What is post-Keynesian economics? Is it a unified theoretical alternative to the neoclassical perspective or is it a handy label for a variety of heterodox approaches? How does post-Keynesian theory relate to other Keynesian-influenced approaches to macroeconomics? Does macroeconomics need micro-foundations? What is money? If answers are to be found, one would expect to find them in the present two-volume handbook which includes contributions by a large number of academics who self-identify as post-Keynesian and a smaller number whose primary allegiance is to Marxian or Sraffian schools. The first volume of the handbook has 25 chapters and is focused on the origins of post-Keynesian theory and the critique of neoclassical theory. The second volume with 21 chapters is somewhat more applied and policy focused, but it also contains a good deal of methodological discussion. In addition, a comprehensive introductory chapter written by editors is included in both volumes. The net result is a handbook of enormous scope which provides the reviewer with a near impossible task.

Faced with this problem, it is tempting to take the advice of Gay Meeks who suggests that there is no substitute for going back to a close reading of Keynes himself (II:118). Meek’s own chapter is certainly worth reading. She reviews the debates surrounding Chapter 12 of the General Theory and poses the question of whether its message is that investment is an irrational activity or whether it is rational in the sense that our means of reaching decisions is as good as it can be given the context of uncertainty and the presence of non-rational elements. Meeks briefly discusses the view of Keynes as a common sense philosopher who like Wittgenstein understood the value and necessity of vague concepts. She also touches on the ‘tortuous’ debate about whether Keynes’ theory of probability is objective or subjective – a matter which is also discussed in O Donnell’s chapter (II:C5). The latter distinguishes between two post-Keynesian approaches to irreducible uncertainty: one which sees it arising from the limitations on human cognitive abilities and the other which attributes it to the nature of the world itself. While some prominent post-Keynesians such as Davidson insist on locating irreducible uncertainty in the mutable nature of the world in itself, O Donnell notes that for many purposes, the origins may not matter. He ends his contribution with a series of questions, the last of which repeats the question as to whether irreducible uncertainty is an epistemological state of humans or an ontological state of reality (II:140). To this, the practical mind might respond: why not a bit of both?

One reason for rejecting ‘a bit of both’ is that we like our theories to have unity and precision. As Heinrich Bortis argues, how can we hope to displace General Equilibrium theory from its perch if we do not have a replacement with the same claims to generality and rigour? (II:C16). The editors have a firm view on this. They argue that there is no uniform way of tackling all issues in economics; different issues require different levels of abstraction and analysis. Shelia Dow (II:C3) goes further, arguing for pluralism not only at the level of methods but also at the level of schools of thought. Vela Velupillai points out that a complete and unified theory is simply not possible since all strands of post-Keynesian theory are underpinned by a vision of dynamic economic development, with Schumpeterian as well as Keynesian roots, for which a complete and unified theory is simply not possible (I:17). Basing himself on Reference KingKing (2003), Velupillai identifies eight precepts, some combination of which is required in any serious post-Keynesian (nonlinear, endogenous, non-stochastic) theory of aggregate fluctuations. These are aggregate effective demand, the fallacy of composition, involuntary unemployment, functional distribution, non-maximum dynamics, time-to-build, systematic uncertainty and non-ergodicity. Only one of these, time-to-build, is satisfied by mainstream real business cycle theory. Vela’s main purpose is not to criticise the mainstream but to argue that, suitably modified, the Cambridge theories of the business cycle such as Goodwin’s encapsulate many of the above precepts. Along the way, prominent post-Keynesians including Kaldor, Minsky, Davidson and even Pasinetti are taken to task for missteps of a mathematical kind. This is valuable in itself. Vela’s knowledge of mathematics extends beyond the average economist’s known unknowns and well into the realm of their unknown unknowns.

