Postkeynesian (PK) theory of production and distribution – selected problems

1. Postkeynesian (PK) theory of production and distribution – selected problems I. Keynesianism, neo-Keynesianism, post-Keynesianism 1. Nature of the so called Keynesian revolution in economics • Keynes: rejection of neo-classical equlibrium concept • Main research area: short-term unequlibrium and adjustment processes ( a difference with regard to monetarists) • Rejection of economic liberalism (model of anti-cyclical state interventionism) • Missing component: original (own) microeconomic theory (generally, the acceptance of neo-classical MPT and MDT) 2. Grand neo-classical synthesis (Samuelson): combination (fusion) of Keynesian macroeconomics (demand oriented theory of aggregate income) with essental theorems of neo-classical microoeconomics (production and distribution theory in particular)  a new (eclectic) model of state interventionism

2. PK production and distribution theory 3. Neo-Keynesianism (new Keynesian macroeconomics) • Genesis: incapability of Keynesian equlibrium theory to explain some phenomena related to general unequlibrium (in particular: simultaneous occurrence of high unemployment and inflation rate  Philip’s curve ; critique by both monetarists and representatives of New Classical Macroeconomisc (NEC theory of general equlibrium under the assumption of rational expectations) • Nature of neo-Keynesian economics: theory of short-term equlibrium under the circumstances of price rigidity (sticky prices of goods and wages) >market clearing through quantities and not through prices

3. PK production and distribution theory 4. Postkeynesianism: general profile • Most radical critique of NCE within the mainstream economics • Continuation of Keynesian macroeconomics, with overall rejection of neo-classical microeconomics, and MPT/MDT in particular • Numerous references to classical economy (classical political economy) in the way of interpreting the mechanism of performance of capitalist (market) economyneo-Ricardianism

4. PK production and distribution theory 4. Postkeynesianism: general profile - cont. • Opposite (with respect to NCE) interpretation of all essential categories related to production and distribution theory (capital, profit, rate of interest, labor and wage) • Methodological differences in relation to NCE: • Rejection of NCE equlibrium concept • Historism vs. Neoclassical unhistorism • Undertaking of the analysis of social and institutional conditions of economic phenomena and processes • Non homogenous nature of Postkeynesian economics

5. PK production and distribution theory II. Main research areas within PK economics • Critique of MPT/MDT • Relevance of essential categories and statements of MPT/MDT with respect to the economic reality and capabilities of empirical identification (with reference to postulates of methodological individualism and critical rationalism) • Internal consistence (conformity) of MPT/MDT (main area of controverses about the capital theory) (interdependence of two above mentioned directions of PK critique of NCE) • Functional distribution in the approach of PKE

6. PK production and distribution theory II.1. Critique of MPT/MDT • Generally: rejection of the possibility of constructing (existence) the aggregate (macroeconomic) production function as a foundation for explaining the proportions of functional distribution of social product • Incapability of aggregation of capital in technical or natural units (due to heterogenous character of capital as the production factor) • The above mentioned aggregation is, conditionally, if at all, possible at the level of enterprise (microeconomic production function) or – with respect to time –ex ante (never ex post) • In economic reality, capital can be aggregated when prices of physically heterogenous capital goods are known (it requires that prior to this aggregation we know the rates of profit (nterest)

7. II.1. Critique of MPT/MDT – cont. • In the NEC MPT/MDT we have to do with conscious identification (or confusion) of two notions: • Capital as the resource of financial means (assets) • Capital as resource of physical means (assets) • Conclusion: the amount of capital (in the macro scale) ever depends on the of interest rate (as the unit reward of capital) and wage rate (as the unit reward of labor) it is theoretically described be the so called Wicksell’s price effects

8. II.1. Critique of MPT/MDT–Wicksell’s price effects

9. II.1. Critique of MPT/MDT–Wicksell’s price effects • Value of k does not depend on prices of production factors only if the relation w/r is constant (rectlinear • w-r curve) • Accordingly with MPT/MDT, the constancy of w/r relation must denote the constancy of K/L relation • If K/L=const, then the substitution between K and L is impossible, which means the NEC macro production function does not exist

10. II.1. Critique of MPT/MDT • In the real economic world, one can not speak of continous substitution between production factors. but of discrete (discontinous, step) substitution (Leontieff production funkction). The respond of NCE on this critique was the concept of the so called surrogateproduction function by Samuelson • In the real world, we have frequently to do with cases that the transition towards more capital intensive technologies is accompanied by the increase in interest/profit rate (which contradicts the MPT/MDT)

11. II.1. Critique of MPT/MDT • It is in practice not feasible to separate (1) the increase in product brought about by the substitution of labor for capital, from (2) that increase which is caused by disembodied technological change/progress (as it results from the concept of macroeconomic NCE production function)  PK concept of the technological progress function by Kaldor

12. II.2.Essential PK categories and theorems concerning the functional distribution • Adoption of the assumption about the existence of class structure of the society (in accordance with the tradition of classical economy) • Functional distribution of social product (GDP, NI) is mostly institutionally determined; first of all, results from the bargaining power of social classes  collective bargaining theory • Historically determined level of living (maintenance) costs of workers is the main factor shaping the proportions of functional distribution • Profits and natural rents are residual revenues (rejection of MPT statements also with respect to labor and wages)

13. II.2. Essential PK categories and theorems concerning the functional distribution • Labor as theonlyrealproductionfactor (reference to theclassicaleconomy, neoricardianism) • Concept of the so calledreal capital (as thecritique of NCE approachtowardsthe capital ) • Capital whichexistsat a given point of time isthe (physical) embodiment of time of labor of past periods • Capital representsthis part of laborresource(in terms of labor time) beingcurrentlyavailable to thesociety (economy) whichcan be usedinthefuture • Thevalue of capital everdepends on unit rewards (prices) of capital (r) and labor (w)  Wicksell’spriceeffects

14. II.2. Essential PK categories and theorems concerning the functional distribution • Wages are not determined by marginal productivity of labor) (critique of MPT) • Market (current) level of wages is a magnitude which is secondary with respect to the rate of profit and results from the following (theoretical) reasoning: 1. There exists a historically determined rate of profit 2. From this rate of profit results a given value of capital 3. Wages have to reach a level that by this value of capital the above mentioned rate of profit is attained

15. II.2. Essential PK categories and theorems concerning the functional distribution • In real economy, the rate of profit (of interest) depends merely on investment decisions (here consisting in increasing the amount of physical capital) and propensity to saving of entrepreneurs. It is so even when there occur savings of workers (workers as owners of the part of existing capital)  the so called Passinetti’s paradox