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II
Finding Common Ground between Ecological Economics
and Post-Keynesian Economics
Tobias Kronenberg1)
1) Forschungszentrum Jülich, Institute of Energy Research - Systems Analysis and Technology
Evaluation (IEF-STE), D-52425 Jülich, Germany
Executive Summary
Post-Keynesian economics and ecological economics have in common that they
are considered to be ‘heterodox’ schools of thought because they reject the neoclassical approach of most ‘mainstream’ economists. Aside from that, there has
not been a strong connection between the two schools. “A New Guide to Post
Keynesian Economics” [Holt & Pressman, 2001] contains no chapter on environmental or ecological issues. This neglect has led ecological economists like Herman Daly in his book “Ecological Economics and Sustainable Development” to
criticize Post-Keynesians for succumbing to the same growth paradigm as the
neoclassical school.
This paper argues that the two approaches are complementary in the sense that
they each have different strong points. Ecological economics has correctly pointed
out that the growth of the global economy may not be welfare-improving anymore,
whereas Post-Keynesians have gained valuable insights in how the growth process of a capitalist economy actually works. Therefore, combining insights of both
approaches may lead to a much better understanding of how a capitalist economy
operates in a natural environment with limits to growth.
Both schools of thought share a dislike of aggregation, although for different reasons –ecological economists reject neoclassical production functions because
they are incompatible with the laws of nature, whereas Post-Keynesians reject
them because the notion of an aggregate capital stock makes no sense to them.
Therefore, both approaches tend to favour multisectoral models, i.e. input-output
models. Based on the theoretical insight gained from both schools of thought, the
paper then moves to an empirical application by outlining a dynamic input-output
model for Germany, whose theoretical foundation is compatible with postKeynesian and ecological economics.
Keywords
ecological economics, post-Keynesian economics, input-output model
Contribution to
III Spanish Conference on Input-Output Analysis: Structural Change and Sustainable Development, Albacete, Spain, 30th September - 2nd October 2009
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I
Introduction
Post-Keynesian economics and ecological economics have in common that they are
considered to be ‘heterodox’ schools of thought because they reject the neoclassical
approach of most ‘mainstream’ economists. Aside from that, there has not been a
strong connection between the two schools. “A New Guide to Post Keynesian Economics” [Holt & Pressman, 2001] contains no chapter on environmental or ecological
issues. This neglect has led ecological economists like Herman Daly [Daly, 2007] to
criticize post-Keynesians for succumbing to the same growth paradigm as the neoclassical school.
This paper argues that the two approaches are complementary in the sense that they
each have different strong points. Ecological economics has correctly pointed out
that the growth of the global economy may not be welfare-improving anymore,
whereas post-Keynesians have gained valuable insights in how the growth process
of a capitalist economy actually works. Therefore, combining insights of both approaches may lead to a much better understanding of how a capitalist economy operates in a natural environment with limits to growth 1.
Ecological economics poses a normative question: “Do we want further growth?”.
They criticize neoclassical resource economics for ignoring the laws of nature, notably the principle of mass balance and the entropy law. According to the former, the
mass of output must be equal to the mass of inputs, which implies that the production
of material goods requires material inputs. Consequently, ecological economists reject the neoclassical aggregate production function, which allows generously for substitution between material and non-material inputs. The entropy law, as GeorgescuRoegen [Georgescu-Roegen, 1971] pointed out, implies that production is an irreversible process. This has led ecological economists to criticize the common neoclassical assumption of ‘malleable capital’ and recognize the importance of path dependence.
Post-Keynesian economists, by contrast, ask a positive question: “How does growth
come about in a capitalist economy?”. Therefore, they are not necessarily growth
maniacs. They agree with ecological economists in much of their criticism against the
neoclassical mainstream. Their theory of consumer behaviour, as Lavoie [Lavoie,
2005] shows, is in many ways similar. The same is true of their production theory:
Having rejected the neoclassical aggregate capital stock in the Capital Controversy,
post-Keynesians generally view production as a transformation of inputs into outputs
1
Recently, other authors have also discovered the potential for combining insights from postKeynesian economics and ecological economics. Ric Holt and others are currently working on a
book which seems to be going in the same direction. Unfortunately, the book is not yet available in
stores. However, a chapter on consumer theory by Marc Lavoie is already available online.
