Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Towards a ‘Classical-Keynesian’ Analysis 
of Effective Demand in the Long Period 
Man-Seop Park, Korea University 
The 12t...
• To provide a framework for the (long-period) analysis 
of (Keynesian) effective demand which is compatible 
with the Cla...
• Part I: main ideas in terms of the aggregate economy 
• Part II: a formalisation for the aggregate economy 
• Part III: ...
Part I 
3
Effective demand in the long period: 
the Classical-Keynesian perspective 
• given 
- the methods of production 
- the ‘no...
r  f (w) 
w g 
r 
Effective demand in the long period 
5 
r 
c g s r  
g * 
* r * r 
w 
g 
K 
g * 
I  gK 
0 I 
1 I 
0 K...
• The ‘long period position capital equipment’ / 
A ‘fully-adjusted position’ 
• ‘The long period position exists in the p...
The long-period position capital equipment 
t K 
* 
1 t K  
Kt1 
Kt 
time 
log K 
log Y 
* 
t Y 
t Y * 
t I 
It 
7 
war...
The long-period position capital equipment 
The size (and composition) of the capital equipment ( ) that 
would have been ...
The long-period position capital equipment 
t K 
Kt1 
* 
Kt2 
' 
Kt 
time 
log K 
log Y 
* 
1 t Y  
t Y 
* 
1t I  
1t ...
Two parts of the long-period analysis 
First part: 
analysis of the long-period position ‘existing in the present’ 
Second...
The long-period analysis (first part): 
three states of the economy 
Kt 
' 
Kt 
time 
log K 
log Y * 
t Y 
t Y 
* 
t I 
It...
Effective demand in the long period 
t K 
Kt 
time 
log K 
log Y 
12 
WG 
rLP 
eLP
0K 
0 K 
WG 
rLP 
eLP 
warranted 
investment 
0 T time 
capacity 
autonomous 
investment 
13
‘erasing the traces of output loss’: 
‘[t]he elasticity of the capitalist economy … in reacting to 
incentives for a more ...
Policy implications 
(against neoclassical) 
• No existence of spontaneous market mechanism which would 
lead to the optim...
Scope for policy action 
• Demand policies: both short-run and long effects 
• Industrial policies: to remove growth const...
Part II 
17
A fully-adjusted position 
The relation between the quantities of the means of production 
and the quantities of output in...
19 
The Warranted Growth state 
WG 
r r 
r  f (w) / c s r  S K  g 
* r 
w /, S K g * g 
 
*  
(1) 
  (u) K  J / (...
The Warranted Growth state 
20 
• normal utilisation 
*   (u), u  1   
Y*  K / v 
* * * Y  (  r )K  wlY 
* * ...
The state of effective demand 
– autonomous investment decision in individual industries 
21 
* 
i,t i,t i,t J  z J 
- (t...
(The recurrence relation) 
(4) zt+1 =1+ 1- 1 zt ( ) é 
ë 
ù 
ûz 
Some examples: 
(1) zt1  zt 1 
(2) zt1  zt  z (1) ...
23 
The effective long-period position (eLP) 
WG 
r  f (w) 
/ c s r  S K  g 
r r 
* r 
w /, S K g * g 
 
*  
(1) 
 ...
The effective long-period position (eLP) 
24 
• normal utilisation 
- depreciation: 
- output: 
• price equation 
  (u)...
25 
The notional long-period position (nLP) 
WG 
r  f (w) 
/ c s r  S K  g 
r r 
* r 
w /, S K g * g 
 
*  
(1) 
  ...
The notional long-period position (nLP) 
26 
Y = u(K / v) 
d = d(u) 
(d + g)K = J = zJ* 
Y = (d + r)K + wlY 
Y = (d + g)K ...
27 
WG 
r  f (w) 
/ c s r  S K  g 
r r 
*r 
w /, S K g * g 
 
*  
(1) 
  (u) K  J / (  g) 
* * (J ,  , K) 
K 
...
The realised long-period position (rLP) 
28 
Y '  u '(K / v) 
'  (u ') 
Y '  (' r ')K  wlY ' 
Y '  (' g ')K  w...
Short period 
• in the short period, the rate of real wages is not necessarily at 
the ‘normal’ level 
• the short period ...
Y (P; J ,W)  Y * 
Y   Y (w, J ) Y 
  
   
  
