European and Latin American Experiences
New Directions in Post-Keynesian Economics series
Edited by Noemi Levy and Etelberto Ortiz
Introduction: what are the issues now? Controversies about disequilibria, economic growth and economic policies
Mainstream economic theory and economic policy actions are based on an intellectual approach that establishes economic equilibrium as the central reference point around which economic and social processes are discussed, particularly the mechanisms that generate economic growth and redistribution of profits (Lucas, 1976; Goodfriend, 2002; Woodford, 2003). The major limitation of this theoretical approach is that it cannot account for changes in direction, or indicate how economic conditions change (Hicks, 1946; De Vroey, 1999); the use of comparative statics, in an ideal case, enables analysis of the change from one state of equilibrium to another. However, it does not explain the transition from one position to another over time (Woodford, 2003). Of particular importance to the situation currently facing the international economic system is the dismissal or improper interpretation of financial disequilibria (see Woodford, 2009). The major changes to the dominant theory, presented today by the New Macroeconomic Consensus (Woodford, 2003), are, first, a greater mathematical formalization and sophistication that does not offer explanations of the dynamic nature of the capitalist economy and, therefore, this perspective still fails to provide consistent arguments about the nature of the phenomena that supposedly established a balanced trajectory. Second, due to institutional changes (movement of capital in the international market) monetarism (which proposed control of monetary aggregates, Friedman, 1968) was displaced by the Austrian School’s monetary approach, reformalized in the New Classical Consensus (which rejects the conventional treatment of the quantity theory of money). The latter view is presented on the basis of a model where the money market is replaced by the interest rate, which is determined by a reaction function of the central bank (Hüfner, 2004) that deploys monetary policies aimed at stabilizing prices. This approach retains the postulate of the ‘Treasury Perspective’ (first raised in the 1930s), which is completely opposite to fiscal deficits and in favor of the reduction of wages (Hawtrey, 1913).