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that is mostly characterized by fixed technology coefficients unless a capacity constraint is reached. The importance of dynamic concepts such as path dependence
and the irreversibility of decisions, which is emphasised by ecological economists,
was also realised by Joan Robinson [Robinson, 1980] and other post-Keynesians.
The aim of this paper is to determine how the theoretical views of both schools can
be reconciled and to show how this could contribute to providing actually relevant
policy advice. To this end, the paper first confronts the views held by post.-Keynesian
and ecological economist on the theory of production (Section 2), consumption
/Section 3), and economic dynamics (Section 4). Following that, it discusses the two
schools’ policy recommendations (Section 5). In order to show the value of applying
theory to practice, it applies a macroeconomic model of a post-Keynesian nature to
study the impact of consumption dematerialisation on the distribution and the level of
GDP (Section 6). Finally, a conclusion is drawn and future research avenues are
suggested.
II Production Theory
This section explains why post-Keynesians and ecological economists reject the neoclassical theory of production. It argues that their views are similar enough to permit
a unified Ecological post-Keynesian theory of production.
Ecological economists emphasise that a theory of production has to be compatible
with the laws of nature. That recommendation may seem obvious and trivial, but it
has in fact been ignored by many neoclassical economists who base their theory on
aggregate production functions. In a highly entertaining special issue of Ecological
Economics (the journal), Herman Daly [Daly, 1997] exchanges his views on this matter with Robert M Solow [Solow, 1997] and Joseph E. Stiglitz [Stiglitz, 1997]. He argues that the aggregate production function used by Solow and others ‘calls for making a cake with only the cook and his kitchen. We do not need flour, eggs, sugar etc.,
nor electricity or natural gas, nor even firewood. If we want a bigger cake, the cook
simply stirs faster in a bigger oven that somehow heats itself”.
What Daly expresses so visibly in his beautifully embellished metaphoric language is
the fact that much of neoclassical economics is based on a very simply aggregate
production function, where output is produced using only labour (the cook’s stirring),
capital (the oven), and no natural resources. Even if natural resources are included
as a third production factor, he argues, the problem is simply swept under the rug,
because it does not address his main criticism. The crucial mistake of neoclassical
economists, in Daly’s view, is that their production functions contradict the first (conservation of energy) and the second law (the entropy law) of thermodynamics.
Ecological economists see production as the transformation of inputs into outputs.
This means that neither energy nor matter is produced or created. The principle of
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mass balance implies that the production of material output requires material inputs,
so the scope of output dematerialisation is limited. It also implies that the production
of capital requires material input, since even intangible knowledge and ideas have to
be stored in brains, books, or some other material storage device. Ecological economists therefore argue that man-made capital cannot be a substitute for material because it consists of material. As a result, they believe that the loss of natural capital
cannot easily be compensated by the accumulation of man-made capital, as neoclassical economists would have it.
Although post-Keynesians have not yet (to this author’s knowledge) dealt with the
substitution of man-made capital for natural capital, they would probably be just as
sceptical about it as Herman Daly, perhaps even more so. This is because postKeynesians completely reject the notion of an aggregate capital stock. Harcourt [Harcourt, 1972] describes how they developed this view during the famous Cambridge
Capital Controversy. Their main argument was that a unit of capital, unlike a unit of
labour, cannot be physically measured. Constructing an aggregate capital stock requires to somehow value the individual capital goods, and this valuation process requires knowledge of the rate of interest. Therefore, the capital-labour ratio, which neoclassical economists use as an indicator of the scarcity of labour, cannot be used to
explain the distribution of income between workers and capital owners. Instead, they
view the rate of interest (or the profit rate) as the outcome of complex social processes. If this is true, the concept of an aggregate capital stock makes no sense, and
theories based on the aggregate production function are faulty.
The Cambridge Capital Controversy dealt a serious blow to the neoclassical production function. More recently, there have been further attacks on it. These refer to the
‘estimation’ of aggregate production functions. A number of authors, for example Felipe and McCombie [Felipe & McCombie, 2005], have shown that people are actually
‘estimating’ equations which are true by definition (they are identities derived from the
national accounts). This observation provides further support to the post-Keynesians’
rejecting the aggregate production function.
