Transcript Some instability puzzles in Kaleckian models of growth and

Some instability puzzles
in Kaleckian models of
growth and distribution
Eckhard Hein, Marc Lavoie and
Till van Treeck
The Kaleckian model
• Three essential equations
– A pricing function (income distribution)
– A saving function
– An investment function
• The actual rate of capacity utilization is
endogenous, determined by demand, even in the
long run, and so in general will not be equal to the
normal rate of capacity utilization
• Consequences: the paradox of thrift, and under
some specifications, the paradox of costs
Justification
• The Kaleckian model of growth has become a
workhorse of heterodox economics since the
early 1980s, proving to be highly flexible.
• Some authors claim however that one may be
Kaleckian or ‘Keynesian in the short run’ but
needs to be ‘Classical in the long run’ (Duménil
and Lévy 1999, Shaikh 2007).
• Others argue that ‘the current dominance of
the Kaleckian model (…) is unfortunate’ for
post-Keynesian and Structuralist
macroeconomics (Skott 2008).
•
The purpose of this paper is to show that
these opinions are premature.
Consequences of the
critique
• Somehow the actual rate of capacity
utilization must be brought back to its
normal rate
• Somehow Harrod’s warranted rate of
growth must constrain the economy, and
the classical equation must hold:
• gw = s/v =sprn
• The paradoxes of thrift and of costs don’t
hold anymore
Outline
• We distinguish Keynesian and
Harrodian instability
• We look at the various mechanisms
that have been suggested to bring
back the actual rate of utilization to
its normal rate
• We question the need for such a
mechanism
• We offer alternative mechanisms
that retain Kaleckian features
Instability
• There have been two somewhat related
kinds of criticisms:
– Keynesian stability (the slope of the saving
function is steeper than that of the investment
function), as assumed in Kaleckian models, is
doubtful.
– Harrodian instability (the investment function
shifts out if u > un)), as assumed away by
Kaleckians, is likely.
– Therefore, there must exist some other
mechanism that brings back the economy
towards its normal rate of capacity utilization
(shifting back in the investment function, or
shifting the saving function)
Keynesian instability
e
K
e
Short period
u   (u  u ),
g
gi
 0
gs
gi(ue)
g*
u
u* ue
uK
Harrodian instability
   (u *  un ),
g
g3
γ3
g2
γ2
γ0=g0
 0
gs
C
gi
A
B
u
un
u1 u2
u3
Consequences
• Whether there is Keynesian or
Harrodian instability, the
consequences are the same: a boost
in effective demand leads to an everrising rate of accumulation and rate
of utilization.
• In practice, the two kinds of
instability may be difficult to
disentangle.
Some “classical” mechanisms
designed to bring back utilization
to its normal rate
• Mechanisms acting on the saving
function
– The Cambridge price mechanism, acting
on the profit margin
– The retention rate solution, acting on
the overall propensity to save
The Cambridge price mechanism
rn   (u *  un ),
,
 0
• (Robinson 1956, Kaldor 1956; Harcourt/Kenyon 1977,
Eichner 1976, Wood 1975, Marglin 1984, Skott 1989)
• The profit margin rises as long as u > un, thus rotating the
saving function.
• The paradox of thrift is only retained if accumulation
depends on the profit rate
• The mechanism has been described either as an ultra-short
run mechanism, or as a long-run mechanism.
• The profit margin, hence real wages fall, when employment
rates and growth are high. Doubtful?
The retention rate solution
s f   (u *  un ),
 0
• This is the Shaikh I solution (2007)
• “This classical synthesis allows us to preserve central
Keynesian arguments such as the dependence of
savings on investment and the regulation of
investment on expected profitability, without having
to claim that actual capacity utilization will
persistently differ from the rate desired by firms”
(Shaikh)
• The retention ratio of firms rises as long as u > un,
thus rotating the saving function
• However, the paradoxes of saving and of costs
disappear, because: g** = γrrn
•
Doubtful?
Shaikh I solution
g
gs
gi
g1
g2
g0
u
un
u1
More “classical” mechanisms
designed to bring back utilization
to its normal rate
• Mechanisms acting on the investment
function
– Monetary authorities get scared of
inflation and raise real interest rates
– Capitalists get scared of full
employment and reduce the rate of
growth of output
– Capitalists have perfect foresight and
revise their sales expectations
Monetary authorities get scared
of inflation, and raise real interest
rates, thus lowering investment
    u  un ,
 0
• The Duménil and Lévy (1999) mechanism
• Similar to the New consensus mechanism
• Also has resemblance with Robinson’s inflation
frontier
• Both the paradoxes of thrift and of costs get wiped
out
The Duménil and Lévy mechanism: low saving
rates lead to high growth in the short run,
but lower growth in the long run
g
gs
gi
g1
g0
g2
u
us
u1
Drawbacks of the Duménil
and Lévy mechanism
• Higher rates of utilization may not mean higher or
accelerating inflation rates (horizontal segments in the
Phillips curve)
• Higher rates of interest may not succeed in slowing down
demand (it may increase consumer demand instead)
• When demand needs to be pumped up, it may be impossible
to lower real interest rates sufficiently (zero lower-bound
problem)
• Raising the interest rate is likely to lead to a lower “normal”
rate of utilization (a higher NAIRU), as firms raise their
target profit margins, and there is no guarantee that the
actual rate will converge to this evolving normal rate (Hein
2006, 2008).
