Jespersen Macroeconomic Methodology Sustainability PostKeynesian economics and sustainability

Jespersen Macroeconomic Methodology & Sustainability

Post-Keynesian economics and sustainability I will speak about how to make a proper sustainability analysis, when the ‘world’ is characterized by: • Micro- and macro-uncertainty, • effective demand is the driving economic force in a capitalistic system ---------------------------- to secure sustainable development is a policy issue

Figure 3. 1: Macroeconomics is a sub-discipline of social sciences Frame of nature Macroeconomics Law Society as a whole Sociology Political science

Figure 2. 1: Critical Realism methodology (Retroduction) WORLD 1 The real level: (Reality) The cognitive veil Ontology History Mappi ng Tendencies Tests WORLD 3 The operational level: recommendations WORLD 2 The analytical level: Landscape Theory/Model Results

• Keynes's vision, which one can trace back to his youth, has to do with the logic of choice, not under scarcity, but under uncertainty (Skidelsky, 1992: 538) • By ”very uncertain” I do not mean the same thing as ”very improbable”. (Keynes, 1936: 148). • Keynes’s macroeconomics: What are the systemic consequences of individual decision making under uncertainty?

Post-Keynesian macroeconomics Post-Keynesian macroeconomists have struggled to develop a methodology which can analyse an open, i. e. undetermined, macroeconomic system, where: Effective demand is the dynamic force in a capitalistic market economy. It is determined by the sum of firms’ uncertain expectations about: • • • Future demand for goods and services Profitability Available credit Which all three are preconditions for production being undertaken This is mainly a flow analysis

Sustainability consists of long-term, stock-related phenomena Sustainability is influenced by macrouncertainty related to: 1. Effective demand environmental impact + consequences of: 2. Exhaustible resources become more scarce 3. The speed and impact of environmental change is partly unknowable – contamination and climate disruptions 4. Population in the underdeveloped countries is growing 5. Technological potentials

But, individual firms are largely unaware of these hardly observable and accumulative effects. Hence, they are not a part of production decisions based on effective demand. èHence, it is a policy prerogative to handle these fundamental macrouncertainties èWe are in search of a relevant methodology for this analysis

This is why post-Keynesian economics is so exciting!

Macro-uncertainties in the long run! • The irony of the long run analysis is that mainstream economics concludes, that in the short run there might be deviations from a stable growth trend; but in the long run we are back on (equilibrium) track – no uncertainty is devoted to long run equilibrium • Post-Keynesians take the reversed stand: the longer the period the less we can know! • Hence, we need stabilizing policies

Long-term productivity and sustainable development • As far as I know, Keynes never wondered about the relationship between growth, environment and exploitation of natural resources. Pigou had given the solution to market externalities in his welfare economics from 1920. • Keynes was more concerned about the positive implications of increased productivity, which could release labour from working!

Increased labour productivity Within the Economic Possibilities for our Grandchildren, mentioned earlier, he made a calculation of a trend in productivity of 2 percent p. a. - which quadruples production capacity in 70 years (two generations)! One political question is – should we increase consumption or leisure time? That decision cannot be made individually in the labour market.

Or should politicians reduce the environmental pressure! • Which is even harder to decide upon individually, because the benefits are mainly global.

Effective demand has to be guided at the macro/global level • Because production/consumption are the main sources of pollution.

• Why not negotiate globally production limits – like CO 2 - caps? • Would that ‘kill’ the incentive to produce? • Quite the opposite – only the best firms will survive the intensified competition

Let me conclude • The unfortunate thing is that Post-Keynesian macroeconomics without environment issues is like Hamlet without the Prince – it hardly make sense. • Macro-uncertainty becomes increasingly dominant – because we simply do not know the future. • We have scenarios, but no knowledge (Environmental impact is different from astronomy!)

• Fortunately the ‘principle of effective demand’ can be expanded to undertake fundamental environmental uncertainty, if governments have the political will (and courage). • They could agree on an internationally binding ceiling on resource exploitation and pollution. That would reduce longer term uncertainty and make environmental costs more transparent.

• Without international regulations, it seems unavoidable that poor people and poor countries will be hit the hardest through deteriorating living conditions. • Whereas, those countries, which have the economic capacity to undertake real environmental changes, have the least incentives to do so – they are in a stronger position to protect themselves against the negative impact of changed climate and increased migration. • Hence, moral hazard and free riding are barrieres for undertaking sustainable development – because, it is too expensive - as my country-man Bjørn Lomborg uses to say.

That was my story Thank you For your attention