Growth without normal capacity utilization

Within the demand-led approach to growth, the long-period tendencies of quantities cannot be effectively studied through theoretical positions entailing normal utilization of capacity. Whether in the form of constant or of average normal utilization, this assumption contradicts the supposed autonomy of aggregate demand. Analysis of the operation of the adjustment of capacity to demand suggests that potentially offsetting forces make fully adjusted positions irrelevant. As quantities cannot be assumed to gravitate towards such positions, the relations between quantity variables determined on the normal utilization hypothesis provide a poor guide to the analysis of reality.     

Autonomous demand and the warranted rate of growth

Unless equality is exogenously imposed between the rate of growthof autonomous demand and the warranted rate, a given rate ofgrowth of autonomous demand generates various 'short-period'warranted rates of growth, period by period. In a stable case,these 'short-period' warranted rates converge to a unique 'long-period'warranted rate, this being determined independently of the rateof growth of autonomous demand. Thus one has a non-steady pathof normal output growth. Different rates of growth of autonomousdemand engender, for one and the same configuration of normalincome distribution, different paths of normal output growth.Moreover, in a circulating-capital-only model with a given constantrate of growth of autonomous demand, different initial ratesof growth in aggregate demand also produce different paths ofnormal output growth. These results point to the importanceof effective demand in capital accumulation.     

Technical Change,Effective Demand and Employment

Ricardo and Marx saw technological change as a possible cause of long-period unemployment. Neoclassical and Schumpeterian economists regard technological unem ployment as a transitory phenomenon. This paper argues that the capital critique (i) demolishes the neoclassical claim that market mechanisms will restore full employment whenever workers are displaced by technical change, and (ii) rehabilitates the old Ricardian argument that automatic compensation factors are generally absent. The neo-Schumpeterian notion of autonomous investment is also rejected, in favour of the view that, in the long period, all investment is induced. By extending Keynes's theory of effective demand to the long period through a model based on the supermultiplier, this paper suggests that the ultimate engines of growth are located in the autonomous components of effective demand--exports, government spending and autonomous con sumption. Technical change plays a role in the accumulation process through its effects on consumption patterns and the material input requirements. However, the impact of technical change is now seen to depend upon circumstances such as income distribution, the availability of bank liquidity and exchange rate policy.     

Some comments on the Sraffian Supermultiplier approach to growth and distribution

Abstract

The article discusses the Sraffian Supermultiplier (SSM) approach to growth and distribution. It makes 5 points. First, in the short run, the role of autonomous expenditure can be appreciated within a standard post Keynesian framework (Kaleckian, Kaldorian, Robinsonian, etc.). Second, and related to the first, the SSM model is a model of the long run and has to be evaluated as such. Third, in the long run, one way that capacity adjusts to demand is through an endogenous adjustment of the rate of utilization. Fourth, the SSM model is a peculiar way to reach what Garegnani called the “second Keynesian position.” Although, it respects the letter of the “Keynesian hypothesis,” it makes investment quasi-endogenous and subjects it to the growth of autonomous expenditure. Fifth, in the long run it is unlikely that “autonomous expenditure” is really autonomous. From a stock-flow consistent point of view this implies unrealistic adjustments after periods of changes in stock-flow ratios. Moreover, if we were to take this kind of adjustment at face value, there would be no space for Minskyan financial cycles. This also creates serious problems for the empirical validation of the model.     

The instability principle revisited: an essay in Harrodian dynamics

Abstract

Harrod's contribution to economic dynamics is very often reduced to the dynamic equation whose character is unstable. Growth theory and cycle theory based on Harrod's contributions aimed at reducing this instability. Following Harrod, who was strongly opposed to the ‘knife-edge’ interpretation, we define the warranted rate of growth as a ‘moving equilibrium’ and focus on its interaction with the effective rate of growth. Our simple Harrodian model generates various dynamics from stable path, to growth cycle and corridor of stability.     

Capacity Utilization,Foreign Portfolio Investment and International Debts and Deficits

This paper develops a long-run equilibrium growth model, in the tradition of Keynes, Kalecki and Steindl, involving international capital flows between a debtor and a creditor country, and in which capacity utilization is variable. This latter assumption implies that the shares of savings by capitalists and workers will vary with capacity utilization. Profit rates will also vary with capacity utilization rates, so that the establishment of a common warranted rate of growth requires that the rates of profit in the creditor and the debtor countries must vary inversely. The long-run equilibrium shares of ownership of the two stocks of capital must therefore vary as the utilization rates vary. Taking the international interest rate as given, steady growth in each country at near full employment is shown to be accommodated, to some extent, through variations in the degree of capacity utilization. Even if income distribution remains unchanged, the variability of capacity utilization allows the existence of a range of growth rates consistent with the long-run equilibrium conditions of the model.     

