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## Über dieses Buch

The 4th volume of Davidson's major contributions to the economics and policy debates of our times, this book contains articles, newspaper columns and papers that explain why Keynes's General Theory , as developed by Post Keynesian theorists, provides important policy implications for the economic problems of the 21st century global economy.

## Inhaltsverzeichnis

### 1. Is a Plumber or a New Financial Architect Needed to End global International Liquidity Problems?

Abstract
How one interprets volatility in the international financial markets and therefore chooses a policy stance regarding these markets depend on the underlying economic theory that one explicitly, or implicitly, utilizes to explain the role of financial markets in a market-oriented entrepreneurial economy. There are two major alternative theories of financial markets: (1) the classical efficient market theory (hereafter EMT) and (2) Keynes’s liquidity preference theory (hereafter LPT). Each produces a different set of policy prescriptions. EMT advocates call for a liquidity plumber to patch up some short-run stresses in today’s efficient international financial flow system. LPT proponents believe that the current system is structurally flawed. Consequently, it will require an architect to build a new international financial structure on more solid foundations.
Paul Davidson

### 2. Capital Movements, Tobin Tax, and Permanent Fire Prevention: A Response to DeAngelis

Abstract
With the liberalization of international financial markets in the past two decades, cross-border financial transactions have grown to epic proportions. This growth, DeAngelis (1999–2000) argues, has exposed “national economies to the whims of financial markets and security owners with no particular ‘national allegiance’. No government can afford to upset speculators with policies that are not compatible with the priorities of international capital”. DeAngelis claims that the result of this obsequious behavior by national governments has been to thwart Keynesian fiscal policy and to encourage the dismantling of each nation’s social safety net. DeAngelis insists that if governments are again to pursue socially desirable national public policies, then there is a need to constrain international capital flows. Unfortunately, DeAngelis states, “the two major proposals that address the problem of limiting capital mobility [the Tobin’s tax and Davidson’s clearing union plan] suffer from some major shortcoming”.
Paul Davidson

### 3. Globalization

Abstract
Keynes’s General Theory of Employment Interest and Money (1936) is developed primarily in a closed economy context. Keynes did, however, introduce an open economy analysis when he noted that
1.
trade could modify the magnitude of the domestic employment multiplier (Keynes, 1936, p. 120),

2.
reductions in money wages would worsen the terms of trade and therefore reduce real income, while it could improve the balance of trade (p. 263), and

3.
stimulating either domestic investment or foreign investment can increase domestic employment growth (p. 335).

Paul Davidson

### 4. The Future of the International Financial System

Abstract
Despite the continuing support for the “Washington Consensus” within the IMF, the World Bank and the U.S. Treasury, most astute observers of the international financial system recognize that there is something seriously wrong with the existing system. Although many recognize the symptoms of a severe malady in the system, few realize what the fundamental flaws of the system are. Accordingly, few can prescribe the correct vaccine to cure the illness and protect the international financial system from relapse.
Paul Davidson

### 5. The Declining Dollar, global Economic Growth, and Macro Stability

Abstract
A headline on the front page of the New York Times (January 13, 2005) stated, “U.S. Trade Deficit Rises to a New High; More Risk to the Dollar”. Since then The Times has reported that in January and February 2005, the monthly U.S. trade deficit was approximately $60 billion each month. In other words, Americans spent$60 billion more on imports than they earned by selling exports to foreigners. The January 2005 New York Times article noted that record trade deficit figures “confounded predictions that the deficit would diminish with the weakening of the dollar”.
Paul Davidson

### 6. Is Fixed Exchange Rates the Problem and Flexible Exchange Rates the Cure?

Abstract
Since the breakdown of the Bretton Woods system in 1973, orthodox economists have promoted the conventional view that freely fluctuating exchange rates in a laissez-faire market system are efficient. Every well-trained mainstream economist, whose work is logically consistent with classical theory “knows” that the beneficial effects of a freely flexible exchange rate are
1.
the impossibility of any one country running a persistent balance of payments deficit;

2.
that each nation may pursue monetary and fiscal policies for full employment without inflation independent of the economic situation of its trading partners1; and

3.
that the flow of capital will be from the rich creditor (i.e., developed) nations to the poor debtor (i.e., less developed) nations. This international capital flow from rich to poor nations depends on a classical belief in the universal “law of variable proportions” that determines the real return to both the capital and labor factors of production. Since rich countries have larger capital to labor ratios than poor nations, the law of variable proportions indicates that the real return to capital should be higher in the poor nations where capital is relatively more scarce. Capital, therefore, should flow into the poor nation until the return on capital is equal in each country. The effect of this hypothetical classical international capital flow is to encourage more rapid development of the LDCs and, in the long run, a more equitable global distribution of income and wealth2 and a convergence of growth rates among all the nations in the global economy.

