Macroeconomics in Ecological Context (eBook)

Preface 7
Acknowledgments 9
Reference 10
Contents 11
Acronyms 19
Part I Building Blocks 21
1 The Economy in the World 22
1.1 The History of Pasta 22
1.2 The Economic Perspective 25
1.3 Macroeconomics vs. Microeconomics 26
1.4 What Is an Economy For? 28
1.5 What Economics Actually Measures 30
1.6 A Look Ahead 32
Problems 33
References 34
2 Resources and Economic Processes 35
2.1 Ecosystems and Resource Use 35
2.2 Gradients 44
2.3 Renewable vs. Exhaustible Resources 48
2.4 Major Types of Renewable Resources 49
2.5 The Rational Use of Exhaustible Resources 52
2.6 Technology and Resource Use 53
Problems 55
References 56
3 Key Variables 57
3.1 GDP 57
3.1.1 Don't Double-Count 58
3.1.2 GDP, Value Added, and Resources 58
3.1.3 What GDP Isn't 59
3.2 Resource Use 60
3.2.1 Aggregate Energy Use 60
3.2.2 Ecological Footprints 61
3.3 Inflation 62
3.3.1 Price Indexes 63
3.3.2 Applying a Price Index 64
3.3.3 Calculating Inflation 65
3.4 Unemployment 67
3.5 Interest Rates 70
3.5.1 Real vs. Nominal Interest 71
3.6 Foreign Affairs 72
3.6.1 Interpreting the Balance of Payments 73
3.7 Exchange Rates 74
3.7.1 Exchange Rates and Interest Rates 76
3.7.2 Exchange Rates and the Overall Investment Climate 76
Appendix: Price Indexes 77
Appendix: Real and Nominal Interest Rates 78
Appendix: Real Exchange Rates 79
Appendix: Data Links 81
Problems 82
References 85
Part II The Long-Run Model 86
4 Labor, Resources, and the Production Function 87
4.1 Overview 87
4.2 The Production Function 87
4.2.1 Diminishing Marginal Product 90
4.2.2 Output, Value, and GDP 90
4.2.3 Graphical Presentation 91
4.3 Labor Demand 92
4.4 Labor Supply 94
4.5 Resource Markets 94
4.5.1 Resource Supply 95
4.5.2 Resource Use 97
4.5.3 The Biosphere's Absorptive Capacity 98
4.6 The Cobb-Douglas Function 99
4.7 The Per-Worker Production Function 101
Appendix: Summary of Terminology 102
Appendix: Why K? Why N? Why A? Why Z? 103
Appendix: Treatment in Calculus and Algebra 103
Diminishing MPK and MPN 103
Constant Returns to Scale 105
Problems 106
References 107
5 The Composition of Output 108
5.1 Introduction 108
5.2 Components of Aggregate Demand 108
5.3 Consumption 109
5.4 Investment 110
5.5 Government Expenditure 111
5.6 Net Exports 111
5.7 Real Exchange Rates 113
Appendix: Summary of Terminology 114
Appendix: Unintended Investment 114
Appendix: Alternative Consumption Functions 115
Problems 116
References 117
6 The Long-Run Model (The Classical World) 118
6.1 Overview 118
6.2 Labor-Market Equilibrium 119
6.3 Equilibrium Output 121
6.4 Markets Work Well 122
6.4.1 The Real Wage Will Adjust 122
6.4.2 What's Made Is Sold 122
6.5 What Changes Output 123
6.6 Real-Nominal Divide 127
6.7 Money and Prices 128
6.8 Interest Rates 129
6.9 Policy Implications 135
6.9.1 The Problem of Recession 136
6.10 Growth, the Long-Run Model, and Potential Output 137
Appendix: What Is ``Nominal Output''? 138
Appendix: Taxes and the Effect on Wages 138
Problems 139
References 141
7 Growth with Abundant Resources 142
7.1 Introduction 142
7.2 Capital and Investment 143
7.3 Resources 143
7.4 Labor Force 145
7.5 Diminishing Returns to Capital 145
7.6 Innovation 146
7.7 Convergence 147
7.8 Mechanics of Growth 147
7.9 Institutions 148
7.10 Diminishing MPK Revisited 149
7.11 The Value of Growth 150
7.11.1 Employment 151
7.11.2 Political Stability 151
