Poli 463, 2016 course outline: Keynes versus monetarists before and after the crash of 2008.

Poli 463/2
Government and Business course outline : under construction
Keynes versus monetarists before and after the crash of 2008
Prof.Harold Chorney
Fall/ 2016
Thursday 2:45-5:30
H529 SGW (Note the room change from H634)

Course overview:

This course explores the tools that are necessary to deal with the contemporary global economy and the public policy that is appropriate after the events in the financial markets these past six years.The crash of September 2008 in the financial markets,the financial bubble that preceded it, the global dimension to the recession which followed it and the presence of widespread significant fraud and excessive reckless risk taking obliges us to reinvigorate standards of regulation in the public interest and to understand the full dimension of financial instability.This seems clear also from the current turmoil in the financial markets despite the steady progress in the U.S. on lowering the rate of unemployment to 5 % or less from its peak of 10 % after the crash.

Governments all over the world initially reacted by engaging in re-regulation, Keynesian deficit finance and a dramatic overhaul of policy to roll back the laissez-faire ideology that had come to dominate public policy over the past two decades. In recent years there has been some backtracking as the defenders of laissez-faire , particularly in Europe at the ECB and among leading technocrats of the European union and the Republican critics of President Barack Obama have reasserted the ”wisdom” of laissez faire against what they claim are the failures of liberal socialism and Keynesian intervention and social engineering. Jean Claude Trichet of the European central bank and his successor Mario Draghi to a somewhat lesser extent have also been outspoken in their defense of sound finance and budget balance. Just two years ago the French minister for economics,Arnaud Montebourg resigned in protest over the austerity policies of the EU and the Hollande government of France. This has been less the case for Ben Bernanke and his successor at the Fed, Janet Yellen who have emphasized the importance of reducing unemployment instead.Here in Quebec the Provincial Government is still committed to austerity but on the Federal scene the Liberal party has come out against it during the last election campaign.Instead they have proposed a modest program of investment in infrastructure and social policy financed by deficits over the short run. Hence the debate between the two schools continues.The British coalition Liberal conservative Government under the leadership of David Cameron and Nicholas Clegg had unfortunately also embraced sound finance and budget slashing despite the severity of the recession in the U.K. and the evidence that Labour’s return to Keynesian stimulation was working.But Ed Miliband the Labour leader was unable to defeat the Cameron conservatives and Britain continues on an anti Keynesian path.We shall see whether Theresa May delivers on her promise to move the U.K. away from austerity . In the current Labour party leadership campaign to replace Miliband the leading candidate Jeremy Corbyn is strongly committed to Keynesian stimulation and quantitative easing but he is a controversial figure who is opposed by much of the British media establishment and the Blairite wing of the Labour party.

In the past this course examined intensively the clash between the Keynesians and the monetarists and the impact of this paradigmatic debate upon public policy. It also examined the neo-conservative and neo-liberal ideology and the break these ideologies have made with post-war liberalism, progressive toryism and social democracy. It argued the case for a return to Keynesian public policy.

This has happened initially in the leading capitalist economies like the US and Japan, post crash. In many respects the new American Presidential administration of Barack Obama has led the way, although critics like Nobel prize winners Joseph Stiglitz and Paul Krugman argue that the American stimulus was too small and improperly focused. Nevertheless it led to a steady fall in the unemployment rateIt has also been undertaken in Europe with Great Britain and to a lesser extent France leading the way, with Germany a very reluctant follower. Despite considerable resistance it has, in a much less dramatic fashion, been undertaken in Canada by the Harper conservative government.

We shall still do some exploration of the history of the previous monetarist classical macroeconomics paradigm but I intend to spend more time this year on deepening our understanding of how the Keynesian technique of demand stimulation is intended to work, the implications for public policy, and how I believe it should work given all of the economic and ideological changes that have occurred over the past thirty years.We shall also explore the emerging debate over growing inequality in much of the Western world by examining the work of Thomas Piketty, Capital in the Twenty-first century.

We also explore the environmental movement and assesses how environmentalism and green public policy can be integrated with Keynesian approaches to globalization.

