professor of Economics, Department of Economics and Finance, University of Castilla-La Mancha, Spain is available now.

Read the introduction and other free chapters on Elgaronline.

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September 15, 2023


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Global Goals Week is annual week of action, awareness, and accountability for the Sustainable Development Goals which this year falls between the 15th and 24th of September. As signatories of the UN’s Sustainable Development Goals Publishers Compact, Edward Elgar Publishing has made a commitment to accelerate progress to achieve the Sustainable Development Goals (SDGs) by 2030 and Global Goals Week is the perfect opportunity to give an update on how we have been working towards this.

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A deep dive in energy derivatives and its EU supervisory framework

September 13, 2023


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Written by Liebrich Hiemstra, Vrije Universiteit Amsterdam – Amsterdam Centre for Climate Change and the Law and Vattenfall NV, the Netherlands

A constant factor in the energy sector is its constant development, evolution and movement. This also applies to the financial products traded within the energy sector. Yet, this is one side of the energy market which has been researched very little: the trade in energy derivatives and how such trading is supervised by EU and national regulatory authorities. My take on this is that the supervision of this sector is too unclear and that the available remedies to market participants against a decision of supervisory agencies to share or disclose confidential information are ineffective.

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Deindustrialisation and Financialisation: Two Sides of the Same Coin?

August 21, 2023


By Imad Moosa, Professor of Economics, Department of Economics, Kuwait University, Kuwait

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Deindustrialisation is a process that involves economic and social changes caused by the erosion or dismantling of industrial capacity and activity, as manufacturing industry is replaced by services, particularly financial services. To be sarcastic, I would say that deindustrialisation involves the replacement of engineers with exotic dancers. The shift to financial services in particular amounts to the “financialisation” of the economy, which is indicated by the spectacular growth of the financial sector in terms of profits, size of institutions and markets, and also in terms of political influence and visibility.  

To those who believe in the absolute economic and moral superiority and supremacy of the West, China is the culprit when it comes to finding an explanation for the rapid deindustrialisation of the West. This explanation, however, is not based on sound economics but rather on blind ideology. Free marketeers, on the other hand, do not deny the shift away from manufacturing industry towards services, but they take attitude of “no worries” as this shift is allegedly “natural”, a phase of economic evolution.  In my humble view, both factions are wrong.  

Let us start with the evolutionary view expressed by some pundits who believe that financialisation (hence deindustrialisation) occurs naturally as the economy moves away from manufacturing industry to services. In an article published in The Economist in 2011, an eminent trade economist, Jagdish Bhagwati, expressed the view that those who call for reviving manufacturing industry suffer from “manufacturing fetishism”, arguing that the service industry is as good as manufacturing in generating jobs and boosting exports. However, manufacturing fetishism, which is the idea that manufacturing is the central economic activity and everything else is somehow subordinate, is not as bad as Bhagwati thinks. After all, advanced countries have become advanced and rich in large part because of industrialisation, which is the prime source of productivity growth (recall the industrial revolution).  

It seems that Bhagwati suffers from “services fetishism”, thinking that manicure and massage (and portfolio management) are as good for the economy as manufacturing industry. Rather than supplant manufacturing, business-service enterprises depend on healthy factories, which are among their biggest clients. Bhagwati is wrong because, as one observer puts it, “it’s hard to imagine how service-sector expansion can play a role in wealth creation if growth in, say, manicurists exceeds that of engineers”. An economist of Bhagwati’s calibre should know that while manufacturing industry lends itself to specialisation and economies of scale (hence, rising productivity) the service industry kills productivity because of the lack of potential for the exploitation of economies of scale and exports.  

Financialisation (hence deindustrialisation) has not happened simply as a “natural course of evolution”. Political decisions, or lack thereof, enabled the process to take off and accelerate beyond control. Policies formulated at the national and international levels encouraged activities and changes that provided the right environment for financialisation to move at full speed. Inaction, the deliberate decision to allow market forces to run our affairs, and refusal to intervene (even to regulate fraud or deal with destabilising forces) allowed the proliferation of parasitic activities that are commonly found in a financialised economy. In short, financialisation has not evolved naturally—rather, it is a product of public policy choices motivated by a race among the political elite to serve the financial oligarchy.  

