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Lecture notes on accumulation theories Heterodox Theories Sergio Cesaratto Professore ordinario di Politica economica Università di Siena Dipartimento di Economia Politica e Statistica (DEPS) Piazza San Francesco 7 53100 Siena 338 1768793 [email protected] http://www.econ-pol.unisi.it/cesaratto/ http://politicaeconomiablog.blogspot.com/ Growth course 3 Heterodox theories • We shall consider 3 groups of theories: • Cambridge equation (circa1950s-1970sKaldor, Joan Robinson, Pasinetti) • Neo-kaleckian models (circa 1980-2015 Rowthorn, Amadeo, Dut, Lavoie, Marling and Bhaduri and many others) • Sraffian authors (1990-2015) distinguished in: First Sraffian position (FSP) mainly at RM3; (b) the supermultiplier approach Serrano and others. • Consensus on the Keynesian Hypothesis (Kaldor-Garegnani, hereafter KH): investment is independent from saving both in the short and in the long run (for the neoclassical/neo-keynesians independence in the short run only) • No consensus on specific models, but wide consensus in policy issues: aggregate demand is the driver of growth. 23/05/2017 2 How to solve the Harrodian instability problem • In Solow v adjusts through the neoclassical substitution mechanisms in order that gA gw • We shall review 4 heterodox attempts to solve the Harrodian problem: • Cambridge equation: s varies in order that gw -> gA (S adjusts to I) • Neo-Kaleckians: va or, better, ua becomes the “new normal” so no instability would arise (extra-saving comes from a higher degree of capacity utilisation that becomes the “new normal”) • FSP: extra-saving comes from a higher degree of capacity utilisation and later from the new capacity created, but the FSP gives up the idea of the economy converging to gw, so avoid the instability problem • Sraffian supermultiplier: reject the Harrodian context, make gross investment (the source of troubles) induced by an external anchor of growth (autonomous demand). 23/05/2017 3 Premise 1: Workers spend what they earn, capitalists earn what they spend • Heterodox models tend to share this Kalecki’s dictum. • Capitalists decide their autonomous spending (investment and luxuries)) by having access to credit (endogenous money loans create deposits). Through the multiplier (and supermultiplier) process income X is created, part goes as wages W to workers that can thus spend, and part as profits P to capitalists that can thus return their loans to the banks. • X = W + P = C + I + Z. • Assuming cw = 1 and cc = 0, W = C (Workers spend what they earn) • Then P = I + Z (capitalists earn what they spend) Premise 2 - Normal degree of capacity utilisation: the average degree of capacity utilisation desired by the entrepreneurs • We must distinguish between full, normal and (average) effective degrees of capacity utilisation. The normal degree of capacity utilisation is defined as e f n n e where Yn is the expected fnormal output when capacity is originally installed [1] and Y is the capacity installed, with (in general). u Y Y Yne Y f One main reason why entrepreneurs install additional capacity over average expected output is to be able to meet sudden peaks of demand and not let unsatisfied customers to turn to competitors. Thus it depends both on expected normal output and on the expected amplitude of the trade cycle peaks. [1] Normal output is that forthcoming at normal prices with capacity utilised at its normal level. 23/05/2017 5 Premise 2 (cont.) un= Yn/Yf where Yf is the maximum physical output from a given capacity K. In general Yn < Yf and un < umax. When gA > gw, it means that s/va> s/vn,, that is va = K/Ya < vn = K/Yn Ya > Yn or, in terms of degree of capacity utilisation u, ua = Ya/Yf > un = Yn/Yf Ya > Yn Read in the opposite direction: whenever gA > gw, Ya > Yn ua > un, the actual degree of capacity utilisation ua is higher than normal The opposite would of course happen when gA < gw (ua < un and investment would keep falling to absorb the less-than-normal u). In short: if va < vn it means that the capital stock is overutilised, that is ua > un if va > vn it means that the capital stock is sub-utilised, that is ua < un Finally, if ua > un then ra > rn where rn is the normal profit rate. A normal rate of profit prevails when, given the real wage and the technical conditions of production, capacity is normally utilised (that is ra = rn when ua > un. 23/05/2017 6 Premise 2 (cont.) • Note that ua can alternatively be defined as ua = Ya/Yn • so that un = Yn/Yn = 1 • We sometimes use this alternative definition. The Cambridge equation and its critics • The equations are S = sc P = sc rn K I=I S=I • where sc is the marginal propensity to save of capitalists (workers do not save classical hypothesis), P are profits, rn is the normal profit rate • Solving the system scrK=I scr = I/K and recalling that I = K we get the famous Cambridge equation gK scr • Given vn = K/Y, gy = gK 23/05/2017 8 Observation • Note that: • gw = scrn = scP/K = sc(P/Xn)/(K/Xn), where Xn is normal output. • Reminding that: • s = sc(P/Xn) + sw (W/Xn) and that sc = 1 and sw = 0 then scP/Xn = S/Xn = s, and that K/Xn = vn we get: gw = s/vn • It is important to note that in equilibrium Harrod’s warranted rate is always respected, whatever the theory (it must, it is just a dynamic expression of I=S). In equilibrium all cats are grey. Theories like cats are, so to speak, visible only in disequilibrium. (Take another example: competition prices are equal to production costs in all theories, but they are not determined in the same way by, say, the labour theory of value, Sraffa or the marginalists). 23/05/2017 9 Digression on grey cats • Recall Solow’s fundamental equation y = sy – nk • In the steady state equilibrium sy = nk, or sy/k = n, and given that k/y = vn, s/vn = n. The warranted rate s/vn in Solow is a full employment path equal to n. • I want you to note that in any model the steady-state solution “contains” (or “respects”) gw = s/vn • In equilibrium all cats are grey (this is important to reject some FSP criticism to the supermultiplier) The main characteristic of the Cambridge equation is in the idea that the rate of accumulation gk decided by the entrepreneurs influences the normal income distribution[1] that thus becomes endogenous and subordinated to the rate of accumulation Assume that capacity is fully utilised The CE does not distinguish between uf and un. Suppose that the entrepreneurs decide a higher level of investment financed out of credit creation. The larger investment expenditure would compete with the existing nominal consumption expenditure out of the given nominal wages. The result is that capacity would be transferred from the wage goods to the capital goods sector, wage goods become more expensive and real wages fall. The larger production of capital goods thus leads to a change in income distribution from (real) wages to profits and to a saving supply adequate to the larger level of investment. In terms of equation [1], gk is the independent variable that, given sc, determines rn: gk r n • [1] A said, the adjective ‘normal’ implies a situation where, given the real wage and the technical conditions of production (including a normally utilised degree of capacity utilisation), a normal rate of profit prevails. 23/05/2017 11 A graphical representation: the wage-profit frontier on the left-hand side and the CE gk = sc rn on the right-hand side The idea is that because of the larger investment expenditure, aggregate nominal demand and therefore, given full capacity utilisation, prices will be higher. However, since the nominal wage bill and nominal consumption expenditure are given, a real wages fall permitts to capitalists to realise their desired investment. • Let us try a simple way to show how in the CE context the investment decisions by the entrepreneurs are able to divert resources from the wage goods sector to the investment sector • Corn economy, p = price of corn (in £), W = given nominal wage-bill, I = investment, X = full capacity output • W + Ip = Xp or W/(Xp) + I/X = 1 • Suppose capitalists decide to invest more I’ > I, and p p’ (with p’ > p) • W + I’p’ = Xp’ or W/(Xp’) + I’/X = 1. Given that p’ > p then W/p’ < W/p and I’/X > I/X. 23/05/2017 13 Criticism • From an empirical point of view, the association of higher growth rates to a change of income distribution in favour of profits is not particularly robust. If anything, real wages would tend to rise during periods of faster accumulation and higher labour demand as a consequence of the greater workers’ bargaining power, and tend to fall during downswings when the ‘industrial reserve army’ increases. Not surprisingly, both neo-Kaleckian and Sraffian authors criticise the Cambridge equation approach (Garegnani 1992: 63; Lavoie 2006: 111-2). In short, they both single out the capacity of capitalism to accommodate an upsurge of capital accumulation by resorting to a fuller rate of utilisation of productive capacity without the necessity of changes in income distribution, as we shall explain below. Rowthorn (1981) has been particularly influential among the former group of economists; Garegnani (1992) among the second. 