Paul Davidson

### 7. A Post Keynesian View of the Washington Consensus and How to Improve It

Abstract
John Williamson coined the term “Washington Consensus” in 1989. This term, however, means different things to different people1 — and apparently even different things to Williamson at different times. Williamson (2002) states that this consensus requires ten reforms:
1.
Fiscal Discipline. This was in the context of a region where almost all the countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.

2.
Reordering Public Expenditure Priorities. ... from things like indiscriminate subsidies to basic health and education.

3.
Tax reform. Constructing a tax system that would combine a broad tax base with moderate marginal tax rates.

4.
Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as financial liberalization, and stressed that views differed on how fast it should be achieved.2

5.
A Competitive Exchange Rate. I fear I indulged in wishful thinking in asserting that there was a consensus in favor of ensuring that the exchange rate would be competitive, which implies an intermediate regime; in fact Washington was already beginning to subscribe to the two-corner doctrine. (Williamson has championed the establishment of FEER [a Fundamental Equilibrium Exchange Rate] target zone for the exchange rate, i.e., a zone based on a fixed competitive rate plus or minus ten percent. He has argued that FEER would simultaneously achieve internal and external balance.3)

Paul Davidson

### 8. Liquidity vs. Efficiency in Liberalized International Financial Markets: A Warning to Developing Economies

Abstract
Until 1973 the postwar international payments system was, in large measure, shaped by Keynes’s thesis that flexible exchange rates and free international capital mobility are incompatible with global full employment and rapid economic growth in an era of multilateral free trade (Felix, 1997–8). This resulted in a stable international monetary system that permitted the global economy to experience unparalleled economic growth and prosperity despite widespread capital controls and international financial market regulations. Since 1973, the financial system has grown progressively more fragile with recurrent and increasingly stressful international debt and currency liquidity crises threatening the stability of the global economy.
Paul Davidson

### 9. LDCs, Institutions, and Money: A Response to Danby

Abstract
Danby makes several important comments on (1) the use of contracts and money in general, and (2) the question of internal liquidity in an open economy with flexible exchange rates and free convertibility, using Mexico as an example. Let’s take each in turn.
Paul Davidson

### 10. Dollarization, the Functions of a Central Bank, and the Ecuadorean Economy

Abstract
At the beginning of the new millennium, Ecuador abandoned the use of national money and instead adopted the U.S. dollar as its official currency for settling domestic contractual transactions. Since it is claimed that dollarization eliminates the use of monetary policy (and exchange rate policy) as weapons to cure a nation’s macroeconomic problems, is there any need for a Central Bank of Ecuador? More importantly has, or will, dollarization solve Ecuador’s macroeconomic problems and be a useful aid in providing conditions that help foster substantial real economic growth for its residents?
Paul Davidson

### 11. The Dangers of Debt Reduction

Abstract
Are drastic reductions in the federal debt a good idea? President Clinton thinks so. He plans to allow budget surpluses to accumulate over 15 years, cutting the federal debt held by the public to a percentage of total output not seen since 1917. But there are grave dangers in his proposal.
Paul Davidson

### 12. Should We End Market Liquidity?

Abstract
After the Asian contagion, the Russian default, and the Brazilian real reeling, many people are asking whether the liberalization of international financial markets that started in the 1970s has gone too far. Have liberalized financial markets become so fragile as to threaten the health of the global economy?
Paul Davidson

### 13. Last Resort for IMF

Abstract
Since 1992, the global economy has been rocked by five currency crises. Consequently, a consensus has developed that we must reduce the potential for a contagious global spread of financial crises. Even President Clinton has called for a “new financial architecture”.
Paul Davidson

### 14. Keynes and the Bear Necessities

Abstract
Since March 2000, the terrorist organization “the bears” have struck Wall Street with a devastating impact on our enterprise economic system. Al-Qaida terrorists on September 11 may have made a more dramatic impact on our way-of-life, but the number of lives destroyed by the bears may ultimately prove to be greater.
Paul Davidson

### 15. Debtor Nations Need a Financial System That Allows Them to Work Their Way to Prosperity

Abstract
The global economy is at a crossroads. We can try to muddle through with the existing defective international financial system, while hoping that minor tinkering will quarantine the devastating depressionary forces experienced by developing nations and avoid contagion spilling over to developed nations. Or we can produce a new financial architecture that not only protects all nations from experiencing the devastation of currency crises but also eliminates the persistent global depressionary pressures of the current system and therefore makes possible the potential of global full employment.
Paul Davidson