We explore the transition from the Keynesian welfare state to the neo-con/neo-liberal doctrine of balanced budgets, free trade and unregulated globalization and to its consequences and now to the partial return of a refurbished Keynesian approach to public policy. The role of the media and popular culture in transmitting these changes is also explored.The impact of the successful Obama campaign for the Presidency will also be explored in terms of its impact upon public policy.

Texts and basic readings:

The first four works are basic texts and are on order at the text book store. The Deficit papers is available from me in electronic format and includes as well  a number of papers posted on my Word Press web site . It will be part of the assigned readings.Thomas Piketty’s work is widely available and very key component of the debate on inequality and modern capitalism.

John Maynard Keynes, The General Theory of Employment, Interest and Money.Macmillan.

Joseph Stiglitz, Free Fall:America, Free Markets and the Sinking of the World economy , 2010,W.W. Norton&C0.

Paul Krugman, End This Depression Now,W.W.Norton&co.

Peter Clarke, Keynes:The Rise, Fall and Return of the Twentieth century’s most Influential Economist, Bloomsbury

Additional optional texts:

Thomas Piketty, Capital in the Twenty-first Century. Harvard university Press.

Harold Chorney, The Deficit Papers available from me in electronic format.

Other core readings:

Hyman Minsky, Stabilizing an Unstable Economy

Can it Happen again? Essays on instability and finance

Kevin Phillips, Bad Money:Reckless finance, Failed Politics and the Global Crisis of American Capitalism

David Mendell, Obama from Promise to Power

Harold Chorney, “On Manias, panics and bail-outs:further thoughts on the financial crisis” see my website.

Harold Chorney, Revisiting deficit hysteria, labour/Le travail, #54, 2004 available on the net

Harold Chorney, The Global Financial Crisis, the Re-emergence of Keynes and the Role of Quantitative Easing
paper Presented to the World Congress of Social Economics, Concordia university, Montréal, June 2010 A revised version presented to the Eastern economics association meetings in New York in 2011

Harold Chorney Restoring full employment:the natural rate of inflation versus the natural rate of unemployment paper presented to the Conference on Social Policy as if People Matter, Adelphi university, Garden City New York, November 12, 2004 (available on net)

Harold Chorney, Keynes, Lerner and Friedman in an Uncertain Age, paper presented to the Canadian economics Association meetings Vancouver May 2014.

Alvin Hansen, A Guide to Keynes (on reserve)

Sidney Blumenthal, The rise of the Counter-establishment:From Conservative Ideology to Political Power

Desmond King, The New Right:Politics, Markets and Citizenship

Brian Snowdon and Howard Vane, eds. A macroeconomics reader, 1997.

Snowdon and Vane, Modern Macroeconomics:its origins, development and current state.Edward Elgar, 2006

The following are some selected basic supplementary readings.You are not expected to read them all but rather portions of some of them. Some of them will be placed on reserve. Others are available through the library .They are intended to help with your research papers and illustrate the breadth and richness of the literature in the area.

John McMurtry, Unequal freedoms:the global market as an ethical system.

Adam Harmes, The Return of the state: protestors, power brokers and the new global compromise, Douglas and McIntyre, 2004.

Henry M.Paulson,Jr. On The Brink, Inside the Race to Stop the Collapse of the Global Financial System, N.Y. :Business plus, 2010;

Scott Patterson, The Quants:How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, N.Y.: Crown Business, 2010;

William Cohan; House of Cards:A Tale of Wretched Excess on Wall Street,N.Y.:Random House Doubleday, 2009;

Benoit Mandelbrot & Richard Hudson, The Misbehaviour of Markets:A Fractal View of Financial turbulence, N.Y.:Basic Books, 2004;

Kevin Phillips, Bad Money:Reckless Finance, failed politics, and the Global Crisis of American Capitalism, N.Y.:Viking, 2008;

Nouriel Roubini & Stephen Mihm, Crisis Economics:A crash course in the future of finance, N.Y.&London: the Penguin Press, 2010;

Paul Jorion, La Crise:Des subprimes au seisime financier planétaire,Paris, France: Fayard, 2008;

Richard Posner, A failure of Capitalism:The crisis of 08 and the descent into depression, Cambridge, Mass. and London U.K., 2009;

