Lecture notes on accumulation theories Heterodox Theories

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

sergio.cesaratto@unisi.it

http://www.econ-pol.unisi.it/cesaratto/

http://politicaeconomiablog.blogspot.com /

Heterodox theories

• We shall consider 3 groups of theories:

• Cambridge equation (circa1950s-1970sKaldor, Joan Robinson, Pasinetti)

• Neo-kaleckian models (circa 1980-2015 Rowthorn, Amadeo, Dutt, 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.

• Since 2015 the supermultiplier approach has progressively attracted most of the attention.

• 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.

22/11/21 3

How to solve the Harrodian instability problem

• In Solow v adjusts through the neoclassical substitution mechanisms in order that g_A g_w

• We shall review 3 heterodox attempts to solve the Harrodian problem:

• Cambridge equation: s varies in order that g_w -> g_A (S adjusts to I)

• Neo-Kaleckians: va or, better, u_a becomes the “new normal” so no instability would arise (extra-saving comes from a higher degree of capacity utilisation that becomes the “new normal”)

• Sraffian supermultiplier: reject the Harrodian context, make gross investment (the source of troubles) induced by an external anchor of growth (autonomous demand).

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 Z (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. [There is an idea of a monetary circuit]

• X = W + P = C + I + Z.

• Assuming c_w = 1 and c_c = 0, W = C (Workers spend what they earn)

• Then P = I + Z (capitalists earn what they spend)

22/11/21 5

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

where is the expected normal output when capacity is

originally installed [1] and is the capacity installed, with (in general).

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. Normal prices mean normal profit rate

f e

n

n

Y Y

u 

e

Y

Y

f

ne

Y

Y 

Premise 2 (cont.) : the desired capital coefficient tells the same story of the desired/normal degree of capacity utilisation

u_n= Y_n/Y_f where Y_f is the maximum physical output from a given capacity K.

In general Y_n < Y_f and u_n < u_max.

When g_A > g_w, it means that s/v_a> s/v_n,, that is v_a = K/Y_a < v_n = K/Y_n  Y_a > Y_n

or, in terms of degree of capacity utilisation u, u_a = Y_a/Y_f > u_n = Y_n/Y_f  Y_a > Y_n

Read in the opposite direction: whenever g_A > g_w, Y_a > Y_n u_a > u_n, the actual degree of capacity utilisation u_a is higher than normal

The opposite would of course happen when g_A < g_w (u_a < u_n 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 u_a > u_n if va > vn it means that the capital stock is sub-utilised, that is u_a < u_n Finally, if u^a > uⁿ then r^a > 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 = r_n when ua > un.

Premise 2 (cont.)

• Note that ua can alternatively be defined as u_a = Y_a/Y_n

• so that un = Yn/Yn = 1

• We sometimes use this alternative definition.

---

• Classical Hypothesis on saving:

• s = sc (P/Y) + sw (W/Y), sc > sw

• It is often assumed sw = 0

The Cambridge equation and its critics

• The equations are

• where s_c 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 s_crⁿK=I  s_crn= I/K and recalling that I = K we get the famous Cambridge equation

gk = sc rn

Where gk is the growth rate decided by capitalists.

• Given vⁿ = K/Y, g_y = g_K

I

= S

I

= I

K r s

= P s

=

S

22/11/21 9

Observation

• Note that:

• g_w = s_cr_n= s_cP/K = s_c(P/X_n)/(K/X_n), where X_n is normal output.

• Reminding that:

• s = s_c(P/X_n) + s_w (W/X_n), and assuming s_w = 0 then s_cP/X_n = S/X_n = s, and with K/X_n = v_n

we get:

g_w = s_cr_n= s/v_n

• It is important to recall 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).

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 = v_n, 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”) g_w = s/vn

• In equilibrium all cats are grey

22/11/21 11

The main characteristic of the Cambridge equation is in the idea that the rate of accumulation g_k 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 u_f and un. But they retain the notion of a normal profit rate (on the opposite the NKs…)

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], g_k is the independent variable that, given s_c, determines r_n:

g_k  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.

Why the CE is stable

• If capitalists decide a higher rate of accumulation: g’k = ga > gw = gk = sc rn

• rn would rise to rn’ so that we have a new warranted rate:

• g’k = ga = sc rn’

• A higher rate of accumulation requires a higher saving rate which is obtained by a change in income distribution in favout f profits which are the source of savings.

• In term of the Harrodian equation gw’ = s’/vn > gw = s/vn where s’ >

s.

• (Remember, in Solow the adjustment was in vn).

A graphical representation: the wage-profit frontier on the left-hand side and the CE g_k = s_c r_n on the right-hand side. This is the Pasinettian

closure of the Sraffian distribution theory

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.

22/11/21 15

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.

Summing up what we have said so far

• Harrod: if, moving from a dynamic equilibrium in which S = I or g_s = g_I , investment decisions vary, then no adjustment of S to I is

possible (or better, S adjusts to I through a higher u_a, but the attempt to restore u_n creates instability).