23/05/2017 14 Neo-kaleckian criticism: the degree of capacity utilisation varies when investment changes, neither prices nor real wages • The underutilisation of capacity is explained by Rowthorn by recalling Kalecki and Steindl idea of a ‘monopolistic economy which is operating well below full capacity’ (Rowthorn 1981: 1). In such an economy, ‘prices are relatively inflexible and firms respond to change in demand by varying the amount they produce. When demand is depressed firms respond by reducing the amount they produce, whilst keeping their prices constant. This reduction in output has no effect on real wage rates, but it does reduce both the level of capacity utilization and the rate of profit' (ibid.). Symmetrically, in the case of an investment upsurge, ‘there is no need to reduce real wages, and the extra profits required to stimulate investment can be generated simply by increasing output and bringing idle capacity into use’ (ibid.). What is more, a fuller capacity utilisation may accommodate both a rise in real wages and of profits and ‘total profits may rise despite the fact that real wages have increased’ (ibid.). • You note that the (actual) profit rate depends on the degree of capacity utilisation. As we have seen: if ua > un then ra > rn where rn is the normal profit rate. 23/05/2017 15 The neokaleckians in brief • So the neo-kaleckian idea is that given a capital stock, a higher rate of accumulation is accommodated by a higher degree of capacity utilisation and not by lower real wages, as in the CE. • The higher saving provision becessary to accommodate the higher investment derives from an higher actual profit rate (if ua > un then ra > rn ). • A higher actual profit rate is consistent with a given real wage rate. Summing up what we have said so far • Harrod: if, moving from a dynamic equilibrium in which S = I or gs = gI , investment decisions vary, then no adjustment of S to I is possible (or better, S adjusts to I through a higher ua, but the attempt to restore un creates instability). • CE: if, moving from a dynamic equilibrium in which S = I or gs = gI , investment decisions vary, then S adjusts to I through a change income distribution (the normal profit rate rises) that affects s. • NK: if, moving from a dynamic equilibrium S = I or gs = gI , investment decisions vary, then S adjusts to I through a higher degree of capacity utilisation and the consequent rise in the actual profit r, without affecting real wages). Instability seems to be avoided by the NKs by neglecting the attempt by capitalist to return to un. 23/05/2017 17 Sraffian criticism to the CE (and to the NK) • Sraffian authors are particularly keen on the distinction, met above, between full, normal and (average) effective degrees of capacity utilisation • By contrast in Rowthorn and the NK we met full and actual degrees only. • So while Sraffian authors accept the idea that in the short-run the flexibility of the degree of capacity utilisation consents a higher accumulation rate at a given real wage rate, they also reject the NK idea that the economy can rest in a position characterised by a not normal degree of capacity utilisation and associated not normal rate of profits • The Sraffian position is a bit complicated. • Step 1: normal prices would prevail even with a not normal degree of capacity utilisation • Step 2: there is some disagreement among Sraffians as to whether the economy effectively tends to a normal degree of capacity utilisation, so that it is useful to study normal accumulation paths • We briefly dwell on the Sraffian position and then return on the NK model. 23/05/2017 18 Step 1: normal prices would prevail even with a not normal degree of capacity utilisation • To begin with, according to Sraffian authors ‘long-period prices …are the prices determined on the basis of conditions of production that can be defined as normal, and hence a particular degree of utilization of capacity, which we can also indicate as “normal”’ (Ciccone). • What it is rejected is the claim that for pn to prevail the absolute size of capacity must be fully adjusted to effectual or to effective (aggregate) demand so to realise a normal degree of utilisation on all plants. For memory: • Effectual demand (from Adam Smith) is defined as the demand that is forthcoming in a single industry at the normal price. • Effective demand is demand forthcoming at the aggregate level when prices are normal in all sectors. 23/05/2017 19 When effectual demand varies pn may prevail through variations in ua • Assume that in one industry effectual demand (the demand of the commodity at its normal prices) rises, so that pm > pn. Competition leads firms in the industry to raise the degree of capacity utilisation to meet the higher effectual demand and to re-establish pn. • So precisely through a higher degree of capacity utilisation, output rapidly adjusts to Effectual Demand and pm pn (Ciccone) • The adjustment of pm to pn takes place at a ua which is different from un, so that ra would be different from rn: if ua > un then ra > rn • At the same time (and given that ra > rn), a process of adjustment of capacity to the new level of effectual demand would take place and the rate of profit that firms expect on the newly installed equipment is the normal rate of profits. • So Sraffian economists may conclude that through variation of u, the gravitation of pm pn is quite a rapid and effective process while the normal rate of profits (and related un) is prevailing or expected “at the margin” (on gross investment) guiding the investment decisions of firms. 23/05/2017 20 Step 2: normal positions and fully adjusted positions (cont.) • So, although in the economy as a whole a tendency of aggregate capacity to adjust to aggregate demand is always at work, with respect to the gravitation of prices to their norma level it is not necessary that capacity is fully adjusted, but only that “at the margin” and in each industry a sufficient number of competing firms are endeavouring such an effort to make the tendency to a normal profit rate effective. • The idea is that the effective (micro) gravitation of prices and distribution towards the long period positions is less demanding and faster than the (macro) full adjustment of aggregate capacity which is more likely to be frustrated by the changes of long run aggregate demand. • These arguments are shared by all Sraffian economists. They diverge, however, about how to treat accumulation (the divergence is of method not of substance). We have a “first Sraffian position” (Garegnani/Trezzini/Palumbo/Ciccone) and the followers of the “Sraffian supermultiplier”. 23/05/2017 21 Difficulties with the first Sraffian position • According to the FSP a (say) higher ga is accommodated by a higher degree of capacity utilisation and ra (as in Rowthorn) , but it leaves rn unaffected (as seen this may prevails “at the margin” even without full capacity adjustment). • But, having accepted the Harrodian framework, the FSP seems in troubles to deal with the gravitation of the economy towards a normal degree of capacity utilisation, which is however admitted. • The escape this difficulty, they argue that the study of the normal path of the economy (steady state paths) is useless. • This view may appear as a post hoc ergo propter hoc argument due to the difficulty of escaping from the dilemma between the CE which respect the KH, is stable but violates Classical distribution theory; and Harrod which is consistent with exogenous distribution, but is unstable. • Eventually the FSP is similar to the NK position: (i) exogenous distribution (ii) surrender the study of growth with a normal degree of capacity utilisation • A “fourth way” is taken by the followers of the Sraffian followers of the Supermultiplier that break the Harrodian framework. 