Some observations on models of growth and distribution with autonomous demand growth

This paper offers some theoretical and methodological observations on a model of growth and distribution, recently developed by Franklin Serrano and others and called the Sraffian supermultiplier model, in which the growth of autonomous capitalist consumption demand and distribution are exogenously given and capacity utilization is at an exogenously given “normal” level in long‐run equilibrium. First, it provides a simple long‐run equilibrium version and dynamic formulation of the model, and compares it to other models of growth and distribution using a common framework and focusing on the effect of a change in income distribution on growth. Second, it shows that the model can be modified to examine other components of autonomous demand growth, including government spending, exports, consumption by workers, and investment and technical change, and to simultaneous multiple sources of autonomous demand growth. Finally, it comments on some methodological issues concerning the model, and on its implications for the notion of long‐run equilibrium.     

MARX‐BIASED TECHNICAL CHANGE AND THE NEOCLASSICAL VIEW OF INCOME DISTRIBUTION

This paper empirically tests two competing views about capital–labour substitution at the aggregate level in capitalist economies: the classical model with Marx‐biased technical change versus the neoclassical model. Following Foley and Michl (1999 ), the classical viability condition of technical change is used to draw out two different hypotheses about the profit share in national income corresponding to the two competing models. A stochastic version of the viability condition is empirically tested with data from the Extended Penn World Tables 2.1 using a simple cross‐country estimation strategy. It is found that the data overwhelmingly rejects the neoclassical theory.     

Consequences of Riding Takeover Waves: Australian Evidence

This paper uses Australian data to analyze takeover bid premiums and long‐term abnormal returns for mergers that occur during wave and non‐wave periods. Findings reveal that bid premiums are slightly lower in wave periods, and bidding firms earn normal post‐takeover returns (relative to a portfolio of firms matched on size and survival) if their bids were made in non‐wave periods. However, bidders who announced their takeover bids during wave periods exhibit significant underperformance. For mergers that took place within waves, there is no difference in bid premiums nor is there a difference in the long‐run returns of bidders involved during the first half and second half of the waves. We find that none of prominent theories of merger waves (managerial, misvaluation, and neoclassical) can fully account for Australian takeover waves and their effects. Instead, our results suggest that Banal‐Estanol et al.'s screening theory of merger activity, by combining the misvaluation and neoclassical theories, may provide a better explanation.     

Directed Technical Change and Capital Deepening: A Reconsideration of Kaldor's Technical Progress Function

This note proposes a growth model that is derived from the standard Solow growth model by replacing the neoclassical production function with Kaldor's technical progress function while maintaining a marginalist theory of factor prices in the spirit suggested by von Weizsäcker. The hybrid model so obtained explains balanced growth in a way that appears less arbitrary than possible explanations in the Solow model, especially because it directly accounts for Harrod neutral technical change, without any need for further assumptions. It complements the current neoclassical and AK models by offering a further perspective for interpreting economic growth.     

What drives long-term capital flows? A theoretical and empirical investigation

What drives capital inflows in the long run? This paper illustrates how capital movements conform surprisingly well to the predictions of a neoclassical model with credit constraints. The most intriguing prediction of this class of models is that, contrary to a pure neoclassical model, domestic saving should act as a complement rather than a substitute to capital inflows. Nevertheless, this class of models keeps the neoclassical prediction that capital should flow to countries where it is most scarce. Using foreign debt data from 1970 to 1998, I find qualitative and quantitative evidence that supports these predictions.     

Raising the Mandatory Retirement Age and its Effect on Long‐run Income and Pay‐as‐you‐go (PAYG) Pensions

In this paper we study the effects of raising the mandatory retirement age in the neoclassical growth model context. It is shown that postponement of the retirement age may be harmful for long‐run income and even for pensions. Our findings show that the retirement age might be reduced, thereby obtaining a higher income and even higher pension benefits. This suggests that the idea that a higher mandatory age of retirement is always beneficial in the long run for income and pension payments is theoretically controversial.     

DEMAND POLICIES FOR LONG‐RUN GROWTH: BEING KEYNESIAN BOTH IN THE SHORT AND IN THE LONG RUN?

The idea of demand‐led growth is defended by neo‐Kaleckians and neo‐Keynesians using very specific assumptions. In their models the paradox of costs is always valid in the long run. The central message of this paper is that these specific and strong assumptions are not needed to defend the Kaleckian perspective of a demand‐driven long‐run growth. What is needed is simply a less demanding theory of flexible mark‐ups in an open economy. The formal model developed in this paper shows that long‐run growth may be demand driven even when the paradox of costs does not hold in the long run.     