Having rejected the aggregate capital stock, post-Keynesians argue that the purpose
of capital goods such as machines and roads is not to increase the marginal product
of labour but to provide a capacity for producing output. In their view, the amount of
installed capital goods determines a firm’s capacity to produce output. As long as
actual output does not exceed capacity, firms are assumed to operate with a technology that can be characterised by fixed input-output coefficients. According to
Eichner and Kregel [Eichner & Kregel, 1975], most post-Keynesian economists agree
that firms face ‘constant prime or direct costs over the relevant range of output, with
the zone of increasing costs lying to the right of that’. This means that within the ‘relevant range’ the firm operates with a constant input-output ratio (in value terms).
From this view, it is very easy to accept the assumption of constant input shares (as
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in the simple Leontief model). Moreover, they mention that ‘profits, or residual income, of the firm will be an increasing function of the rate of capacity utilization’. This
is pretty much in line with the simple Leontief model. Lavoie [Lavoie, 2006b, p. 40]
confirms that ‘Post-Keynesians generally adopt Leontief-type technologies of production’.
Thus, the post-Keynesian theory of production is consistent with the laws of nature, a
requirement which ecological economists emphasise. With constant input coefficients, an increase in output requires a proportional increase in intermediate inputs.
In Herman Daly’s beautiful metaphor, post-Keynesian theory would argue that the
kitchen is large enough for the cook to bake a larger pie, but he will need to buy more
flour and more eggs to do so. He will also need more labour input – maybe he will
hire an apprentice, or he will work overtime. Thus, the post-Keynesian theory of production is perfectly in line with the views of ecological economics.
To sum up, the views of post-Keynesians and ecological economists are very similar
in many respects. There is enough common ground to build a unified theory of production. Such a theory would most certainly describe the relationship between the
output of a certain production process and the inputs in the form of constant technological coefficients. Thus, it would be compatible with the laws of nature. It would reject the existence of an ‘aggregate capital stock’ and, instead, assume that each industrial sector has a certain capacity to produce. Each sector would be assumed to
operate below its capacity under normal circumstances, so an increase in demand
would be met by an increase in production, and the impact on prices would be minimal. In the short run, changes in the relative prices of inputs would have no effect on
the technical coefficients, because the scope for substitution between inputs, especially between man-made goods and natural resources, is regarded as very limited.
In the long run, the unified theory of production could allow for changing technical
coefficients as long as the laws of nature are respected.
III Consumption Theory
This section discusses the similarities between post-Keynesian economics and ecological economics extend in the realm of consumption theory. It is based to a large
extent on the work of Marc Lavoie [Lavoie, 2005]. Lavoie explains: ’I recently discovered that heterodox economists in the environmental field (partisans of ecological
economics) have been, for a good 20 years, proposing models of consumer behaviour that are very similar to those proposed by several economists of Post-Keynesian
influence’ [Lavoie, 2006a]. His statement shows that communication was clearly lacking between the two schools.
Lavoie argues that ecological economists have been using for some time models
which are in fact based on the post-Keynesian theory of consumption. They also
stress the importance of fundamental uncertainty, which renders the expected utility
7
maximisation of neoclassical theory impossible and instead leads to the application
of the precautionary principle. Also, both schools believe that consumer behaviour is
very much driven by habits as long as no fundamental changes occur.
Ecological economists usually criticise the methods with which their neoclassical colleagues try estimate the value of certain natural resources. These methods are
based on the assumption that all available consumption bundles can be ranked in
terms of value. However, ecological economists argue that people may have lexicographic preferences, especially with respect to choices that involve the extinction of a
species or some such thing. Lavoie argues that this perspective is closely related to
what post-Keynesians call the subordination of needs.
Lavoie summarises his findings by stating that ‘the principles of consumer behaviour
which have been put forward by post-Keynesians have already been endorsed or put
to use by some specialists of ecological economics’. The fact that similar views prevail in both schools, he argues, is actually not surprising, because both schools were
heavily influenced by the work of Georgescu-Roegen. Hence, ecological economics
and post-Keynesian economics share many similarities in their view of consumer
theory.
IV Dynamic Theory
There is a widespread misperception in economics, probably caused by the popular
success of the ‘neoclassical synthesis’, that Keynesian economics is only relevant for
the analysis of short-term deviations from equilibrium, but that the grand questions of
economics – like long-term growth or the natural rate of unemployment – can still be
studied in a ‘proper’ general equilibrium model in which the classical dichotomy holds
and government interventions are generally detrimental unless some well-specified
market failure exists. This belief can be summarised by the recommendation that
economists should be Keynesian in the short run and neoclassical in the long run.
