"Post-Keynesian macroeconomic paradoxes"
Post-Keynesian macroeconomic paradoxes Paradox of thrift and paradox of costs Mainstream macroeconomic laws (also Marxist laws) Higher real wages reduce employment or reduce growth rates Higher saving rates increase output per head (Solow model) or increase growth rates (New endogenous growth). Paradox of thrift Established by Keynes in The General Theory,in 1936 A higher propensity to save does not induce higher investment and leads to a reduction in output and employment in the short run, because of a fall in effective demand Paradox of costs Established by Kalecki in 1939 Higher costing margins, and hence, lower real wages, lead to no change in the total amount of profits and to a reduction in output and employment, because of a fall in effective demand. The role of effective demand and income distribution in the short run 1. A model with diminishing returns (close to Keynes’s economics) 2. A model with constant returns (closer to Kaleckian economics) The mainstream case of diminishing returns; Effective vs Notional demand, with given real wages and autonomous demand Profit maximization AD = w.N + a.p Notional demand RAD = w/p + a q for labour B RAD W q(N) qs qd A (w/p)fe.N C a NA Nfe NB N The distance WC represents real profit Effective demand with diminishing returns and profit maximization: general view w/p NnotD NS A B (w/p)fe W NeffD AD=AS NA Nfe NB N Effective demand with diminishing returns and profit maximization: w/p With flexible prices, move to W’ then K NnotD NS K (w/p)K (w/p)W W’ B (w/p)fe W NeffD AD=AS NK Nfe N Effective demand with diminishing returns and profit maximization;Quantity adjustment, w/p move from W to A, then along the NeffD curve NnotD NS K (w/p)K A B (w/p)fe W NeffD AD=AS NA NK Nfe N Effective demand with diminishing returns and profit maximization; w/p Higher autonomous spending, move to W NnotD NS K (w/p)K AD > AS A (w/p)fe W NeffD AD=AS AD < AS NA NK Nfe N Effective demand with constant returns: The post-Keynesian case w/p NS pr (w/p)fe NeffD (w/p)1 N a1/pr N1 Nfe The post-Keynesian case: effect of an increase in real autonomous expenditures w/p NS pr (w/p)fe NeffD (w/p)1 N a1/pr N1 a2/pr Nfe PK instance of multiple equilibria: The low equilibrium is the stable one w/p NS T H (w/p)high NeffD (w/p)0 B (w/p)low N Nfe-low N0D S N0 Nfe-high The detrimental impact of higher productivity if real wages remain constant w/p NS pr2 (w/p)fe2 pr1 (w/p)fe1 NeffD a/pr2 a/pr1 N2 Nfe N Effective demand and growth 1. The Old Cambridge growth models Robinson and Kaldor models Keynes’s paradox of thrift applied to the long run 2. The New Kaleckian growth models Paradox of costs Variants of the model Stability in the Robinsonian model g gs gi H gh* g0 gs = sp.r gi = + .re B gb* rb * ra r0 rh* r The paradox of thrift in the Robinsonian model: A lower propensity to save leads to faster growth g gs gs(sc2) g2 * H’ H gi g1* gs = sp.r gi = + .re r1 * r2 * r The Kaleckian growth model g gs gi gs =sp.r g0* gi = + .(u-us ) - .us r = f.u/v (PC) f =profit share u r PC ED rs ED obtained by r0 * equating both g’s u u0* us The Kaleckian paradox of costs: effect of a gs reduction in g gi costing margins g1* gs =sp.r g0* gi = + .(u-us ) u r PC r1 * ED r = f.u/v r0 * p = (1+)(w/pr) w/p = pr/(1+) rmic f = / (1+) u u0* u1 u1* Limits to the paradox of costs The investment equation may be positively related to the profit share f or to the target rate of return rs In an open economy, rising real wages achieved by rising wages may be detrimental to competiveness. Limits to the paradoxes of costs and of thrift What about inflation? What if higher rates of growth and/or higher rates of capacity utilization are conducive to faster growth rates? What if the central bank reacts to higher inflation rates by raising real interest rates? What if real interest rates reduce investment? This is the Marxist story (Duménil and Lévy) The Marxist story: return to the standard rate gs of capacity utilization g gi g1* g0 gs =sp.r g2* gi = + .(u-us ) = (u-us) d/dt = - u r PC ED r1 * r = f.u/v r2 = rs p = (1+)(w/pr) w/p = pr/(1+) f = / (1+) u us u1*