Long-run convergence in a neo-Kaleckian open-economy model with autonomous export growth

This study combines a neo-Kaleckian growth and distribution model with a sort of Sraffian supermultiplier mechanism in which autonomous demand is driven by foreign exports. Short-, medium- and long-run equilibria are considered. In the long-run case, the expectations of sales growth governing investment change adaptively, and this, combined with the autonomous growth rate of exports, produces convergence of the actual rate of capacity utilization to its normal rate. It is demonstrated that some aspects of the main Kaleckian results can be preserved not only in the short or medium run but also in the long run, in the sense that both (1) a decrease in the propensity to save, and (2) a change in income distribution favoring labor, bring about higher average rates of production growth and capital accumulation. However, the impact of a change in the profit share is shown to be subjected to the condition that the responsiveness of the real exchange rate with respect to the profit share has to be bounded from above, confirming that the scope for wage-led demand or wage-led growth can be limited by open-economy considerations, even within the supermultiplier context.     

The aggregate neoclassical theory of distribution and the concept of a given value of capital: a reply

In this reply to Paola Potestio, it is argued that there are cases in which both the “supply” of and the “demand” for “capital” can be conceptualised in an economically meaningful way and used in the conventional long-period neoclassical manner to determine an equilibrium or to investigate the adjustment process towards it. This conceptualisation is based on strict assumptions. If, for the sake of the argument, we concede these assumptions, the critique of the theory that tries to generalise the determination of distribution in a simple one-good model, or “corn-economy”, to multi-good models can be safely founded on the possibility of reswitching and capital reversing, contrary to Potestio's critique.     

Revisiting the Old Theory of Cyclical Growth: Harrod,Kaldor cum Schumpeter

This paper advances two main arguments. First, it argues that Harrodian instability can be thought of as the motor force of long period expansions and contractions. This means that the virtuous cycle of an ever-increasing growth rate during the upturn of a long cycle can be seen as a process of runaway expansion, caused by an actual growth rate above the warranted rate. Likewise, the vicious cycle of an ever-deepening downsizing can be interpreted as resulting from an actual growth rate below the warranted rate. Secondly, by showing how a revised Harrodian model can yield a limit cycle in the rate of accumulation, the paper argues that the turning points in these long cycles can be explained by a nonlinear Kaldorian savings function and a variable scrapping rate.     

Model design and simulation

The purpose of this paper is to illustrate some of the uses of simulation in building econometric models. By its means we can solve complicated non-linear systems and discover how sensitive the solutions are to changes in the parameter values and in the form of particular relationships. These uses are exemplified in a simple model of cyclical growth, whose stability depends on the speed with which the wage rate is kept adjusted to the marginal product of labour.     

Demand-led Growth Theory: A Historical Approach

This paper builds upon the Keynesian theory of demand-led growth in order to provide an analytical framework for explaining economic growth and development in concrete terms, consistent with the fundamental idea that growth in output and employment is determined by the growth in aggregate demand. The framework employs a historical approach to identify the main factors and their role in explaining demand-led growth and the accumulation process. The theoretical model developed abandons steady-state conditions by proposing that capacity utilisation varies in the long run as well as in the short run to ensure output has the elasticity to accommodate levels of autonomous demand free of any capacity saving constraint. On the basis of our analytical framework, the paper considers the main factors that explain the growth in aggregate demand: first, by examining the variables that determine the ‘super-multiplier’ and what social, institutional and technical conditions can cause its value to change over time; second, by identifying the components of autonomous demand and the main forces explaining their growth; and third, by considering the manner in which technical progress promotes demand-led growth.     

Is the long-run equilibrium wage-led or profit-led? A Kaleckian approach

This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of growth are adjusted in the long run. Both the Kalecki-type and the Marglin–Bhaduri-type investment functions are introduced. Using the model, we examine which regime is obtained in the long-run equilibrium, the wage-led growth regime or the profit-led growth regime.     

Long-run Effective Demand in the US Economy: An Empirical Test of the Sraffian Supermultiplier Model

The Sraffian supermultiplier is a model of demand-led growth that stresses the importance of the autonomous components of aggregate demand (exports, public spending and autonomous consumption). This article tests empirically some major implications of the model employing macroeconomic data for the United States. In particular, we study the long-run relation between autonomous demand and output through cointegration analysis. The results suggest that autonomous demand and output are cointegrated and that autonomous demand exerts a long-run effect on output. There is also some evidence of simultaneous causality, especially in the short-run. Movements in autonomous demand and in the investment share are also found to be positively related, with Granger-causality going from Z to I/Y.     

On the Transition from Long-period to Short-period Equilibria

The paper examines the contributions of Myrdal, Lindahl, Hicks and Hayek that initiated the transition from the traditional long-period method to the methods of 'intertemporal' and 'temporary equilibria' in neoclassical general equilibrium analyses. It is shown that in the early contributions the idea of a tendency towards a long-period position was not completely abandoned, and that the new 'dynamic' equilibrium concepts were conceived by some of their originators as useful analytical devices for studying transitions between long-period equilibria only.     