The link between financialisation and deindustrialisation has been highlighted by a number of economists who observe the negative impact of financialisation on value added and employment in manufacturing industry. This link is conspicuous in reported data. For example, consider the annual data (displayed in the chart) on a measure of the financialisation of the US economy, which is the IMF’s index of “financial development”, and manufacturing employment, both measured as indices that take the value of 100 in 1980. Between 1980 and 2000, the financialisation of the US economy was running full steam ahead while manufacturing employment (the number of people employed in the manufacturing industry sector) was following a declining trend, with the usual cyclical ups and downs. Even though the pace of financialiastion has slowed since then (because there is a limit to the financialisation of the economy) manufacturing employment continued to decline. The (negative) relation between financialisation and manufacturing employment, as represented in the chart, can be seen more clearly by looking at the smooth trends of the two variables. Negative correlation is conspicuous: manufacturing employment has been shrinking at a diminishing rate, while financialisation has been rising, also at a diminishing rate.    

Those who reject the proposition that deindustrialisation and financialisation are two sides of the same coin (blaming deindustrialisation on China or otherwise) would suggest that what the chart shows is correlation, not causation. However, theory, intuition and observation of the facts on the ground tell us that the association between financialisation and deindustrialisation represents causation and not (spurious) correlation. Financialisation has a negative impact on manufacturing industry because of its adverse effect on capital accumulation. In a financialised economy, non-financial firms spend less on real capital accumulation. Financialisation imposes short-termism on management and curtails animal spirits with respect to real investment in capital stock, the outcome being increasing preference for financial investment to generate short-term profits from financial transactions that add no value whatsoever. It also drains the internal means of finance available for real investment purposes, owing to increasing dividend payments and stock buy-backs.  

By observing the profits and the potential increase of management compensation provided by financial transactions, non-financial firms shift from their primary activity of producing goods and services to financial activities for the purpose of making easy and quick “buck”. Financialised accumulation has implications for how the economy works. If companies can make more money by trading financial assets than by manufacturing products, they are unlikely to invest in new technology, opting instead to expand their finance departments to the detriment of other areas. This is why non-financial firms have become “financial rentiers”. We should not forget that the productive sectors of a financialised economy (including manufacturing industry) experience the adverse effects of the brain drain inflicted on them by the financial sector. Scientists and engineers leave labs and factories, take off their lab coats and uniforms, and rush (in suits and ties) to utilise their brain power in parasitic activities such as the pricing of “exotic” financial assets.  

An anecdotal “evidence” for the proposition that China has played a role in the deindustrialisation of American and the West in general can be found in a story told by Paul Krugman, a Nobel Prize winning economist, in a 2011 article in The New York Times. The story is about a Russian immigrant, an engineer by profession, who had just arrived in the US. The Russian engineer made the following observation: “America seems very rich… but I never see anyone actually making anything”. Krugman thought that the observation made by the Russian engineer became increasingly accurate over time, which led him to suggest (at the risk of being called a “Putin propagandist”) that “Americans made a living by selling each other houses, which they paid for with money borrowed from China”. This is an accurate description of the status quo as reflected in the trends displayed by the chart. Deindustrialisation and financialisation have not occurred naturally, and they are indeed two sides of the same coin.    

Financialisation and Manufacturing Employment in the US (indices, 1980=100)

Financialisation: Measurement, Driving Forces and Consequences
By Imad Moosa, Professor of Economics, Department of Economics, Kuwait University, Kuwait is available now.

Read the introduction and other free chapters on Elgaronline

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The global Basic Income debate

August 2, 2023


By Malcolm Torry, University of Bath, previously London School of Economics, Basic Income Earth Network (BIEN) and formerly Citizen’s Basic Income Trust.

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The modern debate about Basic Income—an unconditional income for every individual: sometimes called a Universal Basic Income, a Citizen’s Income, or a Citizen’s Basic Income—can be dated from the founding of the Basic Income Research Group in 1984. The Basic Income European Network (BIEN) soon followed in 1986. For the following thirty years the subject remained a minority interest. Once every two years an international congress was held; most of us knew each other; and I could honestly say that I had read everything written on the subject in English as well as some of the books and articles in other languages.