However, many economists are not truly aware of the fact that post-Keynesian economists have actually been quite busy studying long-term growth. Eichner and Kregel
[Eichner & Kregel, 1975] mention the work by Harrod (1939) as the starting point of
post-Keynesian growth theory. Following Harrod’s work, Joan Robinson and Nicholas
Kaldor also studied long-term growth from a post-Keynesian perspective. In some
instances, they came to quite radical conclusions. For example, Robinson [Robinson,
1980] wants to ‘throw out concepts and theorems that are logically self-contradictory,
such as the general equilibrium of supply and demand, the long-run production function, the marginal productivity of capital and the equilibrium size of firms’. She also
asserts that ‘the construction of a long-run model does not lead up to any plausible
hypotheses about reality’.
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Currently, most post-Keynesians study long-term growth using models based on the
work by Michal Kalecki (‘Kaleckian’models). An important feature of these models is
that the paradox of thrift is maintained in the long run as well as in the short run. This
‘paradox’ refers to fact that an increase in the savings rate, which is usually intended
to cause faster growth since saving is thought of as sacrificing current consumption
for future consumption, actually reduces output. This is because in the postKeynesian view an increase in saving implies a reduction in effective demand, and
firms react to this by producing fewer goods. Many neoclassical economists of the
‘New Keynesian’ school would agree with this line of reasoning in the short run.
However, the Kaleckian models show that the paradox of thrift may also hold in the
long run. If this is the case, an increase in the propensity to save reduces the longterm rate of growth.
Some post-Keynesians do not agree with all the implications of the Kaleckian model,
for example the lack of a tendency toward a ‘normal’ rate of capacity utilisation. However, virtually all post-Keynesians agree that economy dynamics are very much governed by path dependence and hysteresis. What this means is that if the economy is
shocked by some exogenous disturbance, it will not return to the same steady state
or balanced growth path that may have prevailed before the disturbance occurred. In
some models, no such balanced growth path exists. In other models, a balanced
growth path does exist, but its characteristics depend on past events, so after a temporary shock the economy will move toward a new balanced growth path which is
different from the old one. In one word, the economy exhibits path dependence.
It should be mentioned that neoclassical authors have – after some decades of criticism from their post-Keynesian colleagues – realised the importance of path dependence. The models which they developed starting in the 1980’s – the so-called
new growth theory – share some of the features which post-Keynesian growth theorists emphasise, for example path dependence. For this reason, Palley (2002) argues
that new growth theory is compatible with Keynesian macroeconomics, whereas old
growth theory was not.
The post-Keynesian view on economic dynamics is similar to what ecological economists say. The latter emphasise that due to the law of entropy, the economic process has a direction, implying that certain actions are irreversible once they have
been carried out. When a lump of coal has been burned to produce heat and electricity, it is simply impossible to convert the resulting emission back into a lump of coal
(actually, it might be possible using some yet-to-be-developed technique, but the two
conversion processes would still increase the entropy of the system, which renders a
return to the previous situation impossible). Therefore, the concept of a ‘malleable’
capital is an abhorrent idea for ecological economists.
Hence, post-Keynesians and ecological economists once again share important ideas. In the field of economic dynamics, these ideas include the importance of path de-
9
pendence and the irreversibility of actions, which are likely to cause technological
lock-in and other kinds of complications which suggest that even if the economy
tends toward a balanced growth path, market forces will not assure that this path will
be optimal in any respect. Hence, both schools argue that governments should take
action to influence the rate of long-term growth. However, while post-Keynesian generally recommend policies that are intended to promote growth, ecological economists often argue that growth needs to be slowed down. These different policy recommendations will be discussed in the following section.
V Views on Policy
The previous sections have shown remarkable similarities in the theoretical background of ecological economis and post-Keynesian economics. This section, however, will show that despite the theoretical consensus the two schools tend to hold differing views on policy.
Ecological economists accuse post-Keynesians of ignoring environmental issues.
Daly [Daly, 2007, p. 25], for example, admits that Keynesians and post-Keynesians
put forth a well-founded critique of neoclassical economics, but when it comes to
GDP growth, they succumb to the same “growthmania” and ignore the environmental
limits to growth This may be true for many but certainly not all of them. For example,
Joan Robinson was well aware of ‘the notorious problem of pollution’ [Robinson,
1972] and the work by J. W. Forrester. Also, Eichner and Kregel [Eichner & Kregel,
1975] mention in passing the ‘recently revived Malthusian sensitivity to what are the
true limits on economic growth’.