Goodwin’s structural dynamics also features alongside the work of Robinson, Stone, Pasinetti and Kaldor in the chapter (I:C13) by Prue Kerr and Roberto Scazzieri. There, Goodwin’s contribution is neatly described as a bold attempt to ‘integrate circular representation of the economic system with the analysis of its steady evolution over time’. Like Goodwin, Pasinetti sought to represent the economy in terms of a multisectoral model undergoing structural change, but whereas Goodwin focused on the instability features of a capitalist economy, Pasinetti attempted to identify the long-run dynamic conditions for full employment and capacity utilisation independently of the institutional set-up. These ‘natural’ dynamics could then be compared and contrasted with the actual course of historical systems (I:282).

Kaldor’s contribution is the main focus of Mark Setterfield’s chapter (I:C12) on endogenous growth. The Kaldorian vision is one in which growth begets growth. As the market expands, productivity increases due to increasing specialisation, learning by doing and a greater propensity to conduct research and development (R&D) and invest in capital embodying technological improvements. In this two-way interaction between demand and supply, Kaldor, like Keynes, privileged the causal role of demand which in turn led him to emphasise the importance of exports for growth. Setterfield uses Kaldor’s framework to explore how debt-financed consumption-led growth in the United States affected both the US itself and countries exporting to it. Like Kerr and Scazzieri, he points to Kaldor’s recognition that increasing returns could lead to a polarising process concentrating industry in advanced industrial countries but also spreading it once a process of cumulative development gets underway.

This brings us to question of the relevance of Keynesianism for development economics. It has been suggested that Keynes’ economics was developed with advanced countries in mind and hence has only limited relevance in the context of developing countries where the main problem is shortage of productive capacity rather than capacity utilisation. While broadly accepting this view, Dutt argues that because of its focus on the mobilisation as well as allocation of resources and its legitimating of activist state policies, Keynesianism was important for the emergence of development economics after World War II (I:C25). Taking a broad historical view of development, Kriesler argues that the Keynesian regime becomes relevant as capital accumulates and the dual nature of the economy is overcome. However, in earlier stages of development, the Marxian vision in which a reserve army of the unemployed maintains downward pressure on wages thus allowing capital accumulation without pressure on profits may have better explanatory power (I:C23). Thirlwall (I:C24) accepts that Keynes did not directly address issues of economic development but that he did so indirectly through his focus on unemployment and through his insistence that what drives the capitalist economy is the decision to invest not the decision to save (I:559). Whereas the liberalisation school favours high rates of interest to encourage saving, Keynes would have favoured low rates to encourage investment, and this, as Thirlwall points out, is in line with the empirical finding that gross domestic product (GDP) growth is highest in countries with real interest rates close to zero. Much of Thirlwall’s work on development has focused on the modelling of balance of payments constrained growth (BPCG) which explicitly takes into account the growth of imports as income grows and the likelihood that this may constrain the overall rate of economic growth. Here, he focuses on the deflationary bias resulting from the impact of commodity price fluctuations on developing countries’ balance of payments. This bias is exacerbated by the presumption of the Washington Institutions that deficits are caused by countries living ‘beyond their means’ and hence to be treated by means of deflationary policies. In his chapter on long-run growth in open economies, Blecker considers both Kaldor’s export-led cumulative causation (ELCC) and Thirlwall’s BPCG models (I:C16). He notes that both recognise the importance of aggregate demand constraints in determining a nation’s output and see those constraints as lying primarily in the international domain rather than in the domestic economy. While both models have found backing in the literature, empirical support for the BPCG models was found mainly in very long-run data reflecting the slow rise of domestic incomes, while support of ELCC models was found in studies with a medium-run perspective.

