Post-Keynesian macroeconomic paradoxes by tt0FG1

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									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


                AD>AS




                     AD<AS
          A                                 B
(w/p)fe                          W               NeffD
                                                    AD=AS
                                                 w/p = [f(N) – a]/N


          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

     T
 (w/p)fe                       NeffD
                               w/p = T – a/N

  (w/p)1




                                       N
           a1/T   N1     Nfe
The principe of effective demand
within a Kaleckian framework
   We start from the aggregate demand is equal to
    aggregate supply equality:
   w/p = [f(N) – a]/N
        = [T.N – a]/N
        = T – a/N
   If we assume a propensity to consume out of profits sc
    and real investment ai
   p.T.N = w.N + (1-sp)(p.T.N-w.N) + ai

   N = ai /sp(T-w/p) ou encore :
   w/p = T – (ai /sp)/N
The post-Keynesian case: effect of an
increase in real autonomous expenditures
     w/p
                               NS

     T
 (w/p)fe                            NeffD

  (w/p)1




                                            N
           a1/T   N1   a2/T   Nfe
PK instance of multiple equilibria:
The low equilibrium is the stable one
       w/p

                                  NS

                              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

      T2
  (w/p)fe2
       T1
  (w/p)fe1                           NeffD




             a/T2 a/T1   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*

								
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