### 16. There Are Major Differences between Kalecki’s Theory of Employment and Keynes’s General Theory of Employment, Interest, and Money

Abstract
Michal Kalecki came to Cambridge as Keynes was completing his General Theory of Employment, Interest and Money. Joan Robinson noted that “without any contact either way, Michal Kalecki had found the same solution. … The interesting thing is that two thinkers, from completely different political and intellectual starting points, should come to the same conclusion” (Turner, 1989, p. 63). The question I would like to explore in this chapter is whether these two geniuses, Kalecki and Keynes, not only independently discovered the principle of effective demand but also came to the identical explanation of why there was no automatic market mechanism to assure full employment whenever a decline in investment spending occurred in an entrepreneurial economy. This is not merely an exercise in the history of economic thought. I believe that understanding the differences in Kalecki’s and Keynes’s underlying analysis of the principle of effective demand is essential to comprehending how recent events, such as the East Asian currency crisis and the Russian debt default, affect unemployment in the global economy. In the final pages of this chapter, I shall suggest how Keynes’s analysis points to a solution for today’s recurrent currency crises and high global unemployment rates.
Paul Davidson

### 17. Is “Mathematical Science” an Oxymoron When Used to Describe Economics?

Abstract
In How Economics Became a Mathematical Science, Roy Weintraub has provided a well-written fascinating book that suggests, at least to this reader, why Keynes’s General Theory was shunted to a wrong track and has never had any real impact on the theories and models proposed by rigorous mainstream economic theorists.
Paul Davidson

### 18. Samuelson and the Keynes/Post Keynesian Revolution

Abstract
For most students who studied economics in any American University during the last half of the 20th century, Paul A. Samuelson was thought to be a direct disciple of Keynes and his revolutionary general theory analysis. Samuelson is usually considered the founder of the American Keynesian school which he labeled neoclassical synthesis Keynesianism because of the classical microeconomic theory that Samuelson believed was the foundation of Keynes’s macroanalysis. As we will explain, Samuelson’s neoclassical synthesis brand of “Keynesianism” was not analytically compatible with the theoretical framework laid out by Keynes in The General Theory of Employment, Interest and Money (1936).
Paul Davidson

### 19. Setting the Record Straight on “a History of Post Keynesian Economics”

Abstract
John King has written a powerful, interesting, and useful History of Post Keynesian Economics. King states that although Post Keynesian theory mounted a major challenge to orthodox macroeconomics in the last few decades, it has “ultimately failed to supplant it” (2002, p. 1). The object of this book is to explain (determine?) why Post Keynesianism did not supplant orthodox macroeconomics (p. 1).
Paul Davidson

### 20. Responses to Lavoie, King, and Dow on What Is Post Keynesianism and Who Is a Post Keynesian

Abstract
Lavoie, King, and Dow share one common theme in their criticism of my review of King’s (2001) book A History of Post Keynesian Economics. They all object, in different ways and in different degrees to (1) my definition of the boundary lines that encompass Post Keynesian economics and (2) who, in the 21st century, should be entitled to be labeled a Post Keynesian.
Paul Davidson

### 21. The Effect of Ending Hostilities on Output and Employment

Abstract
Peace is usually considered socially desirable. Yet the historical record indicates that the ending of hostilities can cause severe economic problems in the form of a significant increase in the rate of unemployment and a downturn in national production even for the victorious nations.
Paul Davidson

### 22. Can, or Should, a Central Bank Inflation Target?

Abstract
Today’s conventional wisdom states that central banks will be very successful if they engage in developing a monetary policy that targets a specific rate of inflation. To understand whether a central bank can successfully pursue an inflation target policy we must inquire (1) what is the theory that informs us whether a central bank can target inflation? and (2) what is the mechanism that converts a specific monetary policy into achieving a specific rate of inflation?
Paul Davidson

### 23. Are We Making Progress Toward the Good Society?

Abstract
In 1988, an alumnus of the Kennedy School (Greg Davidson) and his economist father (I) wrote a book entitled Economics for a Civilized Society (1988). Of this book, Ken Galbraith wrote: “This remarkably informative, wide-reaching book is the civilized product of two civilized authors”. In 1996 this book went into a second edition at the same time that Galbraith’s The Good Society (1996) was published. In a copy of Galbraith’s The Good Society that he sent to me, he wrote: “To Paul Davidson to whom I, and this book, owe so much!”
Paul Davidson

### Backmatter

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