Towards a ‘Classical Keynesian’ Analysis of Effective Demand in the Long Period

Towards a ‘Classical-Keynesian’ Analysis of Effective Demand in the Long Period

The 12th Post Keynesian International ConferenceUMKC

25 Sept 2014

Man-Seop Park, Korea University

• To provide a framework for the (long-period) analysis of (Keynesian) effective demand which is compatible with the Classical/Sraffian perspective

(Arising from criticisms of the Cambridge and the Kaleckian approaches)

• (To show how the ‘given’ quantities of output in the Sraffa system can be interpreted as those being determined in accordance with Keynes’s principle of effective demand)

2

The objective(s)

• Part I: main ideas in terms of the aggregate economy• Part II: a formalisation for the aggregate economy• Part III: a multi-sector model

3

The paper(s)

Part I

4

• given - the methods of production - the ‘normal’ real wage rate (or the ‘normal’ rate of profits) - the saving propensities of social classes

the ‘normal’ rate of accumulation is determined:

• the principle of effective demand: generating saving through changes in the size of capital stock

cI s rK

Effective demand in the long period: the Classical-Keynesian perspective

5

cg s r

cg s r

( )r f w

w g

r

Effective demand in the long period

6

rcg s r

*g

*r*r

w

g

K

*g

I gK

0I

1I

0K

1K

• The ‘long period position capital equipment’ / A ‘fully-adjusted position’

• ‘The long period position exists in the present’

• Two parts of a long-period analysis

• Three states of the economy for the first part of a long-period analysis

7

Key ideas/concepts for a ‘Classical-Keynesian’ approach

The long-period position capital equipment

tK

1tK

*1tK

tK

time

log Klog Y

*tY

tY*tI

tI

8

warranted investment

autonomous investment

long period positioncapital equipment

The size (and composition) of the capital equipment ( ) that would have been utilised at the normal level for a given level of investment

• the autonomy of investment not necessarily

• why ‘long period’ ?:(1)‘fully-adjusted’ to the level of output (= utilised at the normal

level) [the first part of the long-period analysis]

(2) regarded ‘normal’ with respect to the current state of effective demand, thus guiding investment in the next period (‘reference point’ /‘centre of gravity’) [the second part]

'K

The long-period position capital equipment

'K K

9

The long-period position capital equipment

tK

1tK

*2tK

'tK

time

log Klog Y

*1tY

tY

*1tI

1tI

'1tK

2tK

1tY

10

WG

‘realised’

LP

First part: analysis of the long-period position ‘existing in the present’

Second part: analysis of the sequence of the long-period positions existing in the present

Two parts of the long-period analysis

11

The long-period analysis (first part): three states of the economy

tK

'tK

time

log Klog Y *

tY

tY

*tI

tI

The Warranted Growth state

The state of effective demand

The long-period position

The ‘realised’ state

12

Effective demand in the long period

tK

tK

time

log Klog Y

13

WG

rLP

eLP

0K

time0 T

0K

rLP

eLP

capacity

autonomous investment

warranted investment

WG

14

‘erasing the traces of output loss’:

‘[t]he elasticity of the capitalist economy … in reacting to incentives for a more rapid growth by bringing about additional productive capacity, or, symmetrically, by … erasing the visible traces of the losses in output due to a low such incentive’

(Garegnani, 1992, p. 53)

• the observed tendency, if any, to the ‘normal’ utilisation of the existing productive equipment is a result of the adjustment of supply to demand

15

Effective demand in the long period

Policy implications(against neoclassical)

• No existence of spontaneous market mechanism which would lead to the optimal use of available resources

• No welfare properties of the paths that the system spontaneously realises

• No trade-off between consumption and investment• No trade-off between public and private expenditure• No unique set of prices compatible with (output) equilibrium• No unique path of optimal growth wide scope for policy

action

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Scope for policy action

• Demand policies: both short-run and long effects• Industrial policies: to remove growth constraints• Economic growth is figured partly by the relative power of the

different groups of the society: the conscious social choice of policies

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Part II

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The relation between the quantities of the means of production and the quantities of output in the respective industries is such that

(1) output is produced at the normal utilisation of the means of production

(2) each type of output is produced of the quantity that is exhausted for gross investment and consumption in the economy as a whole (supply = ‘(effectual) demand’)

• The Warranted Growth state (WG)• The long-period position (LP)

A fully-adjusted position

19

20

The Warranted Growth state

WG

( )r f w /cs r S K g r r

*r

w / ,S K g*g

*

( )u / ( )K J g

(1)

* *( , , )J K

K

K

*g gumaxu1

The Warranted Growth state

21

* /Y K v

** *( )Y Kr wlY

** *( )gY CK

• normal utilisation - depreciation: - output:

• price equation

• quantity equation

• saving

* * * * *( )Y C S sr K

*( ), 1u u

The state of effective demand

– autonomous investment decision in individual industries

22

*, , ,i t i t i tJ z J

- (the volume of gross investment)- the capacity-generating effect: - the effective-demand-constituting effect: - the autonomy of investment: not necessarily

*,i tJ

,i tz

, 1i tz

(The recurrence relation)

Some examples:

1(1) 1t tz z

1(2) ( 1)t tz z z

1(3) 1t tz z K K

23

(7) too complex to formalise (completely autonomous)

(WG)

(Kaleckian)

(Harrod)

(Supermultiplier)

24

WG

( )r f w/cs r S K g

r r

*r

w / ,S K g*g

*

( )u / ( )K J g

(1)

* *( , , )J K

K

K

*g gumaxu1

The effective long-period position (eLP)

eLPK *,J

The effective long-period position (eLP)

25

• normal utilisation - depreciation: - output:

• price equation

• quantity equation

• autonomous investment

*( ), 1u u

26

WG

( )r f w/cs r S K g

r r

*r

w / ,S K g*g

*

( )u / ( )K J g

(1)

* *( , , )J K

K

K

*g gumaxu1

eLP nLP

The notional long-period position (nLP)

The notional long-period position (nLP)

27

• utilisation

• depreciation

• autonomous investment

• price equation

* quantity equation not holding

28

WG

( )r f w/cs r S K g

r r

*r

w / ,S K g*g

*

( )u / ( )K J g

(1)

* *( , , )J K

K

K

*g gumaxu1

eLP nLP

The realised long-period position (rLP)

u

( )ur

g

g

( , , )J K rLP

The realised long-period position (rLP)

29

(' / )'Y Ku v

'' ( ' ) 'Y K wlYr

' ( ' ) ' (1 '' )Y K wlY s rg K

(' ')u

* * *(1) ( ') ' ' , 'u u r zr g zg * * * * * * *(2) ( ') ' ( ) , ' ( )u r z r g z g

*( ' ')g K J zJ

• in the short period, the rate of real wages is not necessarily at the ‘normal’ level

• the short period rate of real wages is determined in reference to

- the given money wage rate (determined by short-period wage bargaining)

- the short-period price level (determined by some short-period price setting procedure

such as mark-up pricing)

Short period

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( , )Y Y w J Y

WP

w

Short period

31

LP for

SP for

SP for

WP

w

( , , )w J W

( ; , ) *Y P J W Y

( ; , ) *Y P J W Y

(SP-1) (SP-2) (SP-3) (SP-4) (SP-5) (SP-6)(SP-7)

32

Short period

33

~𝑃 𝐴

𝐴𝑎𝑏

𝑃𝑎

𝑃𝑏

Short period

𝒀

• the ‘employment curve’:

- from the rLP, one obtains for each w

• The ‘wage bargaining curve’

34

The normal real wage rate

( )/d e wL L e

dL lY

0

( ); (0( )

) 0, 0 1w w e

w if e e

w f e f f if e e

35

𝑤

1

𝐴

𝑤𝐵

𝑒𝐴

𝑤𝑚𝑎𝑥

𝑒𝐵

𝐵

𝑤=𝑤(𝑒)

𝑒=𝑒(𝑤)

The normal real wage rate

the existence

36

𝑤

1

𝐴

𝑒𝐴

𝑤𝑚𝑎𝑥

𝑤=𝑤(𝑒)

𝑒=𝑒(𝑤)𝑒=𝜀(𝑤′ ′)

𝑤𝑚𝑎𝑥′ ′

The normal real wage rate

the stability

Part III

37

Multi-sector model

• The prices of production

• The financial market for allocating aggregate saving

38

* * * * * * * * * *

*

[ ]([ ] ) [ ] [ ]

1

i i i ix r w x x

I A p l B p

dp

* * * * * * *[ ]i ig h x B x A d

* * * * * *[ ]i ig S x A p

A fully-adjusted position

39

* * * * **

*

*[ ]([ ] ) [ ] [ ]

1i i i ix w xr x

I A l Bp

dp

p

* * ** *[ ]ii g h x B x A d

* * * * *[ ]i ix S x Ap

* * * * *( )i i i i iJ g x a p

The Warranted Growth state

40

*i iixk a

41

[ ]ig h B xA x A dx

*[ ]( ) [ ] [ ]

1i i i ix w xr x

I A l

d

p Bp

p

(1 )i i i i ig x z J a p

The effective long-period position (eLP)

42

[ ][ ] [ ] [ ]

1i i ii ixrx w x

Ap l Bp

dp

( )i i i i ii x z Jg a p

The notional long-period position (nLP)

*( )i i i ix x

43

[ ][ ] [ ] [ ]

1i i i i ix w x xr

A p l B p

dp

( )i i i i ii zg x J a p

The realised long-period position (rLP)

*( )i i ii x x

[ ]ig S x A p

[ ]i hg B x A x Ax d