In his chapter, Velupillai emphasised the importance of avoiding maximisation assumptions in constructing dynamic models with a Keynesian and/or Schumpeterian pedigree. The maximisation issue is also taken up in Nell’s chapter on re-inventing macroeconomics (I:C15). As Nell points out, economists have always assumed that agents look for the best deal, the best price or at least act as if they do so, and this certainly is a form of optimising which it would seem unreasonable to abandon. Nell regards this form of optimising, which he calls optimising 1, as a necessary foundation for our definitions of economic variables. Nell sees the trouble beginning with optimising 2 which starts innocuously enough with assumptions by Marshall and his followers that firms settle on the minimum cost point of operation and that households figure out the best combination goods. Eventually, however, the concept was pushed beyond the realm of plausibility with households assumed to solve complex intertemporal maximisation problems and firms assumed to be able to choose the least cost method of production. As Nell insists, methods of production are developed not chosen, outcomes are often path dependent and agents are not generally in possession of the relevant knowledge or probabilities. When it comes to the macroeconomy, Nell identifies two broad approaches. The Keynes–Kalecki approach sees macroeconomics as the study of how the system works and how the different parts interlock and react upon each other. By contrast, the neoclassical version examines the aggregate properties of a group of abstract agents making rational choices over time, and the whole represents no more than the aggregate of parts.

The issue of whether the appropriate object of investigation is the whole or the parts that make it up is a fundamental one for post-Keynesians. It is touched on in several of the contributions to these volumes and discussed in detail in S. Abu Turab Rizvi’s chapter on the search for micro-foundations of macroeconomics (II:C1). Rizvi traces the history of this search and its eventual discrediting and poses some interesting questions about the way in which the prevailing monoculture in academic economics has been generated and sustained. Rizvi is clear that, since certain properties are emergent at the macro-level, explanation should also be at that level. He explains that recognition that the macro-unit is made up of smaller units (ontological reduction) does not necessarily require that explanation starts with the smaller units (explanatory reduction).

If we follow Nell in broadly accepting optimisation 1 while rejecting optimisation 2, what does this mean for post-Keynesian attitudes towards neoclassical theory? On this, there appear to be two broad ‘schools’ of thought within the post-Keynesian fold. While rejecting the general equilibrium approach, Paul Davidson is happy to erect the macroeconomic edifice on Marshallian partial equilibrium foundations. Indeed, part of Davidson’s chapter is taken up with the provision of Marshallian foundations for Keynes’ aggregate demand and aggregate supply schedules (I:C5). On the other hand, Heinz Kurz argues that Sraffa totally rejected the marginal method and the associated theories of value and distribution (I:C2).

For Davidson, the key features of post-Keynesian economics are its recognition that economic activity takes time and is carried out in conditions of fundamental and inescapable uncertainty. According to Davidson, in such an economy,

In Davidson’s characterisation, money and deep uncertainty go together, and the existence of both ensures that Say’s law cannot hold. All post-Keynesians agree about the importance of analysing a monetary production economy, but as Randall Wray writes at the conclusion of his chapter, money is arguably the most difficult and controversial subject in macroeconomics (I:6). Wray’s discussion of money is based on three propositions: goods don’t buy goods, money is debt and default on debt is possible. Wray suggests that the orthodox story which sees money arising because of the inefficiencies of barter implies that money is not essential and not necessary for economic analysis. On the contrary, Wray argues, money is the object of production. All commodity production is intended to result in sales for money. It also begins with money which is required for the purchase of labour power and other produced means of production. Another reason why orthodoxy has no role for money is that it (orthodoxy) rules out the possibility of default. In such circumstances, everyone can borrow as much as they want at the risk-free interest rate, and sellers would always be willing to accept any buyer’s IOU. There would be no need for cash, no liquidity constraint, no need for institutions to assess creditworthiness and no need for a lender of last resort. By contrast, in a world of fundamental uncertainty, liquidity has value and financial institutions are important because they issue liquid IOUs with little or no default risk which are classified as money.

