Demand regimes, financialisation and hysteresis. New Keynesian and post-Keynesian macroeconomic underpinnings of the Varieties of Capitalism

By Engelbert Stockhammer

PKES Working Paper 1809

October 2018

The recent integration of post-Keynesian insights into Comparative Political Economy is an exciting development. Post-Keynesian theory differs from neoclassical and Marxist theories in its analysis of the role of income distribution and of finance. It allows for wage-led demand regimes and it regards finance to be endogenously created and a source of instability. The paper contributes to the debate on the integration of demand regimes in the Varieties of Capitalism analyses. It contrasts post-Keynesian theory to the New Keynesian three equation model. It highlights that post-Keynesian theory gives prominence to the role of income distribution and allows for wage-led demand regimes; financial variables play a key role, which gives rise to endogenous instability and financial cycles (Minskyan debt cycles); economic growth is regarded as a path dependent process (with unemployment hysteresis due to wage norms) and is not anchored in a supply side equilibrium. However, PKE has so far mostly provided a normative analysis of government interventions. The ability to generate income and wealth rather than competitiveness is regarded as key criteria for a viable variety of capitalism.

Keywords: Varieties of Capitalism, post-Keynesian economics, financialisation

JEL classification: E02 E12 P50