7.11.3 The Functioning of the Money System 151
7.11.4 Questioning the Value of Growth 152
7.12 Conditional Equivalence 152
Appendix: Growth and the Steady State 154
Problems 158
References 159
Part III Business Cycles 160
8 A Natural History of Money 162
8.1 Introduction 162
8.2 In the Animal Kingdom 163
8.2.1 Coordinating Current Production 163
8.2.2 Building the Future 164
8.3 The Human Problem 165
8.3.1 Non-monetary Means of Coordination 165
8.3.2 Enter Money 167
8.3.3 Taking on Credit 169
Problems 171
References 171
9 What Money Is 173
9.1 The Money Mystery 173
9.2 The Physical Economy 174
9.2.1 The Investment Project 174
9.3 Getting it Built 175
9.4 Beyond Promises 176
9.5 Money, Debt, Saving, Borrowing, Investment 177
9.5.1 Magic Money 179
9.6 Different Responses to Expenditure 179
9.7 Physical Saving vs. Financial Savings 181
9.7.1 Money as a Means, Not an End 182
9.7.2 Flexible Saving and Output 183
9.8 Comparing Money Stories 184
9.9 State Money 185
9.10 Exchange Value and the Roles and Attributes of Money 186
9.10.1 Exchange Value 186
9.10.2 The Roles of Money 187
9.10.3 The Attributes of Money 188
Appendix: Savings Without Obligation 190
Appendix: Gold and Silver 191
Problems 193
References 193
10 Banking 195
10.1 Introduction 195
10.2 Checking Transactions 195
10.3 The Bank Balance Sheet 197
10.3.1 Balancing Your Balance Sheet 198
10.3.2 Loans Two Ways 198
10.4 Reserves 200
10.5 Illiquidity vs. Insolvency 202
10.6 Tools for Credibility 205
10.6.1 Bank Runs and Deposit Insurance 206
10.7 Central Banks 208
10.7.1 Lender of Last Resort 209
10.7.2 Capital and Reserve Requirements 211
10.7.3 Monetary Policy 212
10.8 Fractional Reserve Banking 212
Problems 212
References 214
11 Expenditure Multipliers 215
11.1 Mills and Multipliers 215
11.1.1 Multipliers 219
11.1.2 Crowding Out 220
11.2 Logical Limits to the Multiplier 221
11.3 The Standard Keynesian Multipliers 223
11.3.1 The Aggregate Expenditure Function 223
11.3.2 Algebraic Treatment 224
11.3.3 The Tax Multiplier 225
11.3.4 Sanity 227
11.3.5 Nominal vs. Real 228
Problems 228
12 Monetary Policy 231
12.1 The Aims of Monetary Policy 231
12.2 Who Makes Monetary Policy 232
12.3 The Money Supply 233
12.3.1 Definitions of Money 233
12.4 The Relationship Between the Money Supply and Economic Activity 235
12.5 Tools for Influencing the Money Supply 238
12.5.1 Open-Market Operations 238
12.5.2 The Discount Rate 240
12.5.3 Reserve Requirements 241
12.5.4 Emergency Measures 242
12.5.5 Quantitative Easing 243
12.6 Monetary Targeting, Inflation Targeting, Taylor Rules, Nominal GDP Targeting 245
12.7 Conclusion 247
Appendix: An Open-Market Operation 248
Problems 249
References 251
13 Fiscal Policy 252
13.1 The Aims of Fiscal Policy 252
13.2 Mechanics of Fiscal Policy 252
13.2.1 Automatic Stabilizers 253
13.2.2 Active Fiscal Policy 253
13.3 Who Makes Fiscal Policy 254
13.4 Fiscal Policy, the Multiplier(s), and Timing 255
13.5 Conclusion 256
Problems 256
Reference 257
14 The IS and LM Curves 258
14.1 Overview of the IS-LM Model 258
14.2 Overview of the IS Curve 259
14.3 The Shape of the IS Curve 259
14.3.1 Why Does it Slope Down 260
14.3.2 What Makes it Steep or Flat 261
14.4 What Moves the IS Curve 262
14.5 Algebraic Derivation of IS Curve 264
14.6 LM Overview 265
14.7 The Shape of the LM Curve 266
14.7.1 Why Does it Slope Up 266