It is clear, however, that even if post-Keynesian economists did not completely ignore
environmental issues, they certainly did not put them on the top of their agenda. This
is evidenced by the fact that “A New Guide to Post Keynesian Economics” [Holt &
Pressman, 2001] contains chapters on many interesting issues, such as income distribution, unemployment, and inflation, but no chapter on environmental issues. King
[King, 2001], in his chapter on labour and unemployment, does propose that ‘increased public sector employment should be targeted to neglected areas of social
services and environmental improvement’. However, the main objective of his proposal is to reduce the rate of unemployment, and environmental improvement is seen
as a secondary objective, which allows the policy to obtain a kind of double dividend.
In the same volume, Wray [Wray, 2001] proposes that governments regulate energy
prices, but his concern is not the internalisation of pollution externalities but the reduction of energy price volatility in order to stabilise inflation.
These examples would show that post-Keynesians are certainly not totally ignorant of
environmental issues. However, they seem to have different priorities, and environmental problems only play a minor role in most of the post-Keynesian literature. This
might be related to the post-Keynesian view that ‘resources are not typically scarce’
10
[Setterfield, 2001]. However, what is true for unskilled workers may not be true for
endangered species. Therefore, post-Keynesians should consider paying more attention to those resources which are scarce, especially natural and non-reproducible
resources. Once they do this, they will quickly realise that growth is a double-edged
sword – it may help reduce unemployment, but it exacerbates environmental problems. The attractiveness of growth-promoting policies should be reconsidered in the
light of this, and the distinction between qualitative and quantitative growth should
receive more attentions by post-Keynesians. Since their rejection of aggregate production functions often leads them to use multisectoral models, they are actually in a
good position to study these issues.
In contrast to their post-Keynesian colleagues, neoclassical economists see scarcity
everywhere. This might explain why they realised the crucial importance of natural
resource scarcity much sooner. From the early 1970’s, a huge neoclassical literature
on these issues has emerged. Neoclassical economics has developed the sub-fields
resource economics, environmental economics, and energy economics (although the
neoclassical authors in these fields tend to be less ‘fundamentalist’ than in other
fields).
The relative neglect of environmental issues may partly explain why post-Keynesian
economics was not (yet) very successful in its attempt to become a full-fledged alternative to neoclassical economics. It is regrettable, because post-Keynesians could
contribute important insights into the debate on environmental policy, for example to
the question of resource taxation. Pointing out that natural capital is the ultimate
scarce resource, ecological economists are generally in favour of taxing the use of
natural resource heavily and reducing the tax burden on other production factors,
notably labour. However, since they do not have a well-developed theory of income
distribution and growth, they are not in a good position to discuss the macroeconomic
impact of such a tax reform. As a result, the macroeconomic impacts of environmental tax reforms are usually studied by neoclassical economists using neoclassical
models, who usually come to the surprising conclusion that high taxes, including
those on natural resoures, are detrimental to social welfare. If post-Keynesians were
to take up this issue, they could come to very different results, because their macroeconomic theory is quite different. In order to provide a glimpse of what a postKeynesian analysis might contribute, the next section presents a simple postKeynesian model and applies it to the study the macroeconomic effects of output
dematerialisation.
VI Macroeconomic Effects of Dematerialisation
This section uses a stylised macroeconomic model of a post-Keynesian nature to
assess the impact of dematerialisation, which is recommended by ecological economists, on the distribution and the level of income in an economy.
11
VI.1 A simple macroeconomic model
The simple macroeconomic model we use in this section is basically an input-output
model with an income multiplier. Effective demand, as post-Keynesians suggest, is
divided into autonomous demand and induced demand. In this simple model, which
serves only illustrative purposes, we assume that the investment by businesses can
be treated as autonomous demand. Induced demand consists of consumption expenditure (final consumption) and the demand for intermediate goods. The goods
markets are in equilibrium when the following condition is fulfilled:
(1)
x = Cx + Ax + f .