EQUAL ORGANIC COMPOSITION OF CAPITAL AND REGULARITY

Equal organic composition of capital (EOCC) is shown to be a necessary and sufficient condition for constant relative prices in no‐joint production technologies with neoclassical production functions. It is then proved that such neoclassical technologies are regular (which implies that consumption is well behaved across steady‐state equilibria). Regularity is also a necessary and sufficient condition for near aggregation (which implies an aggregate production function with all but one of the usual neoclassical properties). Except perhaps for some fluke cases, the existence of an aggregate production function with all of the usual neoclassical properties (full aggregation) requires the stronger EOCC property.     

Wage Inequality in the United Kingdom: Trade and/or Technology?

I employ two alternative intra‐industry trade Applied General Equilibrium (AGE) models to explain some stylised facts of the British economy. The model with skill‐biased technical change (i.e. exogenous skill‐biased technical change à la Solow) can explain the rise in wage inequality between skilled and unskilled workers, the decline in manufacturing and the expansion of modern services. However, the model where technical change is trade‐induced (i.e. endogenous sector‐biased technical change à la Romer) performs better, because it can also explain the exponential rise of imported intermediate capital goods and developments in the wage rate of unskilled workers.     

Neoclassical theories of stationary relative prices and the supply of capital

In the traditional versions of the neoclassical theory of value and distribution, the stock of existing capital, understood as either an amount of value or an endowment of capital goods, was taken as given together with the available quantities of labour and natural resources. This characteristic of the early neoclassical theories is analysed through comparison with the modern neo‐Walrasian models of stationary equilibrium, where the stock of capital is not among the givens. It is shown here that the attempt to present capital as a factor of production on a par with labour and land led the early neoclassical authors to write the zero‐net‐accumulation condition, which was required by the stationarity of relative prices, in the form of a market‐clearing condition for the supply of and demand for capital. The rate of interest was therefore understood as the price determined by this market. As is known, however, the view of capital as a factor of production and the rate of interest as the price for its use failed to work and involved several problems, some of which are discussed here.     

DO RISING REAL WAGES INCREASE THE RATE OF LABOR‐SAVING TECHNICAL CHANGE? SOME ECONOMETRIC EVIDENCE

The long‐run relationship between real wages and labor productivity is investigated using cointegration and Granger non‐causality tests for the US economy over the period 1869–1999. The series are cointegrated, indicating that there is a link between real wages and labor productivity in the long run. Granger non‐causality tests support unidirectional causation from real wages to labor productivity. This outcome corroborates the conception that increases in real wages drive profit‐seeking capitalists to raise labor productivity as their main weapon in defending their profitability. This result is consistent with a long tradition among economists that perceives technical change as being biased toward labor‐saving.     

Entrepreneurial Judgment,Decision Procedure and the Inevitable Emergence of the Non‐optimizing Firm in a Capitalist Economy

It has been argued that understanding of entrepreneurship and firm behavior can be advanced by generalizing the static theory of the neoclassical firm so that it can deal with conditions in a dynamic economy. The paper rejects generalization and explains why such a shift causes the nature of the allocation process to change from the neoclassical pattern. Under generalization, critical information becomes prohibitively costly to obtain and entrepreneurial judgment rather than the Pareto rules decides allocation. Thus, the non‐optimizing firm becomes dominant.     

Classical and Neoclassical Indeterminacy in One‐shot Versus Ongoing Equilibria

I analyze two connections between neoclassical and classical economics. First, I consider the indeterminacy that arises for both schools: in the neoclassical theories of overlapping generations and of factor pricing and in Sraffa's price theory. Neoclassical indeterminacy occurs only in environments where relative prices can change through time; otherwise, determinacy obtains. Although these results challenge the Sraffian position on indeterminacy, the classical principle that current economic activity is embedded in the past proves to be a powerful insight: it establishes the robustness of factor‐price indeterminacy and casts doubt on the importance of overlapping‐generations indeterminacy. Second, I argue that recent claims that capital‐theoretic paradoxes arise in intertemporal general equilibrium modes, not just in aggregative theory, cannot be validated.     

