We can imagine modern capitalism as bopping from one crisis to another – interview with Louis-Philippe Rochon

Louis-Philippe Rochon, Associate Professor of Economics and the Director of the International Economic Policy Institute at Laurentian University (Canada), gave an interview to Kristóf Lehmann after holding a fascinating lecture at the course of the MNB Department. Mr. Rochon is the founding co-editor of the Review of Keynesian Economics, and co-director of New Directions in Post-Keynesian Economics, a book series at Edward Elgar. He is on the Editorial Board of the International Journal of Political Economy, Ola Financiera, and the Problemas del Desarrollo, Revista Latinoamericana d’Economia. He has written over 100 articles and written or edited more than 16 books. His areas of research include monetary theory and policy, financialization, and post-Keynesian economics.


Kristóf Lehmann (KL): Do you think that the economic community learned its lesson after the crisis?

Louis-Philippe Rochon (LPR): Not at all.  At first, I think some did, and undoubtedly some have. But as a whole, no.  From 2007 until 2010 or so, I would go to professional conferences and there were so many papers on the crisis.  What happened? What were the causes? What are the implications for theory? But soon after, those papers disappeared, and it was business as usual. The profession still largely believes in deregulation and liberalization, still believes in microfoundations, still believes in self-regulated markets, albeit maybe now with some frictions.  The DSGE model has proven to be completely useless, but no one is leading the charge to abandon it.  At best, the profession is suggesting the possibility of peaceful coexistence, i.e. many different models being recognized as legitimate.  For me, that is clearly not enough. Those in the mainstream say there is no alternative.  But there is one. They just don’t bother looking past their mainstream noses.  Post-Keynesians and heterodox scholars have much to offer in terms of understanding the real world.

KL: Some say that research and publications are strongly driven by mainstream thoughts and assumptions. As the founding editor of the Review of Keynesian Economics, how do you see the publication opportunities for different economic scholars in the top economics journals?

LPR: To answer this question, one must consider the sociology of our profession.  Ours is an extremely closed profession: economists don’t deal well with criticism.  Add to that the fact that there exists an unhealthy monolithism in economics, and the whole thing becomes unbearably depressing. Currently, if your paper does not have microfoundations and a DSGE model, then you probably won’t be able to publish in top journals.

But this does not mean you can’t publish in second-tier journals, which would be a great improvement over current conditions. To be honest, I waiver all the time between great hope and great desperation when it comes to the possibility of heterodox economists being taken seriously. But since the crisis, a number of issues are being explored by orthodox economists.  I think this represents an opportunity to carry out research in a way that would be understood by some in the mainstream without giving up the integrity of what heterodox economics is about.

KL: Our world is changing dramatically due to technologic innovations, robotics and IT applications. Is it possible for university level (economics) education to keep up with these changes?

LPR: I don’t see why not. The question is whether these innovations change our basic understanding of economics, and if so, how? For instance, the rise of financialization was well understood by heterodox economists, and many are doing excellent work in this area, and incorporating key elements in their courses.  But to do that, we must be able to understand the real world, and how these changes affect it.  In this sense, Keynes, Kalecki, and Marx, still provide a vital analysis of contemporary capitalism.

KL: If you could change three assumptions or principles in mainstream economics what would you suggest?

LPR: This is a difficult question to answer largely because as a post-Keynesian I would change every single assumption.  We really should; but for the sake of argument, I am prepared to say that there may be a few assumptions that are essentially correct (although to be honest, I cannot think of any).  What is encouraging is that some more enlightened orthodox economists are challenging many of these assumptions, what we call the ‘dissenting mainstream’.  Indeed, some have accepted the notion that central banks no longer control the monetary base, some are even investigating the relationship between monetary policy and income distribution.  Notions of hysteresis are creeping in, and income distribution is increasingly being taken seriously as a detriment to growth. The problem of course is that none of these studies refer to the work of post-Keynesians, which is quite disappointing.

So, to answer your question, I would begin with a blanket rejection of microfoundations and the DSGE model, which has no place in a money-using Keynesian world characterized by fundamental uncertainty.  Economic agents, banks, firms, and households live in a macro world, with important institutions and social classes, and their individual decisions are based on what is happening in the world around them.  It is impossible to ignore this.  So microfoundations, the notion that everything is ultimately reduced to microeconomic analysis and as such macroeconomics is simply the aggregation of microeconomics, is wrong.  What we need are macrofoundations of microeconomics.  For instance, when a bank lends, it does so while keeping in mind the current and anticipated levels of aggregate demand, to ensure borrowers are able to reimburse credit sometime in the future.

Second, I would also do away with the notion that inflation is a monetary or demand-led phenomenon.  While demand does play a role, there should be greater emphasis on supply-side explanations, and especially income distribution and conflict as a credible explanation of inflation. When you look at inflation in the last 2 decades, it is clear that demand has not played a role.  For instance, the dramatic increase of unemployment from 2007 to 2018 has not significantly affected inflation.  As unemployment has fallen in the last few years, inflation has not spiked. This should give economists pause, and has led some to question whether the Phillips curve relationship still holds.  It doesn’t. From here, we can then question current monetary policy based on increasing rates of interest because of the fear of inflation.

Finally, we must also get rid of the microeconomic theory of the state, where the analysis of the state is reduced to that of a household.  This has important budgetary and fiscal policy implications.  In a way, this is related to the first example, but it is worth singling out because of the harm it has done to our economies but also to workers.  Austerity makes neither theoretical nor empirical sense, and with the debunking of the (im)famous Reinhart and Rogoff paper, even less so.  It is not sufficient to be Keynesian in a foxhole, as was the case during 2009-2010.  We must think of Keynesian (heterodox) economics as a general framework of analysis irrespective of where we are in the business cycle.

Now, if you allow me a fourth one, I would also add that we should get rid of all ‘natural’ values: the natural rate of interest, the natural rate of growth, the natural unemployment rate. These are necessarily based on the idea that economies are self-correcting and self-equilibrating, and posses centres of gravitation.  After a shock, we are told there are tendencies that bring these economies back to their natural levels.  This is the wrong way of seeing the performance of economies.  This is related to the first question and the DSGE model.  There is a reason why economists did not see the financial crisis coming, and that is essentially because the DSGE model is a fair-weather model: it does not entertain the idea that a crisis can occur, and when it does, has nothing to offer in terms of useful policy.  Economies are prone to great instability, as Minsky told us, and the State has an important role to play in preventing these economies from falling into recessions and crises. Only Keynesian (heterodox) economics has anything useful and meaningful to add to that dialogue.

KL: Crisis management in developed countries had several side effects domestically and internationally. How do you see the economic outlook nowadays?

LPR: I fear that in the last 30 years or so, capitalism has changed tremendously.  We are riddled with deregulation and liberalization policies, which will only exacerbate the unstable elements of capitalism.  In turn, this has enabled the rise of a dual economy: a thriving rentier economy with soaring profits, and a struggling wage economy, with precarious jobs and declining real wages.  As a result, there is greater inequality of wealth and incomes.  This will inevitably lead to more crises. We can imagine modern capitalism as bopping from one crisis to another.  The solution is a dramatic correction in inequality, and adoption of regulations to prevent it from worsening.  Both fiscal and monetary policies have a role to play.  But I doubt very much we will do this.  It may require another crisis soon to maybe, perhaps, convince our elected leaders and the economics profession to act.

Lehmann Kristóf