W 
P 
  
  w 
 
  
Short period 
30 
LP for 
SP for 
SP...
(SP-1) 푌′′ = ( 퐾/푣)푢′′ 
(SP-2) 푌′′ = (훿′′ + 푔′′) 퐾 + 퐶′′ 
(SP-3) 푌′′ = (훿′′ + 푟′′) 퐾 + 푤′′푙푌′′ 
(SP-4) 푌′′ − 퐶′′ ≡ 푆퐺 
′′ ...
32 
푃 푏 
푃 퐴 
퐴 
푎 
푏 
푃 푎 
Short period 
풀
• the ‘employment curve’: 
d L lY 
- from the rLP, one obtains for each w 
• The ‘wage bargaining curve’ 
33 
The norma...
34 
The normal real wage rate 
푤 
1 
퐴 
푤퐵 
푒퐴 
푤푚푎푥 
푤 = 푤(푒) 
푒퐵 
퐵 
푒 = 푒(푤) 
the existence
35 
The normal real wage rate 
′′ 
푤 
1 
푒 = 휀(푤′′) 
퐴 
푒퐴 
the stability 
푤푚푎푥 
푤 = 푤(푒) 
푒 = 푒(푤) 
푤푚푎푥
Part III 
36
Multi-sector model 
• The prices of production 
• The financial market for allocating aggregate saving 
37
a11 a1n 
an1 ann 
æ 
ç 
ç 
ç 
è 
ö 
÷ 
÷ 
÷ 
ø 
A fully-adjusted position 
* * * * * * * * * * 
i i i i x r w x x     ...
The Warranted Growth state 
* * * * * * 
* [ ]([ ] ) [ ] [ ] 
i i i i  x   r  w x  x 
 
  
I A l Bp 
* 
1 
p 
dp 
...
The effective long-period position (eLP) 
p Bp 
p 
40 
* [ ]( ) [ ] [ ] 
i i i i  x   r  w x  x 
 
  
xB  xA  x[...
The notional long-period position (nLP) 
Ap l Bp 
dp 
41 
i i i i i x r x w x       
[ ][ ] [ ] [ ] 
 1 
 