Growth,Normal Capacity Utilization and the Long-Run Saving Ratio: A Comment

In a recent paper Attilio Trezzini presents an explanation of the saving ratio that does not rely on normal capacity utilization positions. Trezzini instead focuses on the fluctuations of consumption and investment. But that very focus, I argue, requires a different kind of approach. Once the traditional theory of saving is discarded, the ‘indeterminacy’ of the saving ratio opens the way to an analysis of the evolution of consumption, and of how that evolution affects aggregate demand. The generation and evolution of autonomous demand are matters of obvious relevance to the classical Keynesian approach to the analysis of growth. The present comment takes James Duesenberry’s criticism of demand theory as the starting point for an examination of the evolving standard of consumption and autonomous (‘innovative’) investment, therefore addressing directly the investment–consumption relationship. There are of course a number of complicated questions involved and they have not yet been satisfactorily analysed. They are part of the necessary task of articulating a theory of consumption consistent with demand-led growth and forward-looking investment decisions.     

Overhead labour and feedback effects between capacity utilization and income distribution: estimations for the USA economy

ABSTRACT

Empirical studies on the USA have not reached a consensus on whether its demand is wage- or profit-led, leading many scholars to scrutinize what drives the empirical results. This article tests two possible explanations for profit-led results which are related to the presence of overhead labour. To do so, a vector autoregression model is estimated for the USA from 1964 to 2010 and the wage share is split between supervisors/managers and direct workers. The results support the argument that the income redistribution away from workers and towards managers increased the likelihood of profit-led demand and suggest that an increase in the workers’ share of income would stimulate the economy. Also, increases in capacity utilization negatively affect the supervisors’ share, so that short-run profit-led results may be capturing the cyclical behaviour of the profit share, but the effect becomes positive as time goes by, suggesting a complex determination of functional income distribution, as capacity utilization affects it in ambiguous ways.     

A post‐Keynesian model of output,employment and monetary demand

This paper presents a simple model based on three broad Post‐Keynesian hypotheses: (1) the economic process develops over time; (2) money is endogenous; and (3) producers are price setters. To make the analysis easier we also assume (4) that firms are vertically integrated. Producers assess the expected demand and ask banks for credit in order to start production; banks create credit at the request of producers to finance the wage bill; workers buy goods sold by firms; firms must repay banks the amount borrowed plus interest and earn a target rate of profit. Since firms have created only as much purchasing power as they have advanced to workers in the form of the wage fund, equilibrium requires that there is an amount of autonomous monetary demand equal to profits and interest. Furthermore, in order to make the value of supply equal to the value of effective demand, firms will employ the number of workers necessary to create the purchasing power which, when added to the anticipated autonomous demand, enables all costs to be covered and the planned rate of profits to be attained.     

External debt sustainability and policy rules in a small globalized economy

The paper develops a Post Keynesian macroeconomic model which discusses the conditions that lead to an external debt crisis in a small developing economy fully integrated to global goods and financial markets. The focus is on how policy rules affect the stability of the economy. Two kinds of policy rules are discussed, namely inflation target and real exchange rate target, implemented through an interest rate operation procedure (IROP). It is argued that in both cases the evolution of the real exchange rate should be closely monitored to avoid external instability. It is also suggested that a real exchange rate target may be more effective to stabilize the economy if there is a strong tendency towards the equality of the foreign and domestic real interest rates.     

The NAIRU reconsidered: why labour market deregulation may raise unemployment

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by ‘excessive’ labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non‐accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long‐term effects. It follows that labour market deregulation does not necessarily reduce steady‐inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady‐inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984–1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).     

Endogenous Imitation and Technology Absorption in a Model of North–South Trade

Abstract

This paper considers the transfer of technology from the North to the South that occurs through trade in high-technology goods and explicitly models the ‘reverse-engineering’ process that allows the South to assimilate new technologies. A key finding of this study is that the South's rate of growth is dictated by the size of the country's human capital, which determines its absorptive capacity and its ability to assimilate knowledge from the North. We find that while a Southern country that is poor in human capital can only imitate, Southern countries that possess sufficiently large human capital endowments, beyond a certain threshold, signal the onset of innovation. We also find that the North enjoys a higher rate of innovation and growth with trade than without. North's gains are the highest when it trades with a human-capital ‘poor’ South, because imitation increases South's demand for Northern intermediates. But trade with the Southern countries that are human capital rich (and therefore involved in innovation), dampens their demand for Northern imports, adversely affecting North's growth. The model predicts growth convergence between the North and a South that is well passed the threshold for innovation.