Karl Seeley Macroeconomics in Ecological Context @ Springer
Contents Part I Building Blocks 1 The Economy in the World 3 1.1 The History of Pasta 3 1.2 The Economic Perspective 6 1.3 Macroeconomics vs. Microeconomics 7 1.4 What Is an Economy For? 9 1.5 What Economics Actually Measures 11 1.6 A Look Ahead 13 14 15 2 Resources and Economic Processes 17 2.1 Ecosystems and Resource Use 17 2.2 Gradients 26 2.3 Renewable vs. Exhaustible Resources 30 2.4 Major lypes of Renewable Resources 31 2.5 The Rational Use of Exhaustible Resources 34 2.6 Technology and Resource Use 35 37 38 3 Key Variables 39 3.1 GDP 39 3.1.1 Don't Double-Count 40 3.1.2 GDP, Value Added, and Resources 40 3.1.3 What GDP Isn't 41 3.2 Resource Use 42 3.2.1 Aggregate Energy Use 42 3.2.2 Ecological Footprints 43 xi
xii Contents 3.3 Inflation 44 3.3.1 Price Indexes J 3 3.3.2 Applying a Price Index 3.3.3 Calculating Inflation 47 3.4 Unemployment 4^ 3.5 Interest Rates 3.5.1 Real vs. Nominal Interest 53 3.6 Foreign Affairs 54 3.6.1 Interpreting the Balance of Payments 55 3.7 Exchange Rates 56 3.7.1 Exchange Rates and Interest Rates 58 3.7.2 Exchange Rates and the Overall Investment Climate 58 Appendix: Price Indexes 59 Appendix: Real and Nominal Interest Rates 60 Appendix: Real Exchange Rates 61 Appendix: Data Links 63 64 67 Part II The Long-Run Model 4 Labor, Resources, and the Production Function 71 4.1 Overview 71 4.2 The Production Function 71 4.2.1 Diminishing Marginal Product 74 4.2.2 Output, Value, and GDP 74 4.2.3 Graphical Presentation 75 4.3 Labor Demand 76 4.4 Labor Supply 78 4.5 Resource Markets 78 4.5.1 Resource Supply 79 4.5.2 Resource Use 81 4.5.3 The Biosphere's Absorptive Capacity 82 4.6 The Cobb-Douglas Function 83 4.7 The Per-Worker Production Function 85 Appendix: Summary of Terminology 86 Appendix: Why Kl Why N1 Why A? Why Z? 87 Appendix: Treatment in Calculus and Algebra 87 Diminishing MPK and MPN 87 Constant Retums to Scale 89 90 91
Contents xiii 5 The Composition of Output 93 5.1 Introduction 93 5.2 Components of Aggregate Demand 93 5.3 Consumption 94 5.4 Investment 95 5.5 Government Expenditure 96 5.6 Net Exports 96 5.7 Real Exchange Rates 98 Appendix: Summary of Terminology 99 Appendix: Unintended Investment 99 Appendix: Alternative Consumption Functions 100 101 102 6 The Long Run Model (The Classical World) 103 6.1 Overview 103 6.2 Labor-Market Equilibrium 104 6.3 Equilibrium Output 106 6.4 Markets Work Well 107 6.4.1 The Real Wage Will Adjust 107 6.4.2 What's Made Is Sold 107 6.5 What Changes Output 108 6.6 Real-Nominal Divide 112 6.7 Money and Prices 113 6.8 Interest Rates 114 6.9 Policy Implications 120 6.9.1 The Problem of Recession 121 6.10 Growth, the Long-Run Model, and Potential Output 122 Appendix: What Is "Nominal Output"? 123 Appendix: Taxes and the Effect on Wages 123 124 126 7 Growth with Abundant Resources 127 7.1 Introduction 127 7.2 Capital and Investment 128 7.3 Resources 128 7.4 Labor Force 130 7.5 Diminishing Returns to Capital 130 7.6 Innovation 131 7.7 Convergence 132 7.8 Mechanics of Growth 132 7.9 Institutions 133 7.10 Diminishing MPK Revisited 134