23/05/2017 22 The inconsistent Harrodian Triangle The canonical first-generation neo-Kaleckian model (a very simple model) • The first equation (similar to the CE), the saving equation, expresses the rate of growth of the capital stock permitted by capacity saving for given levels of the saving propensity – for simplicity profits are the only source of savings - and of the actual profit rate. Eq.1 gs scra The second equation expresses the rate of growth of K as a function of the long term growth of sales expected by firms (animal spirits?). Eq.2 gi The third equation states that the actual profit rate is a function of the actual rate of capacity utilisation, given the actual profit share and the capital coefficient vn. Eq.3 ra Eq. 4 23/05/2017 vn ua gs = gi (that is S/K = I/K) 24 Comparison with the CE model • • • • Using the same presentation used for the CE the NK model would be: It is enough to devide the first three equations by K to obtain the previous formulation. the unknowns are g, ra, ua let us derive the 3° eq. (which is actually the differentia specifica with the CE S sc P sc rK II SI r vn ua P / Y P / Y f a r P / K Y / Y u a a f a Y K / Y v n a K f Y Y f a Solving the model • By simple substitutions we obtain: eq.4 gs sc ua vn • The long run goods market equilibrium is where: g s gi • So we obtain: eq.5 ua vn sc • Equations [2] and [4] can be drawn in the space g-u, as shown in the top part of figure (1). Equation (3) is drawn in the lower part (as profit curve PC): a higher ua implies a higher ra. 23/05/2017 26 The capacity-saving growth function (4), indicated as gs, is an increasing function of u. This is so because a higher u increases the amount of profits extracted by any given level of K, raising the actual r and the capacity-saving supply. In drawing the picture we supposed that at the intersection A the equipment is normally utilised (“old normal”), but this is a fluke since this is not typical of this genre of models. In the lower part of the figure we drew equation [3] indicating that in correspondence to un we find the normal profit rate. Figure 1 then shows the case in which long term growth expectations grow from to ’. The consequence would be a higher u, that in this model can be taken as the ‘new normal’. g gs ' g i' B A gi u a u 1n un0 u r PC ra rn1 rn0 B A 23/05/2017 27 u n0 u a u 1n u Notably, the higher capacity savings corresponding to the new accumulation pattern are brought about by the higher actual profit rate corresponding to the higher utilisation rate. But how is the instability problem removed? What is actual is normal: the new normal • From eq. 5 we get eq. 6: = sc/(vn/ua) • Note that in point A (old normal): = sc/(vn/un) = s/(vn/un) And defining un = Yn / Yn, we have un = 1, then = s/vn The old normal had necessarily to be an Harrodian equilibrium in which all savings are systematically invested (either because there is economic planning or because capitalists collectively decide so [which is the same], or because we were there by fluke) Be this as it may, in A it is s/vn that dictates . 23/05/2017 28 What is actual is normal: the new normal • Look now at point B where the animal spirits dictate a higher accumulation rate ’ • According to the NK entrepreneurs are content with any actual capital coefficient it happens to be, and the actual ua can therefore be usefully defined as the ‘new normal’ ua = unn. • We may similarly define a “new normal” capital coefficient: ’ = sc/(vn/ua) = sc/(vn/unn) The term vn/ua = vn/unn) can be defined as the “new normal” capital coefficient: vnn = vn/ua= (K/Yf)/(Ya/Yf) = K/Ya so that ’ = sc/vnn = s/ vnn • We thus obtain a “flexible” Harrodian gw = s/va = s/vnn Whatever is real is rational, or better, whatever is actual is normal what is normal is endogenous (very funny) What is actual is normal: the new normal • As observed, the initial equilibrium in A is an Harrodian equilibrium, i.e. is the only growth rate consistent with growth with a normal capacity utilisation (“normal growth”). So to abandon the concept of normal growth is essential for the NK to sustain the KH (that is a “freedom” of capitalist to decide the accumulation rate). • But, as we shall see, they cannot abandon it completely. • In Harrod: if ga > gw, ua > un. The attempt by the entrepreneurs to restore un determines instability: recall, if they expect ge>gw, then ga>ge and they expect an even larger ge. • NK: if ga > gw, ua > un, but ua becomes the ‘new normal’ ua = unn. • So no instability (recall that the harrodian instability depends of the attempt to restore a normal exogenous degree of capacity utilisation). Here un is endogenous and equal to the actual rate. Very ad hoc. By comparison, it might be useful to illustrate what would happen in the CE model where the corresponding equations would be (they are derived dividing the equations by K) • Eq. 1 gs scrn • Eq.2 gi • Eq.3 rn vn • Eq. 4 • • For memory, eq. (3) in the NK was In the CE ua = un = Yn/Yf = 1, there is a unique normal degree of capacity utilisation equal to full gs = gi rn vn ua capacity 23/05/2017 31 A rise in the long run expectations from to ’ causes a change in income distribution, a rise of the profit share in equation [3] and an upward rotation of the corresponding PC and gs curves, as shown by figure 2. The new equilibrium is thus again characterised by a higher normal profit rate set in correspondence to a normal degree of capacity utilisation. (in a sense, in the CE we have a “new normal” profit rate. g s' g gs ' B g i' A gi un u f u r PC’ PC ' n r rn 23/05/2017 A B un u f u Figure 2 32 Again as a comparison with the CE, note first that we have different wage-profit curves each for any different degree of capacity utilisation In the NK case, a higher growth rate (gs = scr in the right-hand side) is accommodated not by a change in income distribution (as in the CE) but by a change in the degree of capacity utilisation, from old to new normal. The absence of the thrift paradox in these models and how to amend it It can be noted that in both approaches as presented in figures 1 and 2, a lower marginal saving propensity has no positive effect of long run term growth, although it affects, respectively, the normal profit rate (rising it since a higher profit share is required to generate capacity savings equal to investment) or the degree of capacity utilisation (rising it through the effect of the higher s on the standard Keynesian multiplier). So, unless we assume that these two effects positively influence investment, there is no ‘thrift paradox’ as one might presumably expect from Keynesian or Kaleckian models. “Might”, because this “thrift paradox” is wrong: empirically, a higher g is associated to a higher I/K = S/K, not the opposite as the NKs would like. This is why neoclassical theorists try to endogenize growth sg. This does not imply that we think that sg is true. But we believe that I/K g. 23/05/2017 35 Normal profit and investment decisions I (a digression on an alternative way to demonstrate the thrift paradox) • Lavoie reports that Joan Robinson assumed that investment is sensible to the level of the normal profit rate – so that if sc falls , given , rn rises, and consequently I and then Y rise (another way to show the thrift paradox) • However, the influence of the normal profit rate on investment raises perplexities. Given rn, investment depend on expected effective demand (that forthcoming at the normal profit rate). • Given rn (whatever it is) competition leads entrepreneurs to satisfy all expected demand at that rate. • Variations of rn have to do with income distribution and only through this they may affect expected effective demand and investment. • A rise/fall of rn may negatively/positively affect investment if expected demand is negatively affected by lower/higher wages. 