LONG RUN DEMAND FOR LABOUR IN THE CONSUMER GOOD INDUSTRY

We consider, for alternative models of production, the comparative statics of constant‐returns economies in long run competitive equilibrium, for which reswitching, capital‐reversing and consumption‐reversal are all completely absent. Notwithstanding the ‘well‐behaved’ nature of these economies, the use of labour per unit of output in the consumer good industry is always positively related to the real wage rate.     

LONG‐RUN RISING SUPPLY PRICE AND THE NUMÉRAIRE

When a set of industries is kept in long‐run equilibrium, it is never possible to change just one price at a time. But when various (or all) prices are changing, the direction of change of any one price can depend on the numéraire adopted. What does it mean, then, to say that a long‐run supply curve is upward (or downward) sloping? Can this qualitative property be independent of the numéraire in terms of which the product price is being measured? In general, it cannot.     

Wealth Distribution,Elasticity of Substitution and Piketty: An ‘Anti‐Dual’ Pasinetti Economy

This paper studies the dynamics of wealth distribution between workers and capitalists in a neoclassical growth model with differential saving rates. It shows that if capitalists are thriftier than workers and the factors elasticity of substitution is high enough to ensure endogenous growth, capitalists’ share of total wealth asymptotically tends to one. It is also proved that a tax on capital income shifts the long run distribution of wealth in workers’ favor, and that the capitalists’ share of total wealth is a decreasing function of the tax rate. The results of the paper are compared to Piketty's ‘fundamental laws’ of capitalism.     

INTEREST RATE,DEBT, DISTRIBUTION AND CAPITAL ACCUMULATION IN A POST‐KALECKIAN MODEL

In the present paper we extend Lavoie's (Metroeconomica, 1995, vol. 46, pp. 146–177) ‘Minsky–Steindl’ model, building our analysis on a Kaleckian distribution and growth model which has already taken into account distribution effects of interest rate variations on the short‐run equilibrium. Into this model the effects of debt and debt services are explicitly introduced and the effects of interest rate variations on the short‐ and the long‐run equilibrium are derived. It is shown that the effects of interest rate variations on the endogenously determined equilibrium values of the model not only depend on the parameter values in the saving and investment functions but also on the interest elasticity of distribution and on initial conditions with respect to the interest rate and the debt–capital ratio.     

Competing through relationships: Grounding relationship marketing in resource‐advantage theory

A common element of all views of relationship marketing is the “co‐operate‐to‐compete” thesis. That is, to be an effective competitor often requires one to be an effective co‐operator. One implication of this thesis is that not all instances of firms co‐operating with each other constitute anti‐competitive collusion. This article argues that, although neoclassical, perfect competition theory cannot provide a theoretical foundation for relationship marketing's “co‐operate‐to‐compete” thesis, the recently developed “resource‐advantage” theory of competition can do so. Furthermore, this article uses resource‐advantage theory to address the relationship portfolio conundrum. Specifically, the paper argues that firms should develop a relationship portfolio that is comprised of relationships that constitute relational resources.     

A Linear Multisector Model of “Endogenous” Growth and the Problem of Capital

In this paper a linear multisector model of “endogenous” growth with heterogeneous capital goods is elaborated. The purpose of this exercise is to show that this kind of model is exempt from the capital theory critique put forward against the conventional long-period neoclassical growth model á la Solow. This confirms previous claims that at least some of the “new” growth models are somewhat extraneous to neoclassical analysis and actually exhibit the logical structure of classical theory. In addition it is shown that the use of an intertemporal analysis to establish a correct long-period position is not necessary and that the use of the long-period method may speed up the elaboration of new scientific results.     

Testing mean reversion in financial market volatility: Evidence from S&P 500 index futures

This article presents a comprehensive study of continuous time GARCH (generalized autoregressive conditional heteroskedastic) modeling with the thintailed normal and the fat‐tailed Student's‐t and generalized error distributions (GED). The study measures the degree of mean reversion in financial market volatility based on the relationship between discrete‐time GARCH and continuoustime diffusion models. The convergence results based on the aforementioned distribution functions are shown to have similar implications for testing mean reversion in stochastic volatility. Alternative models are compared in terms of their ability to capture mean‐reverting behavior of futures market volatility. The empirical evidence obtained from the S&P 500 index futures indicates that the conditional variance, log‐variance, and standard deviation of futures returns are pulled back to some long‐run average level over time. The study also compares the performance of alternative GARCH models with normal, Student's‐ t, and GED density in terms of their power to predict one‐day‐ahead realized volatility of index futures returns and provides some implications for pricing futures options. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1–33, 2008