xiv Contents 7.11 The Value of Growth 1^5 7.11.1 Employment 7.11.2 Political Stability 46 7.11.3 The Functioning of the Money System 136 7.11.4 Questioning the Value of Growth 137 7.12 Conditional Equivalence ^7 Appendix: Growth and the Steady State I 39 Part III Business Cycles 8 A Natural History of Money *47 8.1 Introduction 147 8.2 In the Animal Kingdom 148 8.2.1 Coordinating Current Production 148 8.2.2 Building the Future 149 8.3 The Human Problem 150 8.3.1 Non-monetary Means of Coordination 150 8.3.2 Enter Money 152 8.3.3 Taking on Credit 154 156 156 9 What Money Is 159 9.1 The Money Mystery 159 9.2 The Physical Economy 160 9.2.1 The Investment Project 160 9.3 Gelting it Built 161 9.4 Beyond Promises 162 9.5 Money, Debt, Saving, Borrowing, Investment 163 9.5.1 Magic Money 165 9.6 Different Responses to Expenditure 165 9.7 Physical Saving vs. Financial Savings 167 9.7.1 Money as a Means, Not an End 168 9.7.2 Flexible Saving and Output 169 9.8 Computing Money Stories 170 9.9 State Money 171 9.10 Exchange Value and the Roles and Attributes of Money 172 9.10.1 Exchange Value 172 9.10.2 The Roles of Money 173 9.10.3 The Attributes of Money 174 Appendix: Savings Without Obligation 176 Appendix: Gold and Silver 177 179 179
Contents xv 10 Banking 181 10.1 Introduction 181 10.2 Checking Transactions 181 10.3 The Bank Balance Sheet 183 10.3.1 Balancing Your Balance Sheet 184 10.3.2 LoansTwoWays 184 10.4 Reserves 186 10.5 Illiquidity vs. Insolvency 188 10.6 Tools for Credibility 191 10.6.1 Bank Runs and Deposit Insurance 192 10.7 Central Banks 194 10.7.1 Lender of Last Resort 195 10.7.2 Capital and Reserve Requirements 197 10.7.3 Monetary Policy 198 10.8 Fractional Reserve Banking 198 198 200 11 Expenditure Multipliers 201 11.1 Mills and Multipliers 201 11.1.1 Multipliers 205 11.1.2 Crowding Out 206 11.2 Logical Limits to the Multiplier 207 11.3 The Standard Keynesian Multipliers 209 11.3.1 The Aggregate Expenditure Function 209 11.3.2 Algebraic Treatment 210 11.3.3 The Tax Multiplier 211 11.3.4 Sanity 213 11.3.5 Nominal vs. Real 214 214 12 Monetary Policy 217 12.1 The Aims of Monetary Policy 217 12.2 Who Makes Monetary Policy 218 12.3 The Money Supply 219 12.3.1 Definitions of Money 219 12.4 The Relationship Between the Money Supply and Economic Activity 221 12.5 Tools for Influencing the Money Supply 224 12.5.1 Open-Market Operations 224 12.5.2 The Discount Rate 226 12.5.3 Reserve Requirements 227 12.5.4 Emergency Measures 228 12.5.5 Quantitative Easing 229
12.6 Monetär? Targeting, Inflation Targeting, Taylor Rules, Nominal GDP Targeting 12.7 Conclusion Appendix: An Open-Market Operation Fiscal Policy 13.1 The Aims of Fiscal Policy 13.2 Mechanics of Fiscal Policy 13.2.1 Automatic Stabilizers 13.2.2 Active Fiscal Policy 13.3 Who Makes Fiscal Policy 13.4 Fiscal Policy, the Multiplier(s), and Timing 13.5 Conclusion Reference The IS and LM Curves 14.1 Overview of the IS-LM Model 14.2 Overview of the IS Curve 14.3 The Shape of the IS Curve 14.3.1 Why Does it Slope Down 14.3.2 What Makes it Steep or Fiat 14.4 What Moves the IS Curve 14.5 Algebraic Derivation of IS Curve 