23/05/2017 36 Normal profit and investment decisions II • Therefore, a rise of rn, as such, for no reason would positively affect investment. • Likewise, a lower rn will in general leave gross investment unaffected as long as capitalists fear to leave market shares to competitors: each capitalist is homo homini lupus with respect to her classmates. • Ça va sans dire that a rise/fall of ra above/below rn will just signal that ua is above/below un. In both cases gross investment will vary in order to readjust the degree of capacity utilisation and normal profitability (while the long trend of investment is still set by demand for products associated to normal profitability). • As Serrano sums up: “The adequate size of productive capacity does not depend on the level of the normal rate of profit but on the size of the demand of those who can pay the prices that guarantee that the minimum normal profitability requirement is met, irrespectively if this normal rate is high or low‘. Normal profit and investment decisions III • It can finally be thought that a lower rn is not accepted by capitalists that might recur to an “investment strike” • A lower rn does not discourage investment since capitalists do not invest as a class (as perhaps Marx and Vianello tend to think), and they do not want to risk loosing market shares by starting an individual “investment strike” (they would be afraid to lose market shares to competitors if they do this) • However, recalling Marx’s dictum “The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie”, a lower rn might induce the government to adopt deflationary economic policies to re-create the industrial reserve army. Full ‘canonical’ NK model: to demonstrate the thrift paradox, the NK model introduces the dependence of investment on the degree of capacity utilisation – so that if a lower s raises ua, gi would rise • A full ‘canonical’ neo-Kaleckian model (Lavoie 2006) does thus contemplate the attempt by firms to adjust capacity to the desired, normal level. The model: • Eq.1 g s r s • Eq.2 c a g ( u u ) i a n ra ua • Eq.3 vn • It looks more than suspicious that long run effects of variations of the saving propensity on accumulation relies on what should be regarded as short-run adjustments to restore a normal degree of utilisation 23/05/2017 39 By substituting equation [3] in [1], we get Eq.4: gs • The long run goods market equilibrium is where sc ua vn g s gi un scvn • that is where, equating equations [4] and [2]: u a • Equations [4] and [2] can now be drawn in the space g-u, as shown in the top part of figure 3. Also the investment growth function [2] is now an increasing function of u. This is so because a higher degree of capacity utilisation induce firms to invest in order to obtain the desired degree of capacity utilisation. In drawing the picture we supposed again, for the sake of the argument, that at the initial equilibrium A the equipment is normally utilised. Reconsider now the paradox of thrift. 23/05/2017 40 Suppose that a rise in real wages causes a fall of the profit share . This causes a rightward rotation of the gs and PC curves in figure 3, respectively. At the initial growth rate g = , the lower capacity savings determine a higher ua0. The higher rate of extraction of profits out of a given capital stock compensates the fall in the profit share, so that the resulting r is to the initial one. The higher u leads then to a higher growth rate of investment and to an even higher rate of utilisation until a new equilibrium is reached in correspondence to ua1. g gs g s' g’ gi C g= A B un u a0 u 1a u r PC ra rn 23/05/2017 C A B un u a0 u 1a PC’ u 41 The neo-kaleckian Wage-led growth and the classical wage-profit rate relation • The paradox of thrift is proved, in a growth context, since a lower saving rate leads to a higher growth rate. • These economists also speak also of a ‘paradox of costs’: ‘A higher real wage, and therefore higher costs of production, leads to a higher long-period profit rate. In other words, a reduction in the gross costing margin of each individual firm ultimately leads to a higher profit rate for the economy as a whole’ (Lavoie). • These results, the possibility of wage-led growth accompanied by a higher profit rate, is considered particularly important by neoKaleckian authors since it is in sharp contrast not only with the CE inverse relation between real wages and growth rates, but also with the Classical economists inverse relation between real wages and the profit rate. 23/05/2017 42 What is actual is normal: the ‘new normal’ Similarly to above, from eq. [2] and [4] we get: Redefining ua as the ‘new normal’ unn, the denominator on the righthand side becomes the “new normal” capital coefficient s c ( u u ) a n v nu a vn vnn unn we may obtain a warranted growth rate equal to sc π gW = = α + β(u a un ) vnn 23/05/2017 43 The NK warranted rate The growth rate is determined by the ‘animal spirits’ a plus an endless attempt (un – ua) by the entrepreneurs to recover the normal utilisation rate, a never completed attempt that becomes a stable component of the growth rate that might usefully re-defined ' (u a u n) so that sc π gW = = α + β(u a un ) α ' vnn In the words of Lavoie: 23/05/2017 44 This is clearly said by Lavoie* • “what this really means in terms of our … Kaleckian model is that the parameter gets shifted as long as the actual and normal rates of capacity utilization are unequal: The reason for this is that … the parameter can be interpreted as the assessed trend growth rate of sales, or as the expected secular rate of growth of the economy. When the actual rate of utilization is consistently higher than the normal rate (ua>un), this implies that the growth rate of the economy is consistently above the assessed secular growth rate of sales (ga>). Thus, as long as entrepreneurs react to this in an adaptive way, they should eventually make a new, higher, assessment of the trend growth rate of sales, thus making use of a larger parameter in the investment function.” 23/05/2017 45 A Karamazovian theory • We observed above that the initial equilibrium in A is an Harrodian equilibrium, i.e. is the only growth rate consistent with growth with a normal capacity utilisation (“normal growth”). So to abandon the concept of normal growth is essential for the NK to sustain the KH. • But, we see now that they cannot abandon it completely. A term (ua – un) must be retained (that is the term un must be retained) in the “new normal” growth rate since this serves to show the ‘thrift paradox’. • So we cannot let the attempt to re-establish a normal path to go on since this means a return to the Harrodian instability; so we redefine a “new normal path” that, however, contains an endless attempt to re-establish the old normal path. Moreover, this is essential to show the thrift paradox. • As we shall see, Vianello recourses to the Faust to describe this NK tormented soul, I may recur to the Karamazovian equally divided spirit: the economy must at the same time escape from point A, where Harrod prevails and the KH is not proved, but also try to return to it (the term (ua – un)), in order to show the saving paradox. The result of this drama is that the economy stays in C. The literature has pointed out a number of unsatisfactory aspects of this canonical model.* • Core-Sraffian authors (and others) have indicated two: (a) the inconsistency of a steady state model characterised by a not-normal degree of capacity utilisation; (b) the confusion, in dealing with income distribution, between the normal and the actual profit rate (for a given real wage). • I suggested a third substantial weakness: (c) it is surprising that in the neo-Kaleckian canonical model the long-term role of effective demand relies on the firms’ effort to obtain a normal degree of capacity utilisation. This process is, presumably, a short run process that, however, in the neo-Kaleckian view must never be completed in order to have a lasting effect on the accumulation rate (Achilles must never chase the tortoise). Indeed, the capacity adjusting term in the investment function [2] is not just a due addition in order to testify the attempt by firms to adjust capacity, but all the model desired results bear on their long-run failure to do so. • Let’s begin from (c). 