 
 ...
The realised long-period position (rLP) 
 xi i  ri   w xi  xi  
 
A p l B p 
42 
[ ][ ] [ ] [ ] 
 1 
 
 ...
Upcoming SlideShare
Loading in …5
×

Towards a ‘Classical Keynesian’ Analysis of Effective Demand in the Long Period

378 views

Published on

Post Keynesian Economic Policy session at 12th International Conference

Published in: Economy & Finance
  • Be the first to comment

Towards a ‘Classical Keynesian’ Analysis of Effective Demand in the Long Period

  1. 1. Towards a ‘Classical-Keynesian’ Analysis of Effective Demand in the Long Period Man-Seop Park, Korea University The 12th Post Keynesian International Conference UMKC 25 Sept 2014
  2. 2. • To provide a framework for the (long-period) analysis of (Keynesian) effective demand which is compatible with the Classical/Sraffian perspective (Arising from criticisms of the Cambridge and the Kaleckian approaches) • (To show how the ‘given’ quantities of output in the Sraffa system can be interpreted as those being determined in accordance with Keynes’s principle of effective demand) 1 The objective(s)
  3. 3. • Part I: main ideas in terms of the aggregate economy • Part II: a formalisation for the aggregate economy • Part III: a multi-sector model 2 The paper(s)
  4. 4. Part I 3
  5. 5. Effective demand in the long period: the Classical-Keynesian perspective • given - the methods of production - the ‘normal’ real wage rate (or the ‘normal’ rate of profits) - the saving propensities of social classes the ‘normal’ rate of accumulation is determined: • the principle of effective demand: generating saving through changes in the size of capital stock  I  scrK 4 c g  s r c g s r 
  6. 6. r  f (w) w g r Effective demand in the long period 5 r c g s r  g * * r * r w g K g * I  gK 0 I 1 I 0 K 1 K
  7. 7. • The ‘long period position capital equipment’ / A ‘fully-adjusted position’ • ‘The long period position exists in the present’ • Two parts of a long-period analysis • Three states of the economy for the first part of a long-period analysis 6 Key ideas/concepts for a ‘Classical-Keynesian’ approach
  8. 8. The long-period position capital equipment t K * 1 t K  Kt1 Kt time log K log Y * t Y t Y * t I It 7 warranted investment autonomous investment long period position capital equipment
  9. 9. The long-period position capital equipment The size (and composition) of the capital equipment ( ) that would have been utilised at the normal level for a given level of investment • the autonomy of investment  not necessarily ' K ' K K  • why ‘long period’ ?: (1) ‘fully-adjusted’ to the level of output (= utilised at the normal level) [the first part of the long-period analysis] (2) regarded ‘normal’ with respect to the current state of effective demand, thus guiding investment in the next period (‘reference point’ /‘centre of gravity’) [the second part] 8
  10. 10. The long-period position capital equipment t K Kt1 * Kt2 ' Kt time log K log Y * 1 t Y  t Y * 1t I  1t I  ' Kt1 1 t Y  2 t K  9 WG ‘realised’ LP
  11. 11. Two parts of the long-period analysis First part: analysis of the long-period position ‘existing in the present’ Second part: analysis of the sequence of the long-period positions existing in the present 10
  12. 12. The long-period analysis (first part): three states of the economy Kt ' Kt time log K log Y * t Y t Y * t I It The Warranted Growth state The state of effective demand The long-period position The ‘realised’ state 11
  13. 13. Effective demand in the long period t K Kt time log K log Y 12 WG rLP eLP
  14. 14. 0K 0 K WG rLP eLP warranted investment 0 T time capacity autonomous investment 13
  15. 15. ‘erasing the traces of output loss’: ‘[t]he elasticity of the capitalist economy … in reacting to incentives for a more rapid growth by bringing about additional productive capacity, or, symmetrically, by … erasing the visible traces of the losses in output due to a low such incentive’ (Garegnani, 1992, p. 53) • the observed tendency, if any, to the ‘normal’ utilisation of the existing productive equipment is a result of the adjustment of supply to demand 14 Effective demand in the long period
  16. 16. Policy implications (against neoclassical) • No existence of spontaneous market mechanism which would lead to the optimal use of available resources • No welfare properties of the paths that the system spontaneously realises • No trade-off between consumption and investment • No trade-off between public and private expenditure • No unique set of prices compatible with (output) equilibrium • No unique path of optimal growth  wide scope for policy action 15
  17. 17. Scope for policy action • Demand policies: both short-run and long effects • Industrial policies: to remove growth constraints • Economic growth is figured partly by the relative power of the different groups of the society: the conscious social choice of policies 16
  18. 18. Part II 17