Equation (1) states that the total output of goods x (i.e. supply) must be equal to the
demand for goods, which consists of investment f (autonomous demand), induced
consumption and intermediate consumption. A is a matrix of technical input-output
coefficients which reflects the production technology. Element A i,j tells us how many
units of input i are required to produce one unit of output j. C is a matrix of incomeinduced consumption. Element C i,j tells us how much demand for good i will be induced when the production of good j rises by one unit.
The elements of A can be computed if an input-output table is available. In the following, we assume that A is exogenous and constant. This assumption is consistent with
the post-Keynesian theory of production as well the ecological economists’ view on
production (see Section 2). In the short term, it is realistic because most firms cannot
instantly change their production recipe. In the long term, one could allow for changes in A because firms may adjust their production recipe in response to altered prices. However, changes in A must be compatible with the laws of nature discussed in
Section 2.
The elements of C can in principle be computed from a social accounting matrix, if
such is available. It is defined as:
(2)
C = Pcˆ Y
Where P is a matrix describing the consumption patterns of different social groups, c
is a vector containing the propensities to consume, ĉ is the diagonalised form of that
vector, and Y is a matrix describing the distribution of income (surplus) between the
social groups. In the following, these matrices are assumed to be constant.
According to post-Keynesian theory, autonomous demand is exogenous, at least in
the short term. As firms produce output to fulfil the requirements of autonomous de-
12
mand, they produce a surplus, which is distributed to workers and firm owners in the
form of wages and profits. Workers and firm owners spend part of that income, inducing further demand, to which firms react by producing additional output. This process
continues until the goods markets are cleared, i.e. condition (1) is fulfilled.
The level of output (of each good) which is consistent with a given level of autonomous demand (for each good) can be determined by re-arranging (1) and substituting (2) for C. The result is
(3)
x = (I − A − C) −1 f = (I − A − Pcˆ Y) −1 f ,
where I denotes the identity matrix.
VI.2 A numerical example
In order illustrate the logic behind equation (3), it may be useful to discuss a numerical example. In line with Kaleckian theory, let us assume that there are two social
groups (or ‘classes’ for those who prefer that term): workers and capital owners.
Workers earn income in the form of wages, whereas capital owners receive profits. In
the production sector, let us assume that there are two sectors. The manufacturing
industry produces manufactured goods, whereas the service industry produces services. There is no joint production, outputs are homogeneous, as are inputs.
Table 1: Production technology
Manufactured goods
Services
Production of manufactured goods
0.3
0.2
Source: author’s assumptions
Production of
services
0.2
0.3
IEF-STE 2009
The production technology is given by the matrix A, as shown in Table 1. In this example, the production of one unit of manufactured goods requires 0.3 units of manufactured goods and 0.2 units of services. In the following, it is assumed that the units
of measurement are normalised such that the price of each unit is equal to one.
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Table 2: Distribution of income
Production of manufactured goods
0.3
0.2
Workers
Capital owners
Production of services
0.2
0.3
Source: author’s assumptions
IEF-STE 2009
Table 2 shows how income is distributed between the two social groups in the two
industries (matrix Y). When a unit of manufactured goods is produced, workers earn
0.3 units of income, and capital owners earn 0.2 units of income. In the service industry, the numbers are exactly reversed. The values in Table 2 were chosen to reflect
the fact that in reality the income share of workers is higher in the manufacturing industry than in the service sector. They were also chosen to reflect the requirement
that the entire surplus generated must be distributed. Note that the coefficients of
Table 1 and Table 2 sum up to one in each sector. If, for example, one unit of services is produced, a surplus (or value added) of 0.5 units is generated. That surplus
is then distributed between workers and capital owners according to Table 2.
Workers and capital owners will spend part of their income (consumption expenditure) and save the remainder. For simplicity, let us assume that workers spend all
their income, so their propensity to consume is equal to one. For capital owners, we
assume that they spend 80% of their income and save the remainder, so their propensity to consume (both marginal and average) is equal to 0.8. Thus, c = (1, 0.8).
Table 3: Allocation of consumption expenditure over manufactured goods and
services
Workers
0.5
0.5
Manufactured goods
Services
Capital owners
0.5
0.5
Source: author’s assumptions
IEF-STE 2009
Finally, we assume that both workers and capital owners allocate their consumption
expenditure evenly over manufactured goods and services. Thus, the matrix P looks
as shown in Table 3. Substituting the assumed parameter values into (3) yields the
following relationship between autonomous demand and sectoral output:
−1
(4)
 1 0   0.3 0.2   0.5 0.5  1 0  0.3 0.2 
 − 
 − 


 f
x = 
 0 1   0.2 0.3   0.5 0.5  0 0.8  0.2 0.3 
−1
 0.47 − 0.42 
 f
x = 
 − 0.43 0.48 
14
10.67 9.33 
f
x = 
9
.