23/05/2017 47 Lavoie admits instability* • “Once the economy achieves a long-run solution with a higher than normal rate of utilization, say at u0 > un , (after a decrease in the propensity to save …), the constant in the investment function moves up …, thus pushing further up the rate of capacity utilization to u1 and u2, with accumulation achieving the rates g1 and g2, and so on. Thus, according to some of its critics, the Kaleckian model gives a false idea of what is really going on in the economy, because the equilibrium described by the Kaleckian model (point (C)) will not be sustainable and will not last.” (2008: 7). • Below Lavoie’s figure, but I prepared an improved description g gs g s' D g2 C g1 g0 g gi B A un ua0 u 1a u a2 u This is the key Lavoie’s passage (worth repeating)* • “what this really means in terms of our … Kaleckian model is that the parameter gets shifted as long as the actual and normal rates of capacity utilization are unequal: The reason for this is that … the parameter can be interpreted as the assessed trend growth rate of sales, or as the expected secular rate of growth of the economy. When the actual rate of utilization is consistently higher than the normal rate (ua>un), this implies that the growth rate of the economy is consistently above the assessed secular growth rate of sales (ga>). Thus, as long as entrepreneurs react to this in an adaptive way, they should eventually make a new, higher, assessment of the trend growth rate of sales, thus making use of a larger parameter in the investment function.” NK instability: an improved representation (next slide the complete figure)* g gs1 gi3 gi2 gs0 D gi1 C gi0 A un gi0 B u0 u1 u2 u g gs1 gi3 gi 2 gs0 D gi 1 C gi0 A B un ua0 gi0 u1a ua2 u ua2 u r ra1 C rn ra0 A un B ua0 u 1a . The economy starts from point A where g s0 g i0 and g i0 . As before, for the sake of the argument, we assume that in A un and rn prevail (what is to say that an Harrodian warranted rate rules there). After a decrease in the propensity to save the gs function shift downwards and the economy provisionally goes to B. In B the higher demand for wage-goods is satisfied by a higher ua, while the accumulation rate is still g i0 . Supposing that capitalists try to restore un, the economy moves along a new investment function g 1i (u a0 u n ) to reach point C. Following Lavoie’s suggestion that “entrepreneurs … make a new, higher, assessment of the trend growth rate of sales, thus making use of a larger parameter in the investment function” (re-read the above quotation), the new investment function becomes g i2 ' (u 1a u a0 ) , where ' (u a0 u n ) , and a new provisional equilibrium is reached in D. There, though, a new investment function g 3i ' ' (u a2 u 1a ) prevails, where ' ' ' (u 1a u a0 ) , and so on and so forth. Final strike to the NK models* • We may ask ourselves where Lavoie would put its “new normal” growth path. Natural would be to put it in B: entrepreneurs take as “normal” whatever the rate of capacity utilisation happens to be. Indeed if we let them to adjust capacity to restore the “old normal” un, there is no reason why they should stop in C, or D etc. The NK have a problem here, however. If the economy stops in B, a fall in the saving propensity would have no effect on the growth rate, that is, the ‘thrift paradox’ would not have been proved in the dynamic context. So, Lavoie would likely have the economy stop in C. In a Karamazonian way, capitalists are trapped between the will to restore normal capacity utilisation – that leads them in C, D etc – and that to take for normal whatever ua the experience. So they stop in C. The ad hocery of this way of reasoning is patent • This is a very weak growth theory. So two pigeons with one seed: a “new normal” function ’ = + (ua-un) serves the purpose of showing the thrift (and cost) paradoxes and avoids the Harrodian instability. Well, not the final strike: ad hoc new normal* • Rationalisations of the endogenity of the degree of capacity utilisation (see Hein & Lavoie). • ‘provisional equilibrium’ (when ua<> un) (Chick, Caserta, Dutt): ‘Hence … firms may be quite content to run their production capacity at rates of utilization that are within an acceptable range of the normal rate of utilization. Under this interpretation, the normal rate of capacity utilization is more a conventional norm than a strict target.’ • ‘managers are satisficers, rather than maximizers’ (Park, J.Robinson and Koutsoyiannis ). • These arguments simply forget that the tendency to a normal degree of capacity utilisation (and to a normal profit rate) takes place ‘at the margin’ on new gross investment (while a quasi rent is yield on the existing capital stock). This is the traditional method shared both by Marx and Marshall (Cesaratto 1995). To argue that: ‘if goals are not met the firm readjusts downwards its aspiration levels’, is simply ‘not credible’ (Hein et al). On new investment firms expect un, unless they deliberately make wrong investment decisions to perpetuate • ua >< un! Origin of the NK contortions • The economic explanation of the NK contortions is that wages are an induced component of aggregate demand, and as such they cannot be the primum movens of growth. By creating a never adjusted discrepancy between ua and un, however, a rise of real wages may affect growth; but the weakness of the trick is patent (it can be seen that in the SM approach higher wages have a level effect only) • For a correct analysis of the (level and not growth) effects of a rise of wages see Serrano’s Ph.D. dissertation Chapter 3. The inconsistency triangle: a new look un Harrod CE exogenous distribution KH NKs/FSP The neo-marxists or second generation- neoKaleckians • Model by Marglin and Bhaduri, very popular since the1990s, not discussed. 23/05/2017 58 All Harrodians now? • As seen, behind all the steady state growth equations there is (after some easy manipulation) Harrod’s gw: • Solow: gw = n = sy/k gw = s/vn (with n as the independent variable, vn as the adjusting variable) stable, but problems with K theory • CE: gw = scrn gw = s/vn (with gk = gg as the independent variable, and with rn as the adjusting variable) stable, but not empirically robust • NK: gw = = sc/(vn/ua), where ua = unn can be defined as the “new normal” u so that vnn = vn/unn gw = s/ vnn (with gw = + (ua – un) as the independent variable, and with unn as the adjusting variable) ad hoc stability • FSP: difficult to say since they bypass problems by avoiding a model. • All the adjustment processes are unsatisfactory • We must break with the Harrodian context We were all Harrodian • The Warranted Growth equation gw = s/vn is behind any growth model since it is an equilibrum condition that dictates the rate of growth consistent with I = S given s and vn. • There is stability if competition leads to an adjustment either of s, given vn, or of vn given s. • No flexibility of both parameters in Harrod • In Solow it is vn that changes via change of techniques (of k = K/L) • In the NK it is vn that changes via the re-definition of the normal degree of capacity utilisation: vnn = vn/unn where unn = ua. • In the CE it is s that changes given vn. • But all this adjustments are unsatisfactory for one reason or the other. • The FSP avoids the problem • We must break with the Harrodian context The supermultiplier approach (the Sraffian Kaleckians): Growing with autonomous components of aggregate demand. The problem with Harrod SEE THE OTHER PRESENTATION IN MY WEB PAGE • Serrano (1995a: 47) points the problems with Harrod out very effectively: “On the one hand – he argues – the accelerator relation I = vngeX* [where, ge = expected income growth, X* normal capacity output] uniquely determines the required share of investment in capacity for any given expected rate of growth … . On the other hand, completely different factors such as the distribution of income … uniquely determine the average propensity to save … Only by a complete fluke will the marginal propensity to save exactly coincide with the required share of investment” • That is only by fluke: sX* = I/X* = vnge so that ga = gw = ge = s/vn 23/05/2017 61 Serrano also points out the surprising absence of the autonomous components of aggregate demand (Z) in the post-keynesian (and postKaleckian) literature. Criticism to investment as the independent variable. • The NK approach (as well as the CE) seems to neglect the analysis of the determinants of long run expectations captured by the term in the investment functions which, one would expect, is the relevant research issue (unless we really believe that talking of ‘animal spirits’ is a serious investment theory). • Eatwell: investment should not be taken as the independent variable, long-term expectations are the independent variable, but anchored to what? • Similarly, Serrano points out that in all ‘Post-Keynesian theories of growth, the long-period version of the principle of effective demand is seen as being essentially a proposition about investment … investment is the key independent variable.’ Investment is often explained by evoking the ‘animal spirits’. Leaving aside the vagueness of this explanation, the conceptualisation of investment as autonomous appears inconsistent with its induced nature, as the adjusting force of capacity to demand. 23/05/2017 62 We must change the framework: enter the autonomous components of aggregate demand • These components are defined as those that (a) do not depend on produced or expected income (as induced consumption and induced investment, respectively) and (b) do not create capacity. • Examples are: government spending, autonomous consumption, exports, [autonomous investment] • Their absence in previous post-keynesian models is even more surprising if we recall the role that government spending plays in Keynes’s theory and “external markets” in Kalecki (on which we shall shortly return). Garegnani (1962) has a similar expression “final demand”. • In a late paper, Kalecki seems to present the “external markets” (already introduced in the eary 1930s) as a way out from the Harrodian troubles 23/05/2017 63 Kalecki on Harrod - To my knowledge, it has not yet been noticed that Michal Kalecki’s masterpiece paper on Tugan-Baranowski and Rosa Luxemburg (1967) is a contribution on how to overcome the problems with Harrod. • The argument of the paper can be so summed up. TuganBaranowski shows that in principle a capitalist system can grow in equilibrium as far as capitalists employ all their savings to build new capital goods. Tugan thus shows a distinctive characteristic of capitalism, that the aim of production is not the satisfaction of human needs, but it can well be the production of means of production useful to produce further means of production and so on and so forth • In order to be so, a tacit pact among capitalists should be stipulated in order that all the social surplus, if not consumed, is invested so that all production is sold. The problem with this view is that we cannot expect capitalists to blindly or deliberately follow Say’s Law, since “capitalists do many things as a class but they certainly do not invest as a class. And if that were the case they might do it just in the way prescribed by Tugan-Baranowski” 23/05/2017 64 Rosa Luxemburg, on the other hand, correctly perceived the difficulty of capitalists to absorb the social surplus through their own consumption and investment. Recall the surplus equation Surplus = Social product Necessities • Therefore the necessity of “external markets”, external to the capitalist income circuit, to absorb the surplus production (this view was taken up in Kalecki 1934). Typically these markets are financed by the capitalist system itself through the financial system . Kalecki includes in these markets (net) exports to the underdeveloped countries and government (deficit) spending. We may usefully add consumers’ credit. We shall later call these external markets ‘noncapacity creating autonomous components of aggregate demand’. Think of the housing bubbles in the US (consumers’ credit) and in Spain (Germany financed consumers’ credit in an (relatively) underdeveloped country). • The numerical example used by Kalecki (shown later) to illustrate the difficulties with Tugan is very clearly intended to show the problems of Harrod’s model. • Kalecki’s paper is quite relevant since it relates in a Marxian fashion the Classical surplus theory to the theory of capitalist accumulation. Just stop a little on Rosa Luxemburg. 23/05/2017 65 See this summary from Brewer A.,Marxist theories of imperialism : a critical survey, 1990. • “In Marxist theory, surplus value originates in production, where the value produced by a worker exceeds the value of his labour-power. The value created is embodied in a product, which must be sold to ‘realize’ the value in money terms, before the capitalist can buy fresh means of production and labour-power to start the process again. Marx analysed the realization of the product, and the reproduction of the system as a whole, in a purely capitalist economy, containing only workers and capitalists, plus hangers on (priests, prostitutes, etc.) who derive their incomes from the capitalists. Luxemburg argued that expanded reproduction is impossible in this context. ... For reproduction to continue smoothly, the entire product at the end of a period of production must be realized, i.e. sold to someone.” 66 Luxemburg wrote: ‘Perhaps the capitalists are mutual customers for the remainder of the commodities [the social surplus] – not to use them carelessly, but to use them for the extension of production, for accumulation’ (Anti-Critique: 56-7). She, however, rejected the possibility: ‘All right, but such a solution only pushes the problem from this moment to the next . . . the increased production throws an even bigger amount of commodities onto the market the following year . . . [will] this growing amount of goods again be exchanged among the capitalists to extend production again, and so forth, year after year? Then we have the roundabout that revolves around itself in empty space. That is not capitalist accumulation i.e. the amassing of money capital, but its contrary: producing commodities for the sake of it; from the standpoint of capital an utter absurdity.’ (Anti-Critique: 57) From this she drew the conclusion that there must be buyers outside capitalist relations of production. 23/05/2017 67 External markets because “capitalist do not invest as a class” NOTE that Kalecki approves T-B in saying that “producing commodities for the sake of it; from the standpoint of capital IS NOT an utter absurdity.’ The question seems rather that of the instability of the T-B-Say-Harrod model – unless capitalists “invest as a class”. Kalecki suggests that to get out from Tugan-Harrod’s knife edge problem, Luxemburg’s external markets must be taken into account as the ultimate explanation of investment. Investment cannot be, so to speak, a self-explanatory variable. Thus, both Kalecki (and Eatwell) suggest that investment should not be taken as the independent variable in growth theory. In the paper under examination Kalecki rejects the idea that the economy might stabilise along a growth path characterised by a belownormal capacity utilisation rate • In MK’s view, only two alternatives are present: growth with normal capacity utilisation, which is however unstable, and the stationary state (not in the neoclassical sense)*, where the instability of capitalism without external markets might lead the economy. So, Kalecki does not find a way out from Harrod’s problems in abandoning the notion of normal growth, but suggests the stabilising force of “external markets”. Most of the heterodox literature of any orientation has, however, so far taken investment as the independent variable. *“we have shown that the development of capitalism which does not encounter the problem of effective demand, even if possible, is unstable. …it may be said that an expanded reproduction will take place if there exist factors that simply do not permit the system to remain in the state of simple reproduction… Rosa Luxemburg considers expanded reproduction in the long run without the existence of ‘external markets’ to be not only far from obvious but outright impossible” (Kalecki 1967: 150-1). • Let us now go back to Serrano 23/05/2017 69 The way out from Harrod’s trouble proposed by Serrano consists of three steps: • (i) consider investment as fully induced, (ii) take into account the autonomous component of aggregate demand (Z), and (iii) anchor long-term demand expectations to the growth rate (gz) of those components. We shall discuss later if a Schumpeterian explanation of investment as a component of those autonomous components is acceptable. The presence of Z allows the existence of a plurality of demand-led normal growth rates. • Once we introduce Z we must distinguish between the marginal and the average propensity to save, and it is precisely this distinction that gives more flexibility to the approach. • Historical note: SM comes from J.Hicks 1951; recovered by (the late) Kaldor; independently developed by Bortis, De Juan, Serrano. Allen, a French economist close to the NK must now be added to the list. 23/05/2017 70 Paul Krugman admits in a post, we do not need “some kind of special factor aside from the depressed economy to explain low business investment” presenting a chart that shows the association between business investment and what can be taken as a proxy of u Serrano proposes a very simple model of a single-commodity economy with circulating capital only • • • • • • Eq.1 