↑ Return to 7) Economic Theory

Heterodox Economic Theories and GDP

Heterodox economic theories focus on the human desires to spend, to save, to obtain credit in order to anticipate spending and future earnings, to increase or to reduce debt or even to deplete existing savings, on human behaviour. Those theories neither think that humans are rational nor that markets are efficient.

Heterodox economic theories and GDP

While Simon Kuznets did most of his initial research on the intentions of economic actor to spend or to save and on “secular” cyclical movements that are often caused by those intentions. Kuznets was of the opinion that the savings rate most often remained stable, while Keynes suggested that it fell with rising income.1.

He finally improved national income accounting and discovered a new concept that was called Gross National Product (GNP). This new concept was able to outpace the importance of the savings rate and those secular movements.

Heterodox economic theories comprise Michael Pettis, Richard Koo, Steve Keen, the Financial Times editor Martin Wolf, Post-Keynesians, Modern Monetary Theory (MMT), “New Arthurian Economics” and Austrian Economics. The ideas of Austrian economics are mostly identical to the classic economic theory but – due to the Keynesian revolution – it has become a heterodox “outsider” instead of being “orthodox and classic”.

Many of these theories economic theories focus on the human desires to spend, to save, to obtain credit to anticipate spending and future earnings, to increase or to reduce debt or even to deplete existing savings, on human behaviour. Those theories neither think that humans are rational nor that markets are efficient.

Some approaches roll back the wheel to Simon Kuznets’ original work and simply ignore the misleading concept called GDP that may lead to misleading market valuations.

Orthodox economic theories

The neoclassical synthesis or “orthodox” economic theories focus on  concepts like rational economic actors, on individualism and on the economy as equilibrium. Orthodox economists often want to achieve a certain GDP growth that leads to “moderate inflation” between 0 and 2% per year. If this targeting is called nominal growth targeting or inflation targeting is a purely academic detail, given that nominal GDP and inflation are closely related.

All heterodox economic theories do not agree that economic actors are rational.

Savings, GDP and irrationality

We often use the term “Gross Domestic Consumption (GDC)” for economic growth in Western economies because GDP is essentially a function of consumption. Changes in investments are often positively correlated to consumption, where net exports have a negative correlation. Investment- and savings-driven growth, however, only play a role in Emerging Markets, in particular in Asia.

For us, mainstream economists, including many monetarists, use Quantitative Easing to increase artificial wealth in the form of housing and stock markets valuation. High valuations, however, may destabilize the savings rate on personal income and create irrationality.

We see the global macro world as a combination of multi-country sector balances possibly depict-able in Steven Keen’s Minsky models.

 

Background

Bawerk (Pseud. for the Austrian economist Eugen Böhm von Bawerk): The Misleading Concept Called GDP

Richard Koo’s and other Sector Balances

Richard Koo: The Balance Sheet Recession

Michael Pettis: Abenomics is just a measure to enforce higher household savings

Steve Keen: Debt deflation and Minsky Models

Simon Kuznets: Uses and Misuses of National Income Accounting, in St. Louis Fed  National Income, 1929-1932 : Letter from the Acting Secretary of Commerce Transmitting in Response to Senate Resolution No. 220 (72nd Cong.) a Report on National Income, 1929-32, Online Link

Chicago Booth: How Simon Kuznets codified modern economic growth

G. Dorgan: FX Rates, Contrarian Investments and the Misleading Concept Called GDP

G. Dorgan: Quantitative Easing, its Indicators and the Swiss Franc

Chartalism and Modern Monetary Theory, MMT

New Arthurian Economics and Martin Wolf’s “Strip banks of power to create money”

References
  1. Hugo A. Keuzenkamp, “Probability, Econometrics and Truth: The Methodology of Econometrics“ []
George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
See more for Economic Theory

Permanent link to this article: https://snbchf.com/economic-theory/heterodox-economic-theories/

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>