14.7.2 What Determines the Steepness 267
14.8 What Moves the LM Curve 268
14.9 The Money-Supply Multiplier 270
Appendix: The Meaning of ``IS'' and ``LM'' 271
Problems 271
References 273
15 Policy and Shocks in the IS-LM World 274
15.1 Overview 274
15.2 Combining the Two Curves 274
15.3 Effect of Fiscal Policy 275
15.4 Effect of Monetary Policy 277
15.5 The Goal of Policy 277
15.6 When Fiscal Policy Is Ineffective 279
15.7 When Monetary Policy Is Ineffective 281
15.8 The Uses of the IS-LM Framework 282
Appendix I: The LM Curve and the Real Interest Rate 283
Appendix II: Algebraic Solution of IS-LM 283
Problems 284
References 285
16 Short-Run Aggregate Supply/Aggregate Demand and Policy 286
16.1 Overview 286
16.2 Aggregate Demand the Standard Way 287
16.2.1 Interest-Rate Targeting 288
16.3 Aggregate Supply the Standard Way 288
16.3.1 Sticky Wages 289
16.3.2 Flexible Wages 291
16.3.3 Sticky vs. Flexible 292
16.4 ``Fool Me Twice'': Alternatives to the Standard Explanation 293
16.4.1 Aggregate Supply as a Result of Spending 295
16.4.2 Aggregate Demand as a Result of Decentralized Reactions to Inflation 296
16.4.3 Combining AD and AS 299
16.4.4 Demand Shifters 299
16.5 Policy Effects 300
16.6 The Lucas Critique 301
16.6.1 Extending the Lucas Critique 303
Appendix: The Phillips Curve 305
Problems 306
References 307
17 Policy Assessment 308
17.1 Introduction 308
17.2 Theory and the Anti-stimulus Charge 309
17.3 Empirical Assessments of Stimulus 312
17.3.1 Has Fiscal Policy Worked? 312
17.3.2 Has Monetary Policy Worked? 314
17.4 Conclusion 315
Problems 317
References 319
Part IV Macroeconomics in a Constrained World 321
18 The Standard Model and Alternative Perspectives 322
18.1 The Standard Model 322
18.1.1 Exogenous Growth 323
18.1.2 Keynesian Policy as Misguided, or Even a Trap 324
18.1.2.1 With Exogenous Growth 324
18.1.2.2 With Endogenous Growth 324
18.1.3 Keynesian Policy as an Aid to Long-Run Growth 326
18.2 Alternative Perspectives 327
18.2.1 Real Business Cycle Theory 327
18.2.2 Minsky's Unstable World 329
18.2.3 The Prospect of Agent-Based Modeling 330
18.3 Heterodoxy in Perspective 331
Problems 332
References 332
19 Resource Constraints 334
19.1 What to Do with a Treasure Chest? 334
19.1.1 The Hotelling Rule 334
19.1.2 The Hartwick Rule 339
19.1.3 Hubbert Curves 341
19.1.4 Hotelling Behavior with Endogenous Demand 342
19.2 EROI and Energy Cost 345
19.3 Limits on Absorptive Capacity 346
Problems 349
References 350
20 Growth Under Resource Constraints 351
20.1 Growth in the Resources Model 351
20.1.1 Normal Growth 351
20.1.2 Preindustrial Growth 352
20.1.3 The ``Discoveries'' 353
20.1.4 The ``Discovery'' 354
20.2 The Long-Run Impact of Resource Constraints 357
20.3 Paths Toward a Resource-Constrained Future 358
20.3.1 Business as Usual 361
20.3.2 Weak Foresight 361
20.3.3 Strong Foresight 362
Problems 363
References 363
21 Business Cycles Under Resource Constraints 365
21.1 Recessions and Resources 365
21.1.1 Conventional Recessions 365
21.1.2 Resource-Driven Recession 366
21.2 Policy in a Resource-Driven Recession 369
Problems 370
References 370
22 Continuity and New Directions 371
22.1 Continuity and Difference 371
22.1.1 The Long Run 371
22.1.2 The Short Run 372
22.1.3 Ecological Lucas, Ecological Keynesianism 373
22.2 The Very Long View 375
22.3 New Directions 376
Problems 377
References 378
Index 379