X* CIZ Eq.2 I = vng e X n Eq.3 C = wlX n Eq.4 Z Z Eq.5 g e g z Where Xn is the normal level of output, Z is autonomous spending of the capitalists, vn is the normal capital/output ratio, w is the given real wage, l is the labour input coefficient l = N/Xn, and ge is the expected rate of growth of effective demand. • In equation 5 we are provisionally assuming that firms form their growth expectations and investment decisions on the basis of a known rate of growth of Z. 23/05/2017 72 Workers do not save and capitalists save all their profits • Workers do not save sw =0 and capitalists save all their revenues sc= 1. • c = marginal propensity to consume = wage share wl=wN/Xn • s = marginal propensity to save (1-wl) = profit share = From these equations the level of income is easily determined: The supermultiplier: X = 1 Z ( 1 wl) vng z Equation provides economic meaningful solutions if 1) wl vgz < 1 2) Z > 0 The former condition says that the marginal propensity to spend (which is the summation of induced consumption and induced investment) must be lower than 1 or s/vn > gz If the marginal propensity to spend is equal to 1 we are back to Say’s Law and to Harrod’s Warranted Growth s/vn > gz with no space for the autonomous components of demand In Serrano's words: if wl + vngz = 1 if the marginal propensity to spend is equal to one: “that of course is exactly what we mean by Say's Law, i.e., any increase in capacity output would automatically generate an equivalent demand (counting both induced investment and induced consumption for it)” 23/05/2017 74 The (multiplier and the) SM in most traditional terms 1 YD (C a I G E ) 1 c(1 t ) m 1 Y (C a G E ) z 1 c(1 t ) v n g m Kalecki/Serrano: workers spend what they earn, capitalists earn what they spend • • • • • • Z + I total expenditure of capitalists financed by credit creation: they can spend (ex ante) before receiving profits. Their profits are then equal to Z + I Xn - wlXn = Z + I Also Xn = sXn = Z + I When they get their profits, capitalists return the loans to the banks (so, not surprising they do not spend their profits sc = 1) Indeed, while post factum capitalist do not spend what they earn, they have consumed and invested ante factum (indeed they earn what they spend). The fact that capitalists consume (Z = luxuries) is shown by the fact that with autonomous consumption marginal and average propensities to save are different. This has a key role. Marginal and average propensities to save • Marginal propensity to save s = sc P/Xn where sc = 1 • Average propensity to save: S = Xn - wlXn - Z = (1 – wl)Xn - Z = Xn - Z or S/Xn = s – Z/Xn - Although capitalists ex post do not spend what they earn (sc = 1), the average propensity to save depends on the autonomous consumption decisions of the entrepreneurs (so part of ex-post capitalists’ saving is just a redemption of former consumption-loans). Another expression for the average propensity to save • From S = I. Recall that sXn = Xn = Z + I. • S/(sXn) =I/(Z + I) • Note that since I+Z are profits, I/((I+Z)) is the share of profits sp that capitalists invest. sp I I Z • So the average propensity to save is also equal to S/Xn = sp s. The SM normal (warranted) growth path Recall that S/Xn = s –Z/Xn this is the average propensity to save • We may derive Serrano’s gw using the three equation system (we assume gw = gz = ge, we shall return on this): Eq.1 S = s Xn – Z Eq.2 I = vngzXn Eq.3 S=I So: vngzXn = s Xn –Z, that is: gz = gw = (s –Z/Xn)/vn finally: gw = (S/Xn)/ vn . 23/05/2017 79 Understanding Serrano’s gw (I) • gw = (S/Xn)/ vn can be rewritten as gw = (s –Z/Xn )/vn With Z = 0, gw = s/vn, back to Harrod. • Compare two normal paths with different levels and growth rates of Z. If gw’ > gw, then (S/Xn)’/ vn>(S/Xn)/ vn or (sc–Z/Xn )’/vn > (sc–Z/Xn )/vn • So if gw = gz rises, the share of S/Xn = I/Xn must also rise and so Z/Xn must fall (given the marginal propensity to save s = 1-wlXn).(Note that C/Xn is given and equal to the wage share – wages are proportional to income) Intuitively, when gz rises, I/Xn must rise since investment must be higher now to meet higher demand tomorrow: ‘given the capital-output ratio, a higher rate of growth of capacity will necessarily require that a higher share of current level capacity output be dedicated to capacitygenerating investment.’ (Serrano) • This can be viewed also from the accelerator I = vngzXn that implies: I/Xn = vngz Understanding Serrano’s gw (II) • Thus, if rises, in the new normal path the ratio I/Xn must be larger and the ratio Z/Xn lower (for a given s). Since the share of consumption on normal output is constant – it is indeed equal to the wage share which is also constant: W/Xn = wl – then in the new steady state by necessity the higher share I/Xn is accommodated by a lower Z/Xn. • This is possible since in any period along a normal growth path, for the same given level of Z, a (say) higher expected (compared to a lower ) is associated to a higher level of normal output Xn – not surprisingly since a higher implies higher current investment - such that it generates a share of capacity savings S/ Xn adequate to the higher level of investment required by the higher . • (see the example) Understanding Serrano’s gw (III) Recalling that the average propensity to save is also equal to S/X = sp s where sp = I/(I + Z), alternatively the normal growth path can be written as gw = sp s/vn Note that since I+Z are profits, I/((I+Z)) is the share of profits that capitalists invest. So in a normal growth path with an higher gz, capitalist will invest a higher proportion of their profits. (Note that with Z = 0, gw = s/vn, back to Harrod) A higher gz, given s, implies a higher sp = I/(I + Z), that is that in the new normal path a larger share of profits is invested. The idea is again that a higher (compared to a lower ) for a given Z, implies higher current I, Xn and level of profits. A stylised fact of growth • Observe that a positive relation between gw and S/X* = I/X* is a stylised fact of economic growth, a widely (although not unanimously) recognised fact. The causality, whether from output to investment, as in the accelerator-based theories, or from investment to output as in other theories (included the neoclassical) is also, of course, matter of controversy. • [The lack of this association in theory was a problem also for Solow, see my paper on EGT] • The association between gw and I/K might suggest that higher growth requires a fall in consumption, re-proposing the Samuelsonian choice between butter and guns. This is not so. The larger output accommodates larger Z, C and I. • Indeed, a higher gz is associated to higher S/Xn = I/Xn since it generates a higher level of normal output capacity - as it must be in a demand-led growth model by comparison, in the CE model, saving adjusts to investment through variation of distribution given normal output. Understanding Serrano’s gw (IV) • • • • • • • • • • • • Suppose Z = 100, s = 0.5, vn = 2, and gz = 0.05. Xn = 250 , P = Z + I =125, W = C = 125, I = vnXngz = 2*250*0.05 = 25 gz = (s – Z/Xn)/vn = (0.5 – 100/250)/2 = 0.1/2 = 0.05 S/Xn = 0.1 sp = 0.2. If gz = 0.02. Xn = 217 P = Z + I =108.5, W = C = 108.5. gz = (s – Z/Xn)/vn = (0.5 – 100/217)/2 = 0.04/2 = 0.02 S/Xn = 0.04 sp = 0.08. When the expected rate of growth of AD rises, I rises, and the share of profits which is invested sp rises or, which is the same, the average propensity to save rises. S, I sXn I1 S/X I 0 0 Z X Comparison with the NK wage-led growth: growth and level effects of a rise of real wages • In the SM framework, an increase in real wages, and the consequent lower profit share and marginal propensity to save, have a positive level effects, but not the growth effects alleged, with unconvincing arguments, by the NK model. • The lower marginal propensity to save (1 – wl) will increase the value of the SM in equation and thus the level of induced consumption investment leading to a higher long-period level of productive capacity. There might therefore be a temporary faster growth, but once capacity has adjusted to the new higher level of effective demand entailed by the stronger SM, the economy will return to the former normal growth rate determined by the growth rate of autonomous expenditure • As said, being an induced component of income, real wages cannot lead growth. However, during the transition they affect growth, and a slow decline in the wage share, as it happened in the last decades, would have serious negative growth effects. Summing up: Warranted rates compared Harrod: g w s / vr : ‘strict uniqueness’ and instability. Economic policy may stimulate growth by increasing s and keep instability at bay through economic planning. CE: g w rnsc : changes in r provide flexibility and stability if ‘animal spirits’, the unexplained origin of growth, change. No clear role for economic policies (but support to cooperative capitalism). NK: g w s c s or g w c where v nn is the ‘new normal’ capital coefficient: a vn u a vnn flexible u a provides the necessary cushion against the instability due to changes in ‘animal spirits’, the unexplained origin of growth. No clear role for economic policies. SM: g w g z S / Xn : the endogeneity of S/X provides flexibility with respect to changes of vn g z ; the autonomous, non capacity-creating component of aggregate demand explain economic growth; economic policy, by acting on them may stimulate growth. 