56
10
.
44


Under the aforementioned assumptions (constancy of A and C), equation (4) can be
used to compute the sectoral output x that is required in equilibrium for a given autonomous demand f. If, for example, autonomous demand amounts to 5 units of
manufactured goods and services each, the economy needs to produce 10 units of
each good to achieve an equilibrium situation. That equilibrium situation can be described by an input-output table as shown in Table 4.
Table 4: Input-output table describing the equilibrium state in the numerical
example
Intermediate use
Use
Supply
Prod.
Prod.
of
of
manuf. services
goods
Total
Final use
Cons.
Cons.
exp. by exp. by
workers capital
owners
Total
use
Investment
Total
Manufactured
goods
30
20
50
25
20
5
50
100
Services
20
30
50
25
20
5
50
100
Total
50
50
100
50
40
10
100
200
Wages
30
20
50
Profits
20
30
50
Value added
50
50
100
Total supply
100
100
200
Source: author’s calculations
IEF-STE 2009
One can easily see from Table 4 that capital owners receive an income of 50 units
and that they spend only 40 units on consumption. Thus, their savings amount to 10
units. This is exactly equal to the 10 units of autonomous demand, which we interpreted as investment. Hence, the fundamental equilibrium condition for a closed
economy is fulfilled – savings are equal to investment.
The very simple model described above can of course be extended by including international trade (exports and imports), a government collecting taxes and demanding additional goods and services, more social groups and more industries. However,
the simple model of a closed economy with only two industries is quite sufficient for
15
the purposes of the present paper. In the next section, it will be used to examine the
impact of output dematerialisation on the level and distribution of income.
VI.3 Short-term effects of dematerialisation
Ecological economists, as mentioned above, argue that since the production and
consumption of material goods is invariably associated with environmental degradation, we need a dematerialisation of output. This can be brought about, on the one
hand, by a change in technology – if a production process becomes more efficient, a
given good can be produced with less pollution. However, there are thermodynamic
limits to this kind of technological dematerialisation. The other type of dematerialisation is a change in consumption patterns. There are also thermodynamic limits in this
respect, since humans need a certain amount of calorie intake to stay alive. However, as ecological economists would point out, consumers in the OECD countries are
very far away from such binding limits. Therefore, there is ample scope for a dematerialisation of consumption.
Strictly speaking, the simply model described above cannot be used to analyse the
dynamic process of consumption dematerialisation, because it is a static model.
However, it can be used to compare to different static equilibria associated with different consumption patterns. Even though a comparative static analysis cannot capture the dynamic effects of consumption dematerialisation, it can yield certain valuable insights.
In the simple two-sector model, a dematerialisation of consumption means that consumers demand fewer manufactured goods and more services – for a given income.
However, as post-Keynesian theory emphasises, the structure of consumption expenditure affects the distribution of income between social groups, and since the
propensity to consume differs between these groups, the level of output is affected
as well. In theory, the change in consumption patterns could raise the level of output,
and if this effect is large enough it could offset the intended reduction in material consumption. Before recommending a shift in consumption patterns, this theoretical possibility has to be addressed. Furthermore, since the distribution of income is important from a social point of view, it should also be discussed.
In the economy described by the simple post-Keynesian model, an increase in the
savings rate will reduce the level of output due to the paradox of thrift. Generally, the
savings rate of capital owners is higher than that of workers. Thus, the question is
whether the shift in consumption patterns affects the distribution of income between
workers and capital owners. In general, it will do so if the income distribution coefficients differ between industries, as they do in Table 2. Under the assumed parameter
values, a consumption shift toward services raises the income share of capitalists,
which in turn raises the macroeconomic savings rate and hence reduces total income.
