What distinguishes Post-Keynesian economics from others?

In general, it is not an easy task to outline a school of thought describing themselves as a heretical movement, especially that has a feature of pluralism in theories and methods. (Lavoie, 2006b) Only listing salient features of them instead, nevertheless, may not be an appropriate way too, since several characteristic presuppositions cannot precede its foundation. Only after clarifying the foundation on which the school of thought bases, we may be able to have a quite clear picture of it, additionally with its particular aspects together. This essay tries to sketch briefly what elements of so-called Post-Keynesian economics distinguish themselves from others while concentrating on its essential foundation. Following the argument of Pasinetti (Pasinetti, 2007), this essay suggests Post-Keynesian economics is not only mainly based on the concept of ‘re-production’, but their emphasis on the fundamental uncertainty also can be more suitably understood in the horizon of the production paradigm.
At first, as its appellation implies, Post-Keynesian can be roughly defined as the school of thought that tries to overcome the neo-synthesis ‘Keynesian’. If we accept this definition for a while, we need to examine what the neo-synthesis Keynesian is about and we can describe its gist as follows: In the short run, an economy might suffer involuntary unemployment due to the rigidity of nominal wage, on the other hand the economy returns to the long run equilibrium path where the price adjustment works well and no involuntary unemployment exists. In other words, the neo-synthesis Keynesian reduces the contribution of Keynes’ economics to the discovery of the importance of the wage rigidities in the short run. Laidler argues, however, it is a myth that “Keynes’s originality in 1936 lay first in recognizing that the labour market was subject to wage rigidities that other economists had overlooked”. (Laidler, 2006) The understanding of importance of the wage rigidities actually was not only already known among the Classical economists, but Keynes also argued the causes of unemployment lay in the “monetary exchange mechanism”(ibid, pp.44). Furthermore, the gist of the neo-synthesis Keynesian is not fully reflecting the title of Keynes’s book, The General Theory of Employment, Interest, and Money; in their synthesis, the argument Keynes is not general theory at all, as well as it does not cover the interest and money. In this sense, the myth of Keynes’s originality of wage rigidities is a misleading image. It is not surprising that Post-Keynesian also does not accept that the argument of Keynes can be reduced to the wage rigidities so as to explain the involuntary unemployment.
Then, how does Laidler summarize the argument of Keynes? It seems that Laidler puts a strong emphasis on the ‘fundamental uncertainty’ in order to take into consideration what were lacking in the myth of Keynes such as interest or money. Since the economy is intrinsically subject to the fundamental uncertainty in the sense that the people do not know what they do not know about the future, there must be the liquidity preference: Even though it does not bear any interest, people may want to hold their wealth in the most liquid form, i.e. money. Unfortunately, this money holding might hinder the sufficient change in marker interest rate, which would cause the discrepancy between the market rate and the natural rate at which total saving and total investment are equalized. To make matters worse, investment decision is also subject to the fundamental uncertainty. In other words, the swings in the market interest rate cannot guarantee the equilibrium between saving and investment even in the long run, and then it causes involuntary unemployment where the deficiency of demand prevails. Hence, the economy is demand-determined: The principle of effective demand arises[1]. Although seemingly this supplements the neo-synthesis Keynesian quite well, it still, however, limits the Keynes’s economics to the quantity-adjustment market mechanism. Pasinetti strongly argues as follows:
“[S]urely the General Theory cannot simply reduced to this market-adjustment mechanism. … [T]he principle of effective demand belongs to those profound characteristics that mark the ‘production’ economic systems.” (Pasinetti, 2007)
Then, the following question naturally comes to our mind: How is the ‘production’ related to the principle of effective demand? We would like to answer this in terms of the fundamental uncertainty to which the complexity of production system may give rise. In other words, some crucial characteristics of the modern economy intrinsically cause the complexity that can be linked to the fundamental uncertainty. And we argue that the crucial characteristics of the modern economy are the interrelationship among industries and the tendency to converge to the uniform profit rate. This point is emphasized by Piero Sraffa and his condense and influential book, Production of Commodities by Means of Commodities. In his analysis, Sraffa shows us that there can be a unique relative price vector that restores the previous production relationship. In this sense, the relative price is no longer the signal of the scarcity of each commodity. If this is right, price does not work as a market-clearing mechanism, which means the given price may not work in a way to reduce the uncertainty of market in the future; there is no guarantee of clearing. Furthermore, the system would get more complicated since, in order to accumulate capital faster than their rival, the entrepreneurs keep innovating production of technology that must disturb given relative price system. Lastly, we need to take into account that the production takes time; the production process takes place in the horizon of historical time. Unlike the logical time, it does not allow the ‘reversibility’ in the economy, which is main point of American Post-Keynesians. To sum up, with endless stimulus for the capital accumulation (the main characteristic of capitalist economy in the viewpoint of Marxist), the fact that the production takes place by means of produced inputs and over the historical time gives rise to the fundamental uncertainty to which all economic agents, especially entrepreneurs are subject. In this sense, the aspect of ‘production’ can be the foundation of all Post-Keynesian economics.
When we accept this link between the production and the fundamental uncertainty, we may well understand what the uncertainty does result in. First, as we mentioned, the fundamental uncertainty leads to the liquidity preference so that the financial market does not necessarily coordinate the market interest rate for total saving and total investment to be equal. Secondly, and more importantly, production sectors may want to prepare against the uncertain economic shocks in the future, by making spare capacity sufficiently in their production process, thus leading to utilization ratio less than the unity. This aspect is one of the main points that Michal Kalecki emphasizes on:
“Even on the average the degree of utilization throughout the business cycle will be substantially below the maximum reached during the boom. Fluctuations in the utilization of available labour parallel those in the utilization of equipment. ... The reserve of capital equipment and the reserve army of unemployed are typical features of capitalist economy at least throughout a considerable part of the cycle. (Kalecki, 1954)”
Putting these two results together, it is clear that the fundamental uncertainty implies the chronic deficiency in both the labor and the capital equipment. Then we get to the following implications: Firstly, the government can do something to fill the gap between saving and investment (i.e. remedy for unemployment). Secondly, supply side will adjusts to the demand side even in the long run. In addition, the second implication leads to the independency of investment from saving, since the decisions for the capital accumulation are made by entrepreneur’s ‘animal spirits’ in the economy where the deficiency of demand prevails. When the demand side determines the supply side, therefore, the swing in investment would be the main component of the change in demand. This is a brief sketch of the principle of effective demand that is one of the main essential features in Post-Keynesian.
Additionally, it may be worthwhile to mention that some consequences of the independency of investment. Since investment always causes saving, the source of financing for investment may be called into a question. Post-Keynesian explains this by the endogenous money that is strikingly contrasted to neo-Classical economics. When some entrepreneur needs to borrow money for the investment, the bank lends money ex nihilo such as by giving some bank notes. And the invested money will come back to the bank as deposit of those wage earners. Focusing on this feature, we can understand the financial instability in a more suitable way: Bubble and its rapid bust periodically take place in the financial sector through the endogenously created money and its derivatives. Hyman Minsky mainly maintains this point.
So far, we have outlined Post-Keynesian economics on the axis of fundamental uncertainty. However, we should note that the fundamental uncertainty is preceded by the production, not reverse, which is the main foundation of the school of thought. And, in this sense, we also pointed out that the cause of involuntary unemployment lies in deeper layer rather than in the peripheral phenomenon such as wage rigidities. Post-Keynesian is the school of thought that emphasizes on those deeper layers that have been overlooked by other school of thought: Keynes’s economics, therefore, is by no means reduced to the emphasis on the nominal wage (or prices) rigidities or the quantity-adjustment mechanism but it was an incomplete revolution that tried to shift the paradigm of economics from the exchange system to the production one (Pasinetti, 2007). In order to succeed the legacy, Post-Keynesian economics tries to understand an economy on the basis of the principle of effective demand that basically follows from the crucial characteristics of the production side.
Lastly, we want to suggest the ‘re-production’ is a better summary about where Post-Keynesian begins with and what distinguishes them from others. By adding ‘re-’, it can clearly show the production matters in the historical time horizon. In terms of re-production, we may even associate the instability problem of the economy with the characteristics of the own production system, which can be translated into the fundamental uncertainty as well. We have also shown that the principle of effective demand is deeply related to the functional uncertainty through the liquidity preference and utilization ratio less than unity. In addition to this, re-production can shed light on, though secondary, the importance of role of the exchange in the sense that the well organized exchange system may sustain the economy in a better way. That’s because an inappropriately organized exchange activity would generate instability in the future. Sure enough, one of shortcomings in Post-Keynesian is the relative lack of interest in the role of exchange. While emphasizing on the importance of production paradigm, Post-Keynesian economics might become more elaborate by adding the exchange scheme and borrowing a rigorous mathematical methodology into consideration more explicitly.[2]