  19. 19. A fully-adjusted position The relation between the quantities of the means of production and the quantities of output in the respective industries is such that (1) output is produced at the normal utilisation of the means of production (2) each type of output is produced of the quantity that is exhausted for gross investment and consumption in the economy as a whole (supply = ‘(effectual) demand’) • The Warranted Growth state (WG) • The long-period position (LP) 18
  20. 20. 19 The Warranted Growth state WG r r r  f (w) / c s r  S K  g * r w /, S K g * g  *  (1)   (u) K  J / (  g) * * (J ,  , K) K K * u g g max 1 u
  21. 21. The Warranted Growth state 20 • normal utilisation *   (u), u  1   Y*  K / v * * * Y  (  r )K  wlY * * * Y  (  g )K  C - depreciation: - output: • price equation • quantity equation • saving * * * * * Y C  S  (sr   )K
  22. 22. The state of effective demand – autonomous investment decision in individual industries 21 * i,t i,t i,t J  z J - (the volume of gross investment) - the capacity-generating effect: J * i,t - the effective-demand-constituting effect: - the autonomy of investment: not necessarily i,t z , 1 i t z 
  23. 23. (The recurrence relation) (4) zt+1 =1+ 1- 1 zt ( ) é ë ù ûz Some examples: (1) zt1  zt 1 (2) zt1  zt  z (1) (3) zt1 zt K K  1         (5) zt+1 =1+a K K ( ) -1 é ë ù û (Supermultiplier) 22 (6) zt+1 = z +a K K ( ) -1 éë ùû (WG) (Kaleckian) (Harrod) { -1} +b ri r(å i / n) éë ùû (7) too complex to formalise (completely autonomous)
  24. 24. 23 The effective long-period position (eLP) WG r  f (w) / c s r  S K  g r r * r w /, S K g * g  *  (1)   (u) K  J / (  g) * * (J ,  , K) K K K * eLP (JJ,,d*, K) * u g g max 1 u
  25. 25. The effective long-period position (eLP) 24 • normal utilisation - depreciation: - output: • price equation   (u), u  1  * Y = K / v Y = (d* + r)K + wlY • quantity equation Y = (d* + g)K + wlY + (1- s)rK • autonomous investment (d* + g)K º J = z(d* + g*)K
  26. 26. 25 The notional long-period position (nLP) WG r  f (w) / c s r  S K  g r r * r w /, S K g * g  *  (1)   (u) K  J / (  g) * * (J ,  , K) K K K (J , d eLP *, K) * max u g g 1 u u d = (J , d, K) (u) r nLP g g
  27. 27. The notional long-period position (nLP) 26 Y = u(K / v) d = d(u) (d + g)K = J = zJ* Y = (d + r)K + wlY Y = (d + g)K + wlY + (1- s)rK • utilisation • depreciation • autonomous investment • price equation * quantity equation not holding
  28. 28. 27 WG r  f (w) / c s r  S K  g r r *r w /, S K g * g  *  (1)   (u) K  J / (  g) * * (J ,  , K) K K eLP K (J , d*, K) * u g g max 1 u u d = (J , d, K) (u) r nLP The realised long-period position (rLP) u  g g ()u r g  g (J , , K) rLP
  29. 29. The realised long-period position (rLP) 28 Y '  u '(K / v) '  (u ') Y '  (' r ')K  wlY ' Y '  (' g ')K  wlY ' (1 s)r 'K * (' g ')K  J  zJ * * * (1) (u ')  u '  r '  zr , g '  zg * * * * * * * (2) (u ')    r '  z(  r )   , g '  z(  g )  
  30. 30. Short period • in the short period, the rate of real wages is not necessarily at the ‘normal’ level • the short period rate of real wages is determined in reference to - the given money wage rate (determined by short-period wage bargaining) - the short-period price level (determined by some short-period price setting procedure such as mark-up pricing) 29
  31. 31. Y (P; J ,W)  Y * Y   Y (w, J ) Y        W P     w    Short period 30 LP for SP for SP for W P w (w, J ,W) Y (P; J ,W)  Y *
  32. 32. (SP-1) 푌′′ = ( 퐾/푣)푢′′ (SP-2) 푌′′ = (훿′′ + 푔′′) 퐾 + 퐶′′ (SP-3) 푌′′ = (훿′′ + 푟′′) 퐾 + 푤′′푙푌′′ (SP-4) 푌′′ − 퐶′′ ≡ 푆퐺 ′′ = 푠푐 푟′′ 퐾 + 훿′′ 퐾 (SP-5) (훿′′ + 푔′′) 퐾 = 퐽 = 푧(훿∗ + 푔∗) 퐾 (SP-6) 훿′′ = 훿(푢′′) (SP-7) 푤′′ = 푊 /푃 31 Short period
  33. 33. 32 푃 푏 푃 퐴 퐴 푎 푏 푃 푎 Short period 풀
  34. 34. • the ‘employment curve’: d L lY - from the rLP, one obtains for each w • The ‘wage bargaining curve’ 33 The normal real wage rate / ( ) d L L  e  e w 0 ( ); (0 ( ) ) 0, 0 1 w w e w if e e w f e f f if e e             
  35. 35. 34 The normal real wage rate 푤 1 퐴 푤퐵 푒퐴 푤푚푎푥 푤 = 푤(푒) 푒퐵 퐵 푒 = 푒(푤) the existence
  36. 36. 35 The normal real wage rate ′′ 푤 1 푒 = 휀(푤′′) 퐴 푒퐴 the stability 푤푚푎푥 푤 = 푤(푒) 푒 = 푒(푤) 푤푚푎푥
  37. 37. Part III 36
  38. 38. Multi-sector model • The prices of production • The financial market for allocating aggregate saving 37
  39. 39. a11 a1n an1 ann æ ç ç ç è ö ÷ ÷ ÷ ø A fully-adjusted position * * * * * * * * * * i i i i x r w x x       [ ]([ ] ) [ ] [ ] I A p l B p * 1   dp  * * * * * * [ ] i ix   g A p  S * * * * * * * [ ] i i x B  x   g A  h d 38
  40. 40. The Warranted Growth state * * * * * * * [ ]([ ] ) [ ] [ ] i i i i  x   r  w x  x    I A l Bp * 1 p dp * * * * * ( ) i i i i i J    g x a p * * * * * [ ]i ix B  x   g A  h d * * * * * [ ] i ix   x Ap  S 39 * i i i k  x a
  41. 41. The effective long-period position (eLP) p Bp p 40 * [ ]( ) [ ] [ ] i i i i  x   r  w x  x    xB  xA  x[gi ]A  hd I A l 1 d (1 ) i i i i i  g x a p  z J x[gi ]Ap = S
  42. 42. The notional long-period position (nLP) Ap l Bp dp 41 i i i i i x r x w x       [ ][ ] [ ] [ ]  1     ( ) i i i i i i   g x a p  z J * ( ) i i i i    x x
  43. 43. The realised long-period position (rLP)  xi i  ri   w xi  xi   A p l B p 42 [ ][ ] [ ] [ ]  1   dp  ( ) i i i i i i   g xap  z J * ( ) i i i i    x x [ ]i x g Ap  S [ ]i xB  xA  x g A  hd

×