23/05/2017 87 Advancements by Serrano and open questions: existence and stability of the SM normal growth path • We have now the existence of a variety of normal paths that depend on gz and that are not distinguished by a different normal distribution (as in the CE) or by different un (as in the NK models) • Give the real wage w, rn, vn and therefore , given also s, there are infinite gw depending on gz (there was just one in Harrod) • Up to now we have assumed that I is decided on the basis of expected ED ge with ge = gz. We must now see what happen if gz changes • An open question concerns the transition between a normal path to another, the stability issue: does ge adjusts to the new gz (or perhaps we meet the Harrodian instability again?). • When gz rises, ua > un, so entrepreneurs not only invest to deal with the higher expected g, but also to restore un. Does the process “overshoots” in the sense that investment determines a self-fulfilling explosive dynamics? Freitas and Serrano put forward a stability argument that I will verbally summarise here. Suppose that, moving from a fully-adjusted position g z rises. The actual growth rate g a of aggregate demand and output also goes up and, as a consequence, induced consumption and investment will also grow. The degree of capacity utilisation becomes higher than normal. The rise in the induced components generates, in turn, a further augment of g a , a further climb in the induced components and so on and so forth. The fact, however, that g a is anchored to g z means that g k > g a > g z (where gk is rate of growth of the capital stock). Therefore, in spite of the fact that the attempt by firms to adjust the capital stock is an additional stimulus to aggregate demand, the capital stock and capacity are rising more rapidly than aggregate demand and output, so that capacity utilisation ua is falling and tending to normality. The fact that ua tends to normality means that the escalation of g k is slowing down. This implies that also the rise of g a is slowing down, and that g k tends to g a , that in turn tends to g z 23/05/2017 89 Comparison with Harrod: we have an attractor now In a normal position we have: g k g w g a . Suppose then that in a Harrodian context g a g w . This means that g k g a g w . But this leads to g a' g a g w , the well known Harrodian instability result. In the SM context productive capacity benefits from the positive effects of a higher g k in adjusting the capital stock to the higher g a . The fact that the latter rate is anchored to g z limits the effects of the higher g k on g a . In a nutshell, in the SM context the effects of investment on the supply side are faster than those on the demand side. In Harrod, before that g k has time enough to affect capacity, it spurs g a , since g k is the exclusive determinant of the latter (given sc). In this case the effects of investment on the demand side are faster than those on the supply side generating instability. Synthesis and necessary condition • In synthesis, while in Harrod investment is both the engine both of demand and of the adjustment of capacity, and the two roles may compound spiralling instability (unless capitalists invest according to gw = s/vn), in the SM approach aggregate demand is anchored to gz, a variable that it is not affected by the adjustment process. Therefore this adjustment does not create instability. • F&S argue that a sufficient condition for stability is that the reaction of investment must not be ‘too strong’. In intuitive terms, if gk reacts too strongly to the fall in gz and gx, then the fall in gk would pull (drag) gx with it in its plunge, and more and more far away from the anchor gz. Using a metaphors, the storm on investment must not be so strong that the chain that links aggregate demand to autonomous demand breaks. 23/05/2017 91 Summing up • Since Harrod’s contribution, followers of Keynes and Kalecki have taken investment as the independent variable and neglected “external markets”. This has been the source of analytical and substantial troubles. • Post-keynesian authors have overcome Harrod’s troubles by giving up exogenous distribution; neo-Kaleckian models by giving up the concept of long-run full (normal) capacity utilisation, while coreSraffians have given up the formulation of an analytical model of accumulation. • On the opposite, the supermultiplier approach combines (Eatwell’s and) Kalecki’s suggestions by anchoring long-term expectations to the growth rate of ‘external markets’ or non capacity-creating autonomous components of aggregate demand. Thus, it has been able to provide a formal model of demand-led growth with full capacity utilisation. • This solves the puzzles that gripped the Harrodian, neo-Kaleckian and the FSP literature, and by providing a theory more suitable to the analysis of the real economy where, as it is widely acknowledged in practice, the autonomous components of demand are the determinants of long-run growth. In the final part of the presentation we point out that this model of capitalist growth might contains the germs of its crisis. 23/05/2017 92 The instability of capitalism • We have rather moved from one basic contradiction of capitalism, that Kalecki described in better terms than Keynes: the effects of inequality in income distribution on aggregate demand or, in other words, the problems of the realisation of the capitalists’ social surplus. In a market economy ‘external markets’ may temporarily solve the realisation problem. By definition these markets are financed by purchasing power creation, and we may find here an important field of convergence with the literature on ‘endogenous money’. Purchasing power creation finances the external markets that absorb the capitalists’ surplus and return to the capitalists’ hands as profits. Capitalists thus become creditors of those ‘markets’. We may find here a main source of instability in the building up of unsustainable imbalances between core-capitalism and the external markets in what sounds, after all, a debt-driven model of capitalism both the US and the Eurozone have played with (Cesaratto and Stirati 2011), perhaps the only game in town for market economies. In this regard, convergences can be found with the emphasis of the ‘Stock-Flow consistent model’ on the building up of the mentioned imbalances (Zezza 2009) and with the emphasis laid by Minskian scholars (e.g. Wray 2011) on the ensuing financial fragility of capitalism. Limits of steady state analysis and the instability of capitalism • This also shows the limits of steady state analysis (Garegnani’s scepticism is not unjustified from this point of view). • SM analysis is useful to investigate certain phases of growth (and decline), but it is not meant to entail that capitalism evolves according to some natural secular trend (as neoclassical economists sometimes maintain). • Inequality of income distribution and the fact that, to compensate this, demand from external markets is linked to purchasing power creation and debt creates an inherent instability of capitalism and cycles (that, however, are not around a natural trend). • The idea of a natural trend is perhaps associated to that of a natural and exogenous trend of potential output (given by population growth, institutions and habits, technical change). This is not the view of Modern Classical Theory that regard all these factors endogenous to the historical vicissitudes of different periods and regimes of accumulation. Y 1 Z 1 c(1 t ) d m