Bill Bamber & Andrew Spencer,Bear Trap: The Fall of Bear Stearns and the Panic of 2008, New York :Brick Tower Press, 2008;

Richard Bookstaber,A Demon of Our Own Design: Markets, Hedge funds and the Perils of Financial Innovation,Hoboken N.J., John Wiley & sons, 2007 )
John Kenneth Galbraith, The Great Crash,1929
Alvin Hansen, Monetary theory and Fiscal Policy.
Fausto Vicarelli, Keynes:The Instability of Capitalism
George Soros, The New Paradigm for financial markets..
Charles Kindleberger, Manias, Panics and Crashes.
The World in Depression:1929-1939.
David Colander and Dewey Daane, The Art of Monetary Policy.
J.A. Trevithick , Involuntary Unemployment:Macroeconomics from a Keynesian Perspective.
Robert Kuttner, Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.
Tim Lewis, In the Long Run We`re all Dead: The Canadian Turn to Fiscal restraint.(on reserve)
Robert Ascah, Politics and Public debt:the Dominion, the Banks and Alberta’s Social Credit.
Doug Henwood, Wall Street.
Richard Parker, John Kenneth Galbraith: His Life, His Politics , His Economics.
Peter Clarke, The Keynesian Revolution in the Making.
Will Hutton, The Revolution that Never Was: an Assessment of Keynesian Economics.
Lawrence Klein, The Keynesian Revolution.
J.C.Gilbert, Keynes’Impact on Monetary Economics.
Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes.
Gary Teeple, Globalization and the Decline of Social Reform(reserve)
Jonathon Michie and John Grieve Smith eds., Managing the Global Economy.
David Held & Mathias Koenig-Archibugi, Taming globalization: frontiers of Governance.
Bao Gao, Japan’s Economic Dilemma:the institutional origins of prosperity and stagnation.
Sidney Blumenthal, The Rise of the Counter Establishment, From Conservative Ideology to Political Power.
Armand Van Dormael, Bretton Woods: Birth of a Monetary System.
Robert Lucas, Studies in Business Cycle Theory.
Milton Friedman,” The role of monetary policy” The American Economic Review, 1968, vol.58, March, pp.1-17 reproduced in Brian Snowdon and Howard Vane, A Macroeconomics Reader.
Alan Blinder, The fall and rise of Keynesian economics, Economic Record, 1988, December reproduced in Snowdon and Vane., A Macroeconomics Reader
James Tobin, “Price Flexibility and output stability:an old Keynesian view.Journal of Economic Perspectives, 1993 vol7, Winter. reproduced in Snowdon and Vane.a Macroeconomics reader
David Laidler, Monetarism:an Interpretation and an assessment.Economic Journal,1981, vol.91 March reproduced in Snowdon and Vane.
F.A.Hayek, The Fatal Conceit:The Errors of Socialism.
Allan Meltzer, A History of the Federal Reserve, Vol. 1:1913-1951.
James Rock ed. ,Debt and the Twin Deficits Debate.
Robert Heilbroner and Peter Bernstein, The debt and the Deficit:fal;se Alarms/Real Possibilities.
Harold Chorney& Phil Hansen, Toward a Humanist Political Economy
Joseph Stiglitz, The Roaring Nineties;
Making Globalization Work
Thomas Kuhn, The Structure of Scientific revolutions;
Adam Harmes, The Return of the State:Protesters, power brokers and the new global compromise;
Georges Campeau, From UI to EI:Waging War on the Welfare State;
Stephen Clarkson, Uncle Sam and Us.
Michael Woodin & Caroline Lucas, Green alternatives to Globalisation.
Al Gore, An Inconvenient Truth,the planetary emergency of global warming and what we can do about it.
Nicholas Stern, Review Report on the economics of climate change to the British government (available on the internet)
Gwyne Dyer, Climate Wars.
Rubin Simkin, Comments on Consumption, Income distribution and Growth (on reserve)
E.F.Schumacher, Small is Beautiful.(on reserve)
E.J.Mishan, the Costs of Economic Growth (on reserve)
J.Kenneth Galbraith, The New Industrial State (on reserve)
The Affluent Society (on reserve).
Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (on reserve)
Joseph Schumpeter, History of Economic Analysis.
Paul Davidson, Post Keynesian Macroeconomic Theory.
H.Binhammer, Money and Banking and the Canadian Financal System
Alan Booth, British Economic Policy 1931-1949.Was There a Keynesian Revolution?
Anna Carabelli, On Keynes’ Method.
Leo Pliatzky, The Treasury under Mrs. Thatcher.
L.Randall Wray, Understanding Modern Money.the Key to Full Employment and Price Stability
William Greer, Ethics and Uncertainty, The Economics of John M. Keynes and Frank H. Knight.

