Post-Keynesian Macroeconomic Foundations for Comparative Political Economy

• DOI: 10.1177/00323292211006562
• Author: Engelbert Stockhammer
• Date: 01 March 2022
• Published date: 01 March 2022
• Subject Matter: Articles

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Article

Post-Keynesian

Macroeconomic

Foundations for

Comparative Political

Economy

Engelbert Stockhammer

King’s College London

Abstract

The global financial crisis and ensuing weak growth have increased interest in

macroeconomic issues within comparative political economy (CPE). CPE, particularly

the dominant Varieties of Capitalism approach, has based its analyses on mainstream

economics, which limits analysis of the relation between distribution and growth

and neglects the role finance plays in modern economies. It overstates the stability

of the capitalist growth process and understates the potential effectiveness of

government interventions. Baccaro and Pontusson have suggested a post-Keynesian

(PK) theory of distribution and growth as an alternative. This article generalizes

their point. PK theory highlights the instability of the growth process and lends

itself to an analysis of income distribution and power relations. The article identifies

the analysis of financialization and financial cycles, the understanding of neoliberal

growth models, and the political economy of central banks as areas where PK

economics provides specific insights for CPE. It also highlights that these arguments

have important implications for government policy in an era of secular stagnation

with ongoing social, distributional, and economic crises.

Keywords

post-Keynesian economics, comparative political economy, growth models,

financial instability

Corresponding Author:

Engelbert Stockhammer, King’s College London, Virginia Woolf Building, 22 Kingsway, London,

WC2B 6NR, UK.

Email: engelbert.stockhammer@kcl.ac.uk

1006562PASXXX10.1177/00323292211006562Politics & SocietyStockhammer

research-article2021

2022, Vol. 50(1) 156–187

Political economy approaches assert that economic, social, and political factors have

to be analyzed in conjunction. Comparative political economy (CPE) is the field that

studies differences in institutions, policies, and economic outcomes across countries.

It seeks to determine why some countries have higher incomes or economic growth

than others, why there are different degrees of inequality, and how these relate to dif-

ferences in the institutions structuring industrial relations, financial systems, and wel-

fare regimes. CPE therefore needs a theory of institutions and politics as well as a

theory of how the economy works. One key question that divides economic theories is

whether growth should be understood as driven mostly by (slowly changing) supply-

side factors, such as the skills of the workforce and the speed of technological prog-

ress, or by the (more volatile) demand side, that is, spending decisions of firms,

households, and governments. The answer to this question has far-reaching implica-

tions for economic analysis and, more important, shapes the interpretation of eco-

nomic crises. Are they due to exogenous, unforeseeable shocks that bring about

temporary deviations from an otherwise stable growth path (as implied by most sup-

ply-side theories)? Or are they the endogenous outcome of systemic forces that lead to

boom-bust cycles, as non-mainstream versions of demand-side analyses suggest?

These questions matter to CPE because they are necessary to understand the eco-

nomic performances of countries and to evaluate economic policies, but CPE rarely

confronts them head on. Herman Mark Schwartz and Bent Tranøy argue that over the

past few decades there has been a slow shift in CPE from macroeconomic approaches

that emphasize economic instability and issues of political legitimacy to neoinstitu-

tional approaches, in particular the Varieties of Capitalism (VoC) approach, that pre-

suppose (stable) market outcomes which allow for multiple institutional equilibria.1

This has moved CPE closer to mainstream economics with its supply-side focus and

an interpretation of market economies as inherently stable. The global financial crisis

and the ensuing weak growth have reignited interest in macroeconomic issues of

growth, distribution, and stability and thus the question of the economic underpinning

for CPE. Lucio Baccaro and Jonas Pontusson propose basing CPE on the post-Keynes-

ian (PK) theory of demand regimes and use the cases of Germany, Sweden, and the

United Kingdom to analyze export-led and debt-led growth models.2 In a reply, David

Hope and David Soskice argue that the more mainstream New Keynesian (NK) theory,

which is based on methodological individualism, features a supply-side-determined

long-run equilibrium, and regards financial crises as caused by exogenous shocks, is a

more appropriate foundation.3

This article is a reply to this controversy and makes a systematic case for post-

Keynesian economics (PKE) as the macroeconomic foundation for the comparative

analysis of capitalisms. It argues that CPE lacks adequate macroeconomic founda-

tions; it needs an analytical framework that allows an analysis of the potential insta-

bility of growth in a financialized economy and the power relations that underpin

inequality as well as financial relations. PKE, in contrast to NKE, offers a

(Kaleckian) theory of demand regimes that allows for wage-led as well as profit-led

demand regimes, partially used by Baccaro and Pontusson. Importantly, the PK

theory of money and finance enables an analysis of financialization that considers

157

Stockhammer

the dysfunctional aspects of finance and the emergence of (Minskyan) financial

instability. It has a focus on the demand side of growth but considers growth as

path-dependent, with (Kaldorian) technological progress induced by demand pres-

sures. Together this forms a basis for an analysis of growth models that is more

appropriate than mainstream economics for a world characterized by distributional

conflict and financial crises.

The article is at the same time highly sympathetic to and critical of Baccaro and

Pontusson. I argue that PKE has more to offer than Baccaro and Pontusson realize, in

particular regarding finance and financial instability. The article discusses several spe-

cific areas where a PK economics approach can make contributions to CPE debates.

First, the PK analysis of endogenous financial instability has implications for our

understanding of financialization.4 Second, I argue that, contrary to what Baccaro and

Pontusson assert, neoliberal growth models are premised on wage-led demand regimes

and that the stagnation tendencies they encounter in the face of rising inequality are

compensated for by debt-driven or export-driven stimulation, both of which give rise

to unstable regimes. Third, endogenous financial instability has implications for the

political economy of central banks. They act as lender of last resort for private finan-

cial institutions as well as governments, which gives them a distinct form of financial

power. The overall PK vision of capitalist dynamics is one of an intrinsically unstable

growth process, where class relations, financial instability, and government activity

shape the growth path of economies.

The article is structured as follows. The first section below situates PKE and CPE

within the historical development of the political economy approach. Next, recent

debates on the role of macroeconomics in CPE are discussed. The sections following

that discussion present NK theory and the three-equation model advocated by Hope

and Soskice; set out the core features of the PK analysis of distribution, finance, and

path-dependent growth; and highlight contributions of PKE to CPE on financialization

and financial cycles, for the interpretation of neoliberal growth models and for the

political economy of central banking. The last section concludes.

From Political Economy to Heterodox Economics and

CPE

The main objective of this article is to clarify the contributions PKE can make to

CPE, but many of the arguments here will also be relevant to other areas of political

economy. Political economy started as a holistic approach in the nineteenth century

that aimed at a unified analysis of social, economic, and political issues. Toward the

late nineteenth and early twentieth centuries, under the influence of neoclassical

theory, economics turned into “pure economics” and a disciplinary bifurcation

occurred, with economics becoming a discipline distinct from political science and

sociology.5 The political economy agenda, which runs across academic disciplines,

thus also split along disciplinary lines. Within economics, the PK and Marxist tradi-

tions pursued a political economy approach. Economics experienced a broadening

of its theories with the Keynesian revolution of the 1930s, in particular the

158 Politics & Society 50(1)