16
Table 5: The level and distribution of income for different consumption patterns
Expenditure share of…
…manufactured goods
…services
Production of…
…manufactured goods
…services
Total income
Wages
Profits
Wage share (%)
Profit share (%)
0.5
0.4
0.3
0.2
0.1
0.0
0.5
0.6
0.7
0.8
0.9
1.0
200.0 196.1 192.3 188.8 185.3 182.0
100.0 88.3 77.0 66.3 55.9 46.0
100.0 107.8 115.3 122.5 129.4 136.0
100.0 98.0 96.2 94.4 92.7 91.0
50.0 48.0 46.2 44.4 42.7 41.0
50.0 50.0 50.0 50.0 50.0 50.0
50.0 49.0 48.0 47.0 46.0 45.1
50.0 51.0 52.0 53.0 54.0 54.9
Source: author’s calculations
IEF-STE 2009
Table 5 shows the sectoral production corresponding to a given consumption structure as well as the level and distribution of income. Moving from left to right, consumption becomes more biased toward services. In the last column, consumption is
completely dematerialised, an no manufactured goods are consumed.
Even a complete dematerialisation of consumption, however, does not lead to a dematerialisation of production. One reason for this is fact that autonomous demand
still contains a material component. However, even if autonomous demand is also
dematerialised (10 units of services and no manufactured goods), the economy still
needs to produce 40 units of manufactured goods, because services cannot be produced without material inputs (A 1,2 is larger than zero).
In the numerical example shown in Table 5, the impact on the level of income and its
distribution are noticeable are modest. A complete dematerialisation of consumption
allows a reduction of material production – and the associated pollution – by 54%
and is accompanied by a reduction of total income by only 9%. However, the income
loss is distributed unevenly. The income of capital owners is not affected at all, because the equilibrium condition does not allow a fall in aggregate savings, and since
capital owners are the only ones who save a (constant) portion of their income, their
income cannot fall. Workers, by contrast, lose almost 20% of their income. Thus,
there is a conflict of interest between capital owners and workers, since the latter
have to bear the ‘cost’ of output dematerialisation. Whether they are willing to do so
depends on their norms and values.
However, the effect of consumption on the income of workers can be much more
pronounced if the income distribution coefficients differ more significantly between
the two industries. If, for example, A = ((0.4, 0.1), (0.1, 0.4)), the income of workers
falls from 50 units to 25 units as consumption expenditure is completely dematerialised. In this case, workers would suffer an income loss of 50% instead of 18%, and
17
total income would fall by 25% instead of 9%. Thus, a dematerialisation of consumption can have serious unintended consequences on the level and distribution of income, which may be unacceptable for certain groups. Policymakers may therefore
consider cushioning its impact by, for example, using fiscal instruments to affect the
allocation of income or strengthening the bargaining rights of workers.
It should be noted, however, that the model discussed above is essentially a shortterm model, where investment is simply a component of autonomous demand. Such
a model does not take into account the ‘dual role’ of capital investment. Therefore,
the analysis of the previous sections should be complemented in the future by a longterm analysis to examine the dynamic impacts of consumption dematerialisation.
VII Conclusion
Eichner and Kregel [Eichner & Kregel, 1975] believed that ‘post-Keynesian theory
has the potential for becoming a comprehensive, positive alternative to the prevailing
neoclassical paradigm’. More than 30 years later, however, neoclassical economics
still dominates the mainstream of our science. Although Lavoie presents postKeynesian theory as a ‘true alternative to the dominant school of economic thought’
[Lavoie, 2006b, p. xii], it seems that most of his colleagues still find neoclassical theory more convincing than the post-Keynesian alternative. It is my impression that one
of the reasons for this is the failure of post-Keynesians to address environmental issues such as climate change and energy security. Many young economists are very
much interested in these matters, and since the literature on these topics is almost
exclusively written by neoclassical authors, they tend to follow in that tradition. The
notable exception to this pattern arises in the field of ecological economics, whose
founding fathers were very critical about the neoclassical theory of production. The
literature that was reviewed Sections 2 – 4 of this paper shows that ecological economists have come to hold similar views as the post-Keynesians. However, communication between these two schools has been limited in the past.
Combining insights from post-Keynesian economics and ecological economics could
be beneficial for both schools. It would give post-Keynesian economics the practical
relevance it needs, because environmental issues will continue to be on top of political and research agendas in the coming decades as the Earth gets warmer and natural resources get scarcer. Ecological economics, on the other hand, would benefit
from a proper macroeconomic framework with which to tackle the impact of environmental policy on other important issues such as income distribution, unemployment,
and growth.
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