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”.

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Oriol Amat and Pilar Lloret identify the warning signs to identify whether fraud has occurred or is likely to occur in a business.

Accounting fraud causes serious damage. In many cases, it ultimately brings down the company concerned and causes significant losses to those who have placed their trust in it, be they shareholders, employees, banks, suppliers or other interested parties. It is therefore a good idea to detect fraud before it is too late.

[…]

Global Goals Week is annual week of action, awareness, and accountability for the Sustainable Development Goals which this year falls between the 15^th and 24^th 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.

[…]

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

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)

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