Post Keynesian Theory and Policy

Post Keynesian Theory and Policy

A Realistic Analysis of the Market Oriented Capitalist Economy

New Directions in Post-Keynesian Economics series

Paul Davidson

How did economic “experts” worldwide fail to predict the financial crisis of 2007-2008? Eminent economist Paul Davidson discusses how mainstream economic theory may not be applicable to the world of experience. Post Keynesian theory is designed to be applicable to the real world, and this book demonstrates how applying it to policy formulation could help practically resolve economic problems. Davidson goes on to demonstrate how many Post Keynesian economists warned of the impending financial crisis as early as 2002.

Chapter 9: Globalization, international trade and international payments

Paul Davidson

Subjects: economics and finance, history of economic thought, post-keynesian economics

Extract

Keynes’s general theory explains that increases in spending on goods and services create additional profit opportunities for business firms. It follows that the managers of these business firms would be encouraged to hire additional workers whenever additional profit opportunities exist. In the closed economy model of most textbooks, where all transactions are among residents of the same national economy, it is implicitly assumed that the additional spending would come from domestic households, domestic business firms and/or federal, state or local governments to be spent to purchase the output produced by enterprises located in the domestic economy. Once the analysis is placed into a globalized market system involving many separate nations things change somewhat. For example, spending by US households, business firms and/or government to purchase products produced in foreign nations (i.e., imports) creates profit opportunities and jobs in the foreign nation and not in the domestic economy. On the other hand, demand by foreigners for the products of domestically located business firms (i.e., exports) creates profits and jobs for workers in the domestic economy. If, in any year, exports from the United States approximately equals the imports into the United States, then the foreign job creating effects of US imports and domestic job creation in US export industries will approximately offset each other.

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