[1] Some author explains the principle of effective demand that “investment is essentially independent of saving”. (Lavoie, 2006b; p.13) This can be, in my opinion, understood well with Marxian viewpoint on the capitalist economy where the capitalists keep accumulating the capital by exploiting surplus value. Of course, investment can be autonomous in the economy where the deficiency of demand prevails ultimately owing to the fundamental uncertainty.
[2] Even though he might be also making a mistake to reduce the Post-Keynesian economics into the exchange paradigm, Farmer properly points out that “[g]eneral equilibrium theory, broadly interpreted, like mathematics, is a language.” (Farmer, 2017) In this paper, he concisely argues that non-pareto optima in an overlapping model can explain the permanent involuntary unemployment that he thinks the main emphasis of Post Keynesian. Althouth his proposal of incorporation of two different stands might be a good attempt, we believe that more clear distinction between production and exchange should precede.

Bibliography
Eckhard, H. (2014). Distribution and grwoth after Keynes: A Post-Keynesian guide. Edward Elgar Publishing.
Farmer, R. E. (2017). Post Keynesian Dynamic Stochastic General Equilibrium Theory. National Bureau of Economic Research.
Kalecki, M. (1954). Theory of Economic Dynamics: An Essay on Cyclical and Long-run Changes in Capitalist Economy. . George Allen & Unwin.
Laidler, D. (2006). Keynes and the birth of modern macroeconomics. (R. E. Backhouse, Ed.) Cambridge University Press.
Lavoie, M. (2006b). Introduction to Post-Keynesian Economics. New York, NY: Palgrave Macmillan.
Pasinetti, L. L. (2007) Keynes and the Cambridge Keynesians: A 'Revolution in Economics' to be Accomplished . . (1 edition ed.). Cambridge University Press.