• CE: if, moving from a dynamic equilibrium in which S = I or g_s = g_I , investment decisions vary, then S adjusts to I through a change income distribution (the normal profit rate rises) that affects s.

• NK (anticipation): if, moving from a dynamic equilibrium S = I or g_s = g_I , 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 u_n.

22/11/21 17

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

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

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 v_n.

Eq.3

Eq. 4 g_s = g_i (that is S/K = I/K)

a c

s

s r

g 



i

 g

n a

a

u

r v 



Comparison with the CE model

• Using the same presentation used for the CE the NK model would be:

• It is enough to divide 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

n a f

a f a a

f

a u

Y v Y Y

K Y P Y Y

K Y

Y K P

P

r _{   }



/ / / /

/

n a a

a c c

v u r

I S

I I

K r s P

s S

 









22/11/21 19

Solving the model

• By simple substitutions we obtain: eq. 5

• The long run goods market equilibrium is where:

• So we obtain: eq. 6

• Equations [2] and [5] 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 u_a implies a higher r_a.

n a

s c

u

v g _ s 

i

s

g

g 





c n

a

s

u  v

22/11/21 20 The capacity-saving growth function (5), indicated as g_s, 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 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 a result of the NK models. In the lower part of the figure we drew equation [3] indicating that in correspondence to u_n we find the normal profit rate, and an higher profit rate at a higher utilization rate. Figure 1 then shows the case in which long term growth expectations grow from  to ’. The consequence would be higher u and r, that in the spirit of this model can be taken as the ‘new normal’.

g g _s

' B g _i^'

A

 g _i

u ⁰_n u_a u¹_n u

r

PC

1 n

a r

r  B

r A _n⁰

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. 6 we get eq. 7:  = sc/

(vn/ua)

• Let us begin with point A (old normal)

• In point A :  = sc/(vn/u_n) = s/

(vn/un)

And defining un = Yn / Yn = 1 (instead of un = Yn / Yf ), then  = s/vn (all cats are grey)

The old normal is (must be!) an Harrodian equilibrium: there is only one consistent with the warranted growth rate s/v_n. So we assume to start from an equibrium position for the sake of the

argument

What is actual is normal: the new normal

• Look now at point B where there is a higher accumulation rate ’

• According to the NKs 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’ u_a = u_nn.

• We may similarly define a “new normal”

capital coefficient:

’ = s_c/(v_n/u_a) = s_c/(v_n/u_nn)

The term v_n/u_a = v_n/u_nn) can be defined as the “new normal” capital coefficient:

vnn = vn/ua= (K/Yf)/(Ya/Yf) = K/Ya

so that ’ = s_c/v_nn = s/ v_nn

• We thus obtain a “flexible” Harrodian warranted rate g_w = s/v_a = s/v_nn

Whatever is real is rational, or better, whatever is actual is normal what is

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 g_a > g_w, u_a > u_n. The attempt by the entrepreneurs to restore u_n determines instability: recall, if they expect g_e>g_w, then g_a>g_e and they expect an even larger g_e.

• NK: if g_a > g_w, u_a > u_n, but u_a becomes the ‘new normal’ u_a = u_nn.

• 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

• Eq.2

• Eq.3

• Eq. 4 g_s = g_i

• For memory, eq. (3) in the NK was

• In the CE Y_n = Y_f , or u_n = u_f, that is there is a unique normal degree of capacity utilisation equal to full capacity

n c

s

s r

g 



i

 g

n n

r _ v 

a

n n u

r _ v

22/11/21 25 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 g_s 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 g _s^' g _s

' B g _i^'

 A g _i

u_n u_f u

r

PC’

PC r _n^'

r _n A B

u_nu_f u

Figure 2

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 (g_s = s_cr 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. GO TO SLIDE 46

Policy implications: wage-led regimes

• Golden age of capitalism:

• w  u  both g and ra

• The social democrat compromise would work!

• Garegnani’s criticism (Rivista del Manifesto)

• w  rn and, nonetheless, g

• Capitalists accepted a change in the normal rate of profits because of the Soviet challenge and the strength of the workers movement.

When the historically circumstances changed:

• g  unemployment  w  rⁿ

22/11/21 29

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

sg. This does not imply that we think that sg is true. But we believe that I/K  g.

Normal profit and investment decisions I (a digression on an alternative way to demonstrate the thrift paradox).

This is relevant also with regard to the Marglin&Bhaduri NK “profit-led regime”

• [Lavoie reports that Joan Robinson assumed that investment is

sensible to the level of the normal profit rate – so that if s_c falls , given

, r_n 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 (forthcoming at the normal profit rate).

• Given r_n (whatever it is) competition leads entrepreneurs to satisfy all expected demand at that rate.

• Variations of r_n have to do with income distribution and only through this they may affect expected effective demand and investment.

• A rise/fall of r_n may negatively/positively affect investment if expected demand is negatively affected by lower/higher wages.

Normal profit and investment decisions II

• Therefore, a rise of r_n, as such, for no reason would positively affect investment.

• Likewise, a lower r_n 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 r_a above/below r_n will signal that u_a is above/below u_n. 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 r_n might induce the government to adopt deflationary economic policies to re-create the industrial reserve army.