Students are also expected to read extensively the financial and quality press each week.These include The Financial Times, The New York Times,the Wall Street Journal, The Guardian,the Globe and Mail, and focus on stories on the economy, the financial crisis and the recovery.

Evaluation: two options: 1:Essay due mid term, the first week of November 50 %Final exam 50 %. or 2. Seminar presentation option  Essay 40 % final exam 40 % seminar presentation 20 %.


1.Introduction and overview.The interface between economics and politics.The art and science of political economy. The recent financial crisis, sub -prime mortgages, bank bailouts and the crash of 2008. The need for stimulus and the revival of Keynes. The eclipse of monetarism.? The challenge of climate change and the protection of the environment. The impact of the crash and challenges before Barack Obama. The rise and fall of the new right.The Canadian response. the origins of macroeconomics. The issue of inequality.

readings: Chorney,After the crash: rediscovering Keynes and the origins of quantitative easing reposted on my web site Sept.9,2016 originally published as On manias , panics and crashes in my previous web site Harold Chorney political economist on blogspot in 2008.; Chorney; the introduction to the Deficit papers,Chorney the global financial Crisis, re-emergence of Keynes and origins of Quantitative easing.the essay on Keynes in the Deficit papers;chapter one in Kuttner.Obama’s challenge.chapter one in Phillips. Kindleberger; Galbraith, on the crash and Minsky, introduction to Can it Happen again and editors’ introduction to stabilizing an unstable economy.
Piketty,part one.

2.Globalization and the ethical dilemma. Myths and truths about globalization.The environmental challenge.Economic growth and entropy.
Readings: Nicholas Stern, Al Gore;K.Phillips; Stiglitz, introduction and chapter one. John McMurtry pp.1-52.

3. The myth of no alternative.The role of regulation and public enterprise. Laissez-faire versus planning.Hayek versus Keynes. The eclipse of Marx.The rejection of Keynes. Daniel Bell and the End of Ideology. The rise of post-modernism and the new classical macroeconomics.
Readings :Chorney global financial crisis…; Chorney deficit papers :The future of crown corporations:government ownership, Regulation or market control,A Keynesian approach, 1998; Blumenthal; King, Hayek, Mcmurtry, Harmes, Lucas, Friedman,Laidler.

4.The role of the media; political pressure groups;democracy propaganda and the policy process. The rise of the neo-cons.
Media and popular culture in the post modern age.The post war consensus and how it unravelled. Stagflation
and misinterpreting the General theory.
Readings :Chorney the deficit papers: The economic and political consequences of Canadian monetarism; Keynes and the problem of inflation.Keynes, the General Theory The two postulates of classical economics; the possibility that labour markets do not clear; the notion of involuntary unemployment.
Blumenthal, King, Block, Chorney, the natural rate of inflation…, Keynes GT ch.1-3; Peter Clarke Keynes, introduction.

5. The consumption function. The multiplier. Savings and investment.The theory of interest rate determination.Readings: Keynes GT; Hansen a guide to Keynes.

6. The controversy over debt and public finance.readings:Cavenaugh, Rock; Eisner; Heilbroner and Chorney: Rediscovering deficit hysteria, The deficit: hysteria and the current crisis and Chorney commentary on the FT’s austerity debate plus U tube video on deficits and debt.

7. The strategy of stimulus. investment in infrastructure. Investment versus tax cuts. The impact of capital flows.
Readings :Chorney blog entries on stimulus and the strategy behind it plus others tba.