Wray’s criticisms of orthodoxy are echoed in Colin Roger’s evaluation of New Keynesian monetary theory which he sees as attempting the self-contradictory task of providing micro-foundations for monetary theory using moneyless economic models (I: C8). While most post-Keynesians view money as endogenous with the supply of money being determined by the demand for loans, several details remain contentious. The issues arising and ways of resolving them are discussed in the chapters by Victoria Chick and Sheila Dow (I:C7) and Guissepe Fontana (I:C9). These are followed by two chapters in which the monetary theories of Wynne Godley and Hyman Minsky are explored. In his chapter on Godley, Marc Lavoie provides a very good summary of the main features of post-Keynesian monetary analysis. He particularly emphasises that money supply is credit driven and argues that contrary to the standard view, this implies that the exchange rate regime does not have consequences for money and credit and that monetary policy can be effective under a fixed exchange rate regime (I:C10). J.E. King’s chapter on Hyman Minsky provides a succinct exposition of the financial instability hypothesis and extends it to take account of developments in financial capitalism in the era of globalisation (I:C11). Minsky’s main insight was that, in a world characterised by fundamental uncertainty, the expectations of lenders and borrowers fluctuate a great deal. Depression gives way to confidence, which grows into exuberance before collapsing into despair. The downturn brings with it a spate of bankruptcies, falling asset prices, pessimistic expectations and falling profits. This impacts on the ‘real’ economy with output and employment falling due to falling assets prices, reduced expectations and credit rationing. Minsky was a strong proponent of government intervention to allay the effects of recession, but he did not believe that financial instability was avoidable regardless of the vigilance of the central bank. The speculative and innovative elements of capitalism would eventually lead to usages and relations that had not been anticipated by central banks.

Whatever the limitations of central bank supervision in terms of monetary stability, there continues to be widespread belief that central banks have been effective in targeting inflation and that this effectiveness has been supported through central bank independence (CBI). Jorg Bibow (II:C13) points out that the evidence for CBI as the guarantor of low inflation is far from compelling. Moreover, there is even less evidence that it leads to improved economic performance. Bibow maintains that the rise in CBI is a relatively recent phenomenon which is at least in part attributable to Germany’s insistence on it as a sine qua non in the context of European Monetary Union (EMU). While Germany’s commitment to CBI is popularly believed to be due to its experience of hyperinflation, it is interesting to note that actually the German Reichsbank was independent when the country experienced its worst hyperinflation in the early 1920s.

There is general recognition that Kalecki’s ideas and models were important for the development of post-Keynesian theory, and several chapters make reference to aspects of his work. Robert Dixon and Jan Toporowski, whose chapter is devoted exclusively to Kalecki, point out that he shares with Keynes an emphasis on the deficiency of effective demand and volatility of investment as normal features of the capitalist economy. However, whereas Keynes saw these problems as arising from the presence of uncertainty and the nature of money, Kalecki attributed them to the fact that the means of production were monopolised by the capitalist class. This class recognised that full employment would deprive them of a means of disciplining labour. Moreover, not having access to means of production, unemployed workers were unable to employ themselves or form viable co-operatives.

The question of relationship between Sraffa and Keynes and between Sraffians and post-Keynesians is much less clear cut than that between Kalecki and Keynes. Two of the chapters on Sraffa deal with this issue. The third by Ajit Sinha deals solely with the interpretation of prices in Sraffa’s system (I:C4). His argument is that they are not to be interpreted as long-period prices. This position is shared by Richard Arena and Stephanie Blankenburg who, like Sinha, view the uniformity of the rate of profit in Sraffa as a convention (I:C3). On the other hand, Heinz Kurz (I:C2) is comfortable with the ‘long-run’ interpretation as also is Heinrich Bortis (II:C16) who insists that the long-period equilibrium is not imaginary but an essential element of the real world. Kurz’s chapter provides an account of how Sraffa developed his critique of marginalist theory and discusses its implications for a theory of employment, output and growth (I:C2). He argues that Sraffa’s demonstration that methods of production cannot be ordered monotonically with regard to capital intensity is sufficient to show that it is not possible to rely on the principle of substitution to bring about a tendency towards full employment as implied in neoclassical theory. Consequently, without having to invoke deep uncertainty and the role of money, Sraffa could agree with the revolutionary message of the General Theory including its identification of the key importance of investment. However, according to Kurz, orthodoxy was able to overwhelm what was truly novel in Keynes because of shortcomings in Keynes’ own theoretical apparatus.

