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Post Keynesian Demand and Cost, and Marxist Unequal Exchange: An International Trade Application

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Slides from the 2016 PK Conference

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Post Keynesian Demand and Cost, and Marxist Unequal Exchange: An International Trade Application

  1. 1. Post Keynesian Demand and Cost, and Marxist Unequal Exchange: An International Trade Application Ron Baiman Chicago Political Economy Group (CPEG) Graduate Business Administration Benedictine University, Lisle, IL rbaiman@ben.edu International Post Keynesian Conference Univ. of Missouri, Kansas City, MO Sept. 17, 2016
  2. 2. Book Plugs: • The Morality of Radical Economics: Ghost Curve Ideology and the Value Neutral Aspect of Neoclassical Economics, Palgrave, 2016 (Chapter 5) • Ricardo’s Mathematical Free Trade Error: There is No Alternative to Managed Global Trade, Routledge, 2017 (Chapter 8)
  3. 3. The Mostly Fake SDM Story • In one relatively simple story with just enough analytical and graphical content to give it an aura of objectivity and science, the fundamental principles of our SDM social religion can be hammered home. • The SDM shows that given a stable DC and SC, or constant supply and demand shift-factors, competitive markets will “clear” at the unique equilibrium price and quantity where DC and SC intersect where “quantity supplied” equals “quantity demanded.” • This is a self-adjusting stable equilibrium that will be arrived at through individual consumer and producer reactions to “price signals.”
  4. 4. The SDM is the Intro Econ Version of Smith’s “Invisible Hand” • The fundamentally Walrasian SDM story is presented in introductory texts as a description of the workings of Adam Smith’s invisible hand • SDM supposedly supplies a rigorous foundation for the rhetorical message of objective market forces coordinating individual self-interest and providing a beneficial and balanced social equilibrium through freely adjusting price signals. • Given exogenous technological and natural constraints the SDM model shows that capitalist market economies: gravitate toward a social welfare maximizing, stable, market clearing equilibrium that is perfectly determined by natural conditions and individual choice.
  5. 5. High Theory, and Applied “Second Best,” Justifications for the SDM Don’t Work • Now any, more or less, formal model ignores some aspects of reality but a full half of the SDM model-is a complete fantasy for most markets. • In almost every case setting prices at “marginal costs” would result in firm bankruptcy. • “Second best” “Ramsey Pricing” efforts to resurrect “marginal cost” pricing do not work (Baiman, 2016) • Baiman (2016) shows that equity cannot be strictly separated from efficiency in theory or “second-best” practice.
  6. 6. The Mostly Real “Demand and Cost Model” (DCM) Story • All firms also face average total cost curves which are generally flat or slightly downward sloping in their normal range of production (Lavoie, Chap. 2) (Lee, 1998). • In order for the firm to stay in business these cost curves must be below the demand curve in normal production ranges. • Firms will generally apply a “mark-up” over costs that will demand on how much they want to sell and on their long term strategy. • If they want to sacrifice short-term profits to increase market share over the long run they will keep prices relatively low. If they want to maximize short-term profit and don’t care about market share they will keep prices high.
  7. 7. The DCM Meme • the DCM shows that price and quantity outcomes in market economies are subjectively and socially embedded mostly quantity choices that are: – indeterminate (though constrained by objective, institutional, and social conditions ) – unstable – non-optimal
  8. 8. Quantity Rather than Price Changes For example, in a survey of a representative sample of 200 non-agricultural firms in the U.S. (Blinder et. al., 1998) found that: • Almost all of the firms in the sample were “price- makers” (as in the DCM) rather than “price takers” (as in the SDM) • And though prices were periodically reviewed they were not determined instantaneously by supply and demand as : • “….the median number of price changes for a typical product in a typical year is just 1.4 and almost half of all prices change no more than once annually.“
  9. 9. International Trade Principles I a) Prices in any society should reflect the true social costs of that society. b) Societies with higher social costs have the right to impose tariffs on goods and services produced in lower-social costs societies up to a level that equalizes these costs to producers in both societies, and rebate these revenues to support broad-based increases of social costs in lower-standard societies.
  10. 10. International Trade Principles II c) When, for political reasons or in order to support economic development, a higher social- cost society subsidizes production in a lower social-cost society by not imposing tariffs at this level, the burden of these subsidizes should be shared by all producers and workers in the higher social-cost society, and not just by directly affected domestic producers and workers. d) Only Tariffs on trade between societies with comparable social costs, or tariffs that exceed levels that can be justified based on b) above, should be considered “predatory” and not permitted.
  11. 11. International Trade Principles III e) Developing country “infant industry” protective tariffs should be permitted and encouraged, along with other global development initiatives including massive grants to support green development, job creation, and trade, including “productivity pricing off-sets” that take into account generally lower developing country productivity when applying social-standard raising tariffs as in b) above.

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