8. The roots of neo-conservatism.The cold war. The Vietnam war and the sixties. The OPEC crisis of the 1970s. Stagflation. Thatcher Reagan and Mulroney in the 1980s. The Clinton, Blair and Chretien third way.The Bush and Blair war in Iraq. The challenge of Afghanistan.The resurgence of liberalism in America. Obama’s challenge.
Readings: blog; Stiglitz Free Fall; Stiglitz The roaring nineties;globalization and its discontents.Chorney and P.Hansen Toward a Humanist Political economy, The falling rate of legitimation ; introduction and Neo-conservatism, social democracy and province building;King and Blumenthal.

9. The roots of monetarism.Hayek versus Keynes in the thirties. Friedman versus neo-classical Keynesianism in the sixties and seventies. The post-Keynesians and John Kenneth Galbraith. Towards a new Keynesian paridigm.The return of regulation and the state. The bail-out of the banks , Freddie Mac and Fannie Mae and AIG insurance ; cleaning up the bubble,Readings :Stiglitz,Paulson,Phillips, Tobin; Blinder; Davidson;Harmes; Chorney

10. Post and neo-Keynesian policy in the age of OPEC. readings:Davidson,Harmon , The problem of growing inequality, the Piketty thesis.

11. Development issues. The IMF and the World Bank. The turn to the left in Latin America. The return of full employment ? Capitalism in Asia.The European refugee crisis
Readings: Stiglitz, Chorney. The Greek crisis and debt management

12. Prospects for democracy, balanced ecologically sound growth and the compassionate society in the new world order.

Weekly notes: I will use this space to refer students to readings, updates sources etc.

Please note that the reading Harold Chorney,”On manias, panics and bailouts:further thoughts on the financial crisis” is available by referring to my blog. Jan.14, 2009 On manias, panic and bailouts: further thoughts. There are also numerous copies of Keynes’s GT in the libraries around town including Concordia and it is also accessible on line. Begin reading the first 50 pages and we will discuss it in class.

Please go to the PBS.org site and watch their excellent documentary Inside the financial Meltdown which was broadcast on Frontline.It provides an insightful and personal look at the financial crisis as it unfolded in New York and Washington in 2008.

Essay assignment due in class in the first week of November.
Please research and write a 12 to 15 page essay on one of the following topics or if you prefer propose an alternative topic to me. Be sure to use a manual of style, include a full bibliography and proper notes identifying your sources. Sources should include books, periodical literature, quality financial papers like the Wall Street Journal, the Globe and Mail, The Financial Times or the New York Times well as internet sources.

Possible topics include:

1. Discuss the root causes of the financial crisis. Explore the factors that influenced its unfolding as it has. What are the principal flaws in the economic theory that business leaders and policy makers relied upon that led to this crisis? How must economic theory be reconstructed to avoid these policy failures in the future?

2. Compare and contrast the monetarist approach to public policy and management of the business cycle with the Keynesian schools’ approach.Why and how did monetarism displace the Keynes style approach in the 1970s? Does the current crisis suggest another paradigm shift?

3. Discuss the controversy over government use of deficits to stimulate the economy in an economic downturn.Explore the role of deficits in the current policy environment. How did the Canadian Harper stimulus compare with that of the Obama administration? What is the appropriate monetary policy in conjunction with stimulative deficits ? What impact have the austerity policies in Europe had on the European economy ? What about the U.K. ?

4. Explore the roots and current operations of the IMF and the World Bank.
What reforms appear necessary at these institutions. Give concrete country based examples.

5. Explore panics, manias and crashes in financial history. How does this panic compare with previous ones ?

6. Explore the theory of the multiplier and Keynes’ theory of investment. How ought we to modify Keynes’ theory of investment to adjust to the current circumstances of globalization ?

7. Explore the roots of neo-conservatism. Does it have a future ?

8. Explore the environmental aspects of economic stimulus. Is there an inherent contradiction between stimulus leading to full employment and sound environmental policy ?

9. What would constitute a viable and contemporary theory of economic liberalism that would respect the social and economic needs of people but at the same time be open to global values ?

10. Discuss in detail the inequality argument of Thomas Piketty. How has inequality evolved in Canada as opposed to the U.S. ?


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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