22/11/21 33

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 u_a, g_i 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

• Eq.2

• Eq.3

• 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

a c

s

s r

g 

) (

i

u u

g     

n a

a

u

r _ v 

By substituting equation [3] in [1], we get Eq.4:

• The long run goods market equilibrium is where

• that is where, equating equations [4] and [2]:

• 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 more 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.

n a

s c u

v g _ s



i

s

g

g 











 

c n

n

a

s v

u u

22/11/21 35 Suppose that a rise in real wages causes a fall of the profit share . This causes a rightward rotation of the g_s and PC curves. At the initial growth rate g = , the lower capacity savings determine a higher u_a⁰. 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 u_a¹.

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 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 neo-

Kaleckian 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.

• This is the way the NK explain the social democratic compromise during the golden age of capitalism (1945-1979)

22/11/21 37

What is actual is normal: the ‘new normal’

Similarly to above, from eq. [2]

and [4] we get:

Redefining u_a as the ‘new normal’

u_nn, the denominator on the right- hand side becomes the “new normal” capital coefficient

we may obtain a warranted growth rate equal to

) (

a n

c

u u

u v

s      

) u β(u

+ α v =

π

= s

g

nn c

W



nn n

nn

u

v  v

The NK warranted rate

The growth rate is determined by the ‘animal spirits’ a plus an endless attempt (u_n – u_a) 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 (as suggested by Lavoie)

so that (in point C):

) (

'     u

 u



' v α

π

= s g

nn c

W



This is the key Lavoie’s passage

• “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 (u

>u

), this implies that the growth rate of the economy is consistently above the assessed secular growth rate of sales (g

>). 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.”

Vorrei e non vorrei

• 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

– u_n) must be retained (that is the term u_n must be retained) in the

“new normal” growth rate since this serves to show the ‘thrift paradox’.

• The “new normal path” contains an endless attempt to re-establish the old normal path. Funny.

• Unless n point C ua is taken by the entrepreneurs as the new normal u the model is unstable

g

g_s¹ g_i³ g_i²

g_s⁰ D

gi1

C

gi0

A B gi0

u_n u₀ u₁ u₂ u

NK instability: an improved representation (next slide the complete figure)*

g

gs1 gi3

gi2

gs0 D

gi1

C gi0

A B gi0

un u_a⁰ u¹_a u_a² u r

r _a¹ C

0 a

n r

r  A B

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”

u_n, 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.

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 they 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-u_n) serves the purpose of showing the thrift (and cost) paradoxes and avoids the Harrodian instability.

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 u_a and u_n, 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.

Addendum

• After Steindl (1951) NK argue that an actual degree of capacity

utilisation different form normal is typical of monopolistic/oligopolistic competition.

• This is fine as far as it goes

• ua in monopolistic conditions can then be defined as a “monopolistic normal” u, that is u_a = u_nM different form u_n (relative to free

competition). Monopolistic industries can be included in Sraffa’s production prices etc.

• u_nM is exogenous and its variations have to do with changes in the microeconomic conditions, that have nothing to do with the

macroeconomic variations of u due to different g .

The inconsistency triangle: a new look

u

Harrod CE

exogenous distribution KH

NKs/FSP

The neo-marxists or second generation neo- Kaleckians

• Model by Marglin and Bhaduri, very popular since the1990s, not discussed.

• They propose two regimes:

• the wage-led regime, when investment is more sensitive to variations in u. This has been discussed and criticised above

• the profit-led regime when investment is more sensitive to variations in r (r_n, r_a? this guys are often confused). This has also been

criticised above go back to slides 30/31/32.

• Lower wages can affect exports, but this is another story. This is an export-led regime not a profit-led regime!

• So I regard neither the NK nor the more general M&B models as a promising route.

• There is much critical work to be done, to assess for instance their empirical results.

All Harrodians now?

• As seen, behind all the steady state growth equations there is (after some easy manipulation) Harrod’s g_w:

• Solow: gw = n = sy/k  gw = s/vn (with n as the independent variable, v_n as the adjusting variable)  stable, but problems with K theory

• CE: g_w = s_cr_n  g_w = s/v_n (with g_k = g_g as the independent variable, and with rn as the adjusting variable)  stable, but not empirically robust

• NK: g_w =  = sc/(vn/u_a), where u_a = u_nn can be defined as the “new normal” u so that v_nn = v_n/u_nn  g_w = s/ vnn (with g_w =  +  (u_a – u_n) as the independent variable, and with u_nn as the adjusting variable)

 ad hoc stability

• All the adjustment processes are unsatisfactory

• We must break with the Harrodian context

We were all Harrodian

• The Warranted Growth equation g_w = s/v_n is behind any growth model since it is an equilibrum condition that dictates the rate of growth consistent with I = S given s and v_n.

• 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 CE it is s that changes given v_n.

• In the NK it is vn that changes via the re-definition of the normal degree of capacity utilisation: v_nn = v_n/u_nn where u_nn = u_a.

• But all this adjustments are unsatisfactory for one reason or the other.

• We must break with the Harrodian context