14.6 LM Overview 14.7 The Shape of the LM Curve 14.7.1 Why Does it Slope Up 14.7.2 What Determines the Steepness 14.8 What Moves the LM Curve 14.9 The Money-Supply Multiplier Appendix: The Meaning of "IS" and "LM" Policy and Shocks in the IS-LM World 15.1 Overview 15.2 Combining the Two Curves 15.3 Effect of Fiscal Policy 15.4 Effect of Monetary Policy 15.5 The Goal of Policy 15.6 When Fiscal Policy Is Ineffective 15.7 When Monetary Policy Is Ineffective 15.8 The Uses of the IS-LM Framework 233 234 235 237 239 239 239 240 240 241 242 243 243 244 245 245 246 246 247 248 249 251 252 253 253 254 255 257 258 258 260 261 261 261 262 264 264 266 268 269
Contents xvii Appendix I: The LM Curve and the Real Interest Rate 270 Appendix II: Algebraic Solution of IS-LM 270 271 272 16 Short-Run Aggregate Supply/Aggregate Demand and Policy 273 16.1 Overview 273 16.2 Aggregate Demand the Standard Way 274 16.2.1 Interest-Rate Targeting 275 16.3 Aggregate Supply the Standard Way 275 16.3.1 StickyWages 276 16.3.2 Flexible Wages 278 16.3.3 Sticky vs. Flexible 279 16.4 "Fool Me Twice": Alternatives to the Standard Explanation 280 16.4.1 Aggregate Supply as a Result of Spending 282 16.4.2 Aggregate Demand as a Result of Decentralized Reactions to Inflation 283 16.4.3 Combining AD and AS 286 16.4.4 Demand Shifters 286 16.5 Policy Effects 287 16.6 The Lucas Critique 288 16.6.1 Extending the Lucas Critique 290 Appendix: The Phillips Curve 292 293 294 17 Policy Assessment 295 17.1 Introduction 295 17.2 Theory and the Anti-stimulus Charge 296 17.3 Empirical Assessments of Stimulus 299 17.3.1 Has Fiscal Policy Worked? 299 17.3.2 Has Monetary Policy Worked? 301 17.4 Conclusion 302 304 306 Part IV Macroeconomics in a Constrained World 18 The Standard Model and Alternative Perspectives 311 18.1 The Standard Model 311 18.1.1 Exogenous Growth 312 18.1.2 Keynesian Policy as Misguided, or Even a Trap 313 18.1.3 Keynesian Policy as an Aid to Long-Run Growth 315 18.2 Alternative Perspectives 316 18.2.1 Real Business Cycle Theory 316 18.2.2 Minsky's Unstable World 318 18.2.3 The Prospect of Agent-Based Modeling 319
xviii 18.3 Heterodoxy in Perspective 19 Resource Constraints 19.1 What to Do with a Treasure Chest? 19.1.1 The Hölching Rule 19.1.2 The Hartwick Rule 19.1.3 Hubbert Curves 19.1.4 Hotelling Behavior with Endogenous Demand 19.2 EROI and Energy Cost 19.3 Limits on Absorptive Capacity 20 Growth Under Resource Constraints 20.1 Growth in the Resources Model 20.1.1 Normal Growth 20.1.2 Preindustrial Growth 20.1.3 The "Discoveries" 20.1.4 The "Discovery" 20.2 The Long-Run Impact of Resource Constraints 20.3 Paths Toward a Resource-Constrained Future 20.3.1 Business as Usual 20.3.2 Weak Foresight 20.3.3 Strong Foresight 21 Business Cycles Under Resource Constraints 21.1 Recessions and Resources 21.1.1 Conventional Recessions 21.1.2 Resource-Driven Recession 21.2 Policy in a Resource-Driven Recession 22 Continuity and New Directions 22.1 Continuity and Difference 22.1.1 The Long Run 22.1.2 The Short Run 22.1.3 Ecological Lucas, Ecological Keynesianism., 22.2 The Very Long View 22.3 New Directions