But then everything changed. Opinions differ as to precisely when that happened, but it was about ten years ago. And inevitably opinions differ as to why it happened. I suspect that there was no single factor, but rather a combination of them: successful pilot projects had taken place in Namibia and India; the Swiss were preparing for a referendum on the subject; the Finns were discussing a minor experiment with something similar to a Basic Income; the fake news that Finland was planning to give everyone a Basic Income began to circulate, and try as we might we couldn’t stop it; and the UK had seen the first mainstream newspaper article on the subject for twenty years in The Guardian following the publication of my Money for Everyone: the first general introduction to the subject for nearly fifteen years. BIEN’s international congresses became annual events; a journal, Basic Income Studies, was founded; think tanks and academic departments piled in; and publications multiplied. Nobody can now say that they have read everything on the subject. A personal consequence was that what had been a half a day a week voluntary task quickly became an almost full time one, so I had no option but to retire early from the post of Team Rector of a large and busy South London parish in order to give to Basic Income organisations and research the time that they needed. If we count second editions, I have now written twelve books on the subject, and it has been a particular pleasure to have worked with Edward Elgar on four of them: A Modern Guide to Citizen’s Basic Income: A multidisciplinary approach (2020), Basic Income—A history (2021), A Research Agenda for Basic Income (2023), and Unconditional: Towards unconditionality in social policy (forthcoming).

Whilst there are now thousands of books and articles on Basic Income, what sets those four books apart is their somewhat obsessive concern for clear definitions and the best available research. Agreed definitions and high quality research matter, and the debate suffers when they are neglected.

To take a recent example: The Government of Ontario called an experiment with payments that varied with the recipient’s household structure and other income a ‘Basic Income Pilot Project’. A means-tested and household-tested income is a long way from unconditionality, so the experiment was not a ‘Basic Income pilot project’ as that phrase might normally be understood: but it has often been discussed as if it was one. And a number of recent United States experiments that have employed ‘Basic Income’ terminology have imposed proxy means-tests, again disqualifying them as Basic Income pilot projects. This matters, because only if we all understand the same things by the same words can we communicate accurately; and if we mean different things by the same words then misunderstanding is bound to occur. The problem that we now face is that the global extent of the Basic Income debate means that a) it is more important than ever that definitions should be agreed and that we should all stick to them, and b) it is more difficult than ever to achieve agreed definitions and just as difficult to ensure conformity with definitions over which consensus might have emerged.

Just as important as agreed definitions is the employment of the best available research methods. For instance: A particular contribution that the UK has made to the Basic Income debate is microsimulation research. A Basic Income would never be implemented on its own because it would have to be paid for by implementing new taxes, adapting existing taxes and benefits, or creating new money. Whilst a Basic Income is always an unconditional income for every individual, a ‘Basic Income scheme’ is a specified level of Basic Income along with the funding method fully specified and changes to existing taxes and benefits also fully specified—and there is an endless number of different ones, all with different effects. The only way to ensure that a Basic Income scheme would not increase poverty or inequality, would not tip low-income households into deeper poverty, would be affordable, would take people off means-tested benefits, and so on, is to employ microsimulation: a computer programme that employs a vast real-world dataset to predict what would happen in the real world if a particular scheme were to be implemented. In the UK we have discovered that there is a fairly narrow range of Basic Income levels that would be feasible. The existence of such robust research does not stop campaigners advocating for high Basic Incomes that they should know by now would impose deeper poverty on poorer households, and neither does it stop Basic Income’s opponents from employing a particular infeasible Basic Income scheme to vilify the whole idea of a Basic Income: but it does mean that the research results are available for anyone who wants an intelligent debate about Basic Income and how it might be feasibly implemented.

This is just one example of the importance of employing the best available research. The same applies to every aspect of the Basic Income debate. Readers might tire of the way in which my books are strewn with references, but they are essential, as are the long bibliographies that contain only high quality social science research and not some of the less well evidenced books that my readers sometimes hope to find there.

Both clear definitions and high quality research matter, which is why I was particularly pleased to be asked to write the Research Agenda for Basic Income for Edward Elgar. It starts with a thorough discussion of definitions, and then outlines both the research that is already available and the research that now needs to be done.

To be personal again: It is a pleasure to see so many organisations and individuals now involved in the global Basic Income debate. In order to give to new generations of researchers, educators and advocates the social space that they need to run the organisations, hold the conferences, and write the books and articles that the debate now needs, it is high time for some of us who have been involved for forty years to leave the field. Unconditional will be my last book on social policy, and I look forward to seeing how the next generation develops the global debate on Basic Income and on unconditionality more generally. I hope that some of them will publish with Edward Elgar.  

A Research Agenda for Basic Income
By Malcolm Torry, University of Bath, previously London School of Economics, Basic Income Earth Network (BIEN) and formerly Citizen’s Basic Income Trust is available now.

Read the introduction and other free chapters on Elgaronline

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