Although several contributions acknowledge the importance of investment in Keynesian economics, the two volumes in hand do not have a great deal to say about it. As noted earlier, Meeks poses the question, if we dispense with the marginal efficiency of capital and IS schedules, are we to regard investment as a non-rational activity? (II:C4). Holt points to Keynes’ recognition that public investment was not just a way of achieving full employment but also a way of making sure that there was adequate investment in areas neglected by the private sector (II:C14). Arestis and Sawyer (II:C15) note that many European Union (EU) countries and regions suffer from a lack of productive capacity and that there are generally supply-side as well as demand-side constraints on the achievement of full employment of labour. They argue that addressing this issue requires industrial and regional policies not labour market policies along the lines of deregulation and increased flexibility. This is surely right, and it is somewhat disappointing that neither regional policy nor industrial policy is given chapter-long treatment.

While the balance of most articles in the two volumes is in the direction of theory, the chapters by James Forder on the Phillips Curve, James Galbraith on personal income distribution and Lance Taylor on the Crisis in the United States are excellent examples of the insight that can be provided through post-Keynesian inspired approaches to applied topics. Based on his examination of the post-war literature on wage setting and employment, James Forder explores the development of economists’ faith in the existence of the Phillips curve – the idea that there is a definite and stable relationship between the rate of unemployment and the rate of inflation. He argues that, although without foundation, this faith has become embedded deep in the psyche of most economists and has become an obstacle to understanding both unemployment and inflation. Forder argues that we need to ditch it completely and return to the older approaches in which attention was paid to the institutional structure and to social and ethical elements of the wage bargain (II:C12). James Galbraith reports on the work of the University of Texas inequality project which shows that existing industrial, sectoral and regional data collected by the statistical bureaucracies in most countries can be used to fill the gaps and repair the errors which plague standard measures of economic inequality. Among the interesting findings emanating from this work is that pay inequality within the United States and Europe rises and falls with unemployment over time, thus indicating that macroeconomics can provide a theoretical framework capable of explaining the relationship between inequality, unemployment and growth in a coherent way. In terms of the broader world economy, Galbraith suggests that his findings support the basic intuition of Kuznets that the level of inequality is associated with the level of income. However, he argues that the relationship seems more complicated than the inverted U proposed by Kuznets perhaps being better represented as a sideways S (II:C17). Using time series data on factors such as productivity, capacity utilisation, interest and profit rates, borrowing, asset prices and balance of payments components, Lance Taylor examines changes in the US macroeconomy in the post-war period and identifies the factors contributing to the current recession. His argument is that while deregulation and innovation in the financial sector were sufficient to cause the financial crash, transmission to the wider economy was enabled by household borrowing to maintain consumption in the face of deteriorating earned income. Booms in asset pricing facilitated by low interest rates provided the necessary collateral. The accompanying trade deficit was financed by capital inflows from the rest of the world. While all of the factors mentioned contributed to the present crisis, Taylor concludes that the whole process would not have been possible without the shift in political economy away from Keynesian assumptions and that the political environment will have to change if a relapse is to be avoided.

Part of that change will involve the resurrection of some old themes in political economy as well as attending to newer issues such as environmental policy (Perry, II:C18). One would also expect a revival of interest in the classical themes of capital accumulation, technological change, production and the distribution of income as well as the post-World War II themes such as planning, industrial policy, price stabilisation and the ethical considerations surrounding the wage bargain and inequality. None of this will be easy. Change will be resisted because, as Keynes noted, ideas are not separate from interests. They thwart some and serve others.

As reflected in these volumes (including the many excellent chapters not referred to in this review), post-Keynesians have succeeded in showing that neoclassical theorists have failed to provide an adequate theory of a monetary production economy which is evolving over time. More positively, post-Keynesians have preserved and extended Keynes’ insights and asserted the need for a system-wide analysis of the macroeconomy which focuses on explaining the empirically observed reality. Whether post-Keynesians succeed in addressing the challenges ahead remains to be seen, but as Reference KeynesKeynes (1957) wrote in the last paragraph of the General Theory, ‘At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it; eager to try it out, if it should be even plausible’ (p. 383). This is the challenge for post-Keynesians. The editors of these volumes have provided the groundwork on which to build.