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Post-Keynesian macroeconomic paradoxes

Post-Keynesian macroeconomic paradoxes. Paradox of thrift and paradox of costs. Mainstream macroeconomic laws (also Marxist laws). Higher real wages reduce employment or reduce growth rates

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Post-Keynesian macroeconomic paradoxes

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  1. Post-Keynesian macroeconomic paradoxes Paradox of thrift and paradox of costs

  2. Mainstream macroeconomic laws(also Marxist laws) • Higher real wages reduce employment or reduce growth rates • Higher saving rates increase output per head (Solow model) or increase growth rates (New endogenous growth).

  3. Paradox of thrift • Established by Keynes in The General Theory,in 1936 • A higher propensity to save does not induce higher investment and leads to a reduction in output and employment in the short run, because of a fall in effective demand

  4. Paradox of costs • Established by Kalecki in 1939 • Higher costing margins, and hence, lower real wages, lead to no change in the total amount of profits and to a reduction in output and employment, because of a fall in effective demand.

  5. The role of effective demand and income distribution in the short run • 1. A model with diminishing returns (close to Keynes’s economics) • 2. A model with constant returns (closer to Kaleckian economics)

  6. The mainstream case of diminishing returns; Effective vs Notional demand, with given real wages and autonomous demand AD = w.N + a.p RAD = w/p + a Profit maximization Notional demand for labour q RAD B W q(N) qs qd A (w/p)fe.N C a N NA Nfe NB The distance WC represents real profit

  7. Effective demand with diminishing returns and profit maximization: general view w/p NS NnotD A B (w/p)fe W NeffD AD=AS N NA Nfe NB

  8. Effective demand with diminishing returns and profit maximization: With flexible prices, move to W’ then K w/p NS NnotD K (w/p)K W’ (w/p)W B (w/p)fe W NeffD AD=AS N NK Nfe

  9. Effective demand with diminishing returns and profit maximization;Quantity adjustment, move from W to A, then along the NeffD curve w/p NS NnotD K (w/p)K A B (w/p)fe W NeffD AD=AS N NA NK Nfe

  10. Effective demand with diminishing returns and profit maximization; Higher autonomous spending, move to W w/p NS NnotD K (w/p)K AD > AS A (w/p)fe W NeffD AD=AS AD < AS N NA NK Nfe

  11. Effective demand with constant returns:The post-Keynesian case w/p NS pr (w/p)fe NeffD (w/p)1 N a1/pr N1 Nfe

  12. The post-Keynesian case: effect of an increase in real autonomous expenditures w/p NS pr (w/p)fe NeffD (w/p)1 N a1/pr N1 a2/pr Nfe

  13. PK instance of multiple equilibria: The low equilibrium is the stable one w/p NS T H (w/p)high NeffD (w/p)0 B (w/p)low N Nfe-low N0D N0S Nfe-high

  14. The detrimental impact of higher productivity if real wages remain constant w/p NS pr2 (w/p)fe2 pr1 (w/p)fe1 NeffD N a/pr2 a/pr1 N2 Nfe

  15. Effective demand and growth • 1. The Old Cambridge growth models • Robinson and Kaldor models • Keynes’s paradox of thrift applied to the long run • 2. The New Kaleckian growth models • Paradox of costs • Variants of the model

  16. Stability in the Robinsonian model g gs gi H gh* g0 gs = sp.r gi =  + .re B gb* r rb* ra r0 rh*

  17. The paradox of thrift in the Robinsonian model: A lower propensity to save leads to faster growth g gs gs(sc2) H’ g2* H gi g1* gs = sp.r gi =  + .re r r1* r2*

  18. The Kaleckian growth model gs g gi  gs =sp.r gi =  + .(u-us ) r = f.u/v (PC) f =profit share g0*  - .us u r PC ED rs ED obtained by equating both g’s r0* u u0* us

  19. The Kaleckian paradox of costs: effect of a reduction in costing margins gs g gi g1* gs =sp.r gi =  + .(u-us ) g0* u r PC ED r1* r = f.u/v p = (1+)(w/pr) w/p = pr/(1+) f = / (1+) r0* rmic u u0* u1 u1*

  20. Limits to the paradox of costs • The investment equation may be positively related to the profit share f or to the target rate of return rs • In an open economy, rising real wages achieved by rising wages may be detrimental to competiveness.

  21. Limits to the paradoxes of costs and of thrift • What about inflation? • What if higher rates of growth and/or higher rates of capacity utilization are conducive to faster growth rates? • What if the central bank reacts to higher inflation rates by raising real interest rates? • What if real interest rates reduce investment? • This is the Marxist story (Duménil and Lévy)

  22. The Marxist story: return to the standard rate of capacity utilization gs g gi g1* g0 gs =sp.r gi =  + .(u-us )  = (u-us) d/dt = -  g2* u PC r ED r1* r = f.u/v p = (1+)(w/pr) w/p = pr/(1+) f = / (1+) r2= rs u us u1*

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