Capitalists get scared of full
employment and reduce the rate
of growth of output
    u  un ,
•
•
•
•
 0
This is the Skott mechanism (1989, 2007, 2008).
In the ‘mature economy’, the rate of output growth is a positive
function of the profit share and a negative function of the
employment rate.
If the employment rate rises above its steady state value,
capitalists reduce output growth, sales growth declines, the
actual rate of utilization falls, and the constant in the investment
function starts to shrink.
The cause: firms have increasing problems to recruit additional
workers, workers and labour unions are strengthened vis-à-vis
management, workers’ militancy increases, monitoring and
surveillance costs rise, and hence the overall business climate
deteriorates.
Drawbacks of the Skott
mechanism
• It is not clear why output growth should be a positive function
of the profit share: this excludes Kaleckian effects by
assumption.
• It is not clear why high employment rates, accompanied by more
powerful workers and labour unions, should induce capitalists to
reduce output growth in the first place.
• One would rather think that high employment rates generate
rising nominal wage growth. This should cause either rising
inflation or a falling profit share, or both.
• But the latter would intensify Harrodian instability!
• What about labour supply growth being driven by labour demand
growth?
Capitalists have perfect foresight and revise
their sales expectations
g i  g y   u u  un ,
gy , u  0
• The Shaikh II (2007) mechanism
• Based on a special ‘Hicksian’ stock-flow
investment adjustment function.
• Investment depends on the rate of utilization and
the growth rate of sales that will be realized in
the current period
• If so, it can be shown that the actual rate of
capacity utilization necessarily converges to its
normal rate.
û
Shaikh II
+
0
−
u
gs
g
gkal
gi = gy +
γu(u−un)
γ = gk0 = gy0
gk2
gy2
gk3 = gy3
un u2 u1 ukal
u
Drawbacks of the Shaikh II
mechanism
• Firms must know the growth rate of their sales.
• But this rate depends on the investment expenditures of all
other firms.
• Thus, each firm needs to know what all other firms
simultaneously decide.
• The informational requirements are huge.
• The behaviour of managers is unlikely: following a period of
rising rates of utilization, firms need to believe that sales
will grow more slowly.
• If firms act in some adaptive way, Harrodian instability
reappears.
Questioning the necessity of any
adjustment of u towards un
• Provisional equilibrium; everything moves anyway
(Chick and Caserta 1997)
• Other stock-flow norms in growth models are not
realized, even when agents try to achieve them –
wealth/income targets (Godley)
• There is a large range of acceptable “desired” or
“normal” rates of capacity utilization (Dutt 1990).
• A firm may operate each running plant at optimal
capacity (cost-minimizing), while being unable to
to run all plants (idle capacity) (Caserta 1990).
Acceptable range
• ‘The stock adjustment principle, with its
particular desired level of stocks, is itself
a simplification. It would be more realistic
to suppose that there is a range or
interval, within which the level of stock is
“comfortable”, so that no special measures
seem called for to change it. Only if the
actual level goes outside that range will
there be a reaction.’ (Hicks 1974, p. 19)
Even Sraffians accept that
firms usually have idle capacity
• ‘It is virtually impossible for the investmentsaving mechanism … to result in an optimal degree
of capacity utilization…. It is, rather, expected,
that the economy will generally exhibit smaller or
larger margins of unutilized capacity over and
above the difference between full and optimal
capacity’. (Kurz 1994)
• ‘One must keep in mind that although each
entrepreneur might know the optimal degree of
capacity utilization, this is not enough to insure
that each of them will be able to realize this
optimal rate’. (Kurz 1993)
Still, we do not wish to sweep the
problem under the carpet
• There are mechanisms that can bring together
the actual and the normal rates of capacity
utilization, by making the normal rate endogenous
to the values taken by the actual rate (Lavoie
1992, 1996, 2003; Cassetti 2006, Commendatore
2006).
• So normal rates adjust to the actual rates.
• With some specifications, these hysteresis
models safeguard both the paradoxes of thrift
and of costs.
• A critique of these has been: why would firms
modify the normal rate of utilization just because
it has not been achieved recently (Skott 2008)?
A possible answer: because
firms have multiple targets !
• This is the Dallery and van Treeck (2008) model, partly
based on Lavoie (2003).
• Firms may set themselves “target” or “normal” rates of
utilization.
• But they also may have other targets, such as target rates
of return (rsf), required for financing growth or imposed or
suggested by shareholders.
• In addition, workers may have a target real wage, equivalent
to some target rate of return (rw), which stops the firms
from achieving their target rate of return.
• Thus, to follow Skott’s analogy, although I may always be
late arriving at work (u > un) , I may be unable to leave any
earlier to arrive on time (u = un), because of other
commitments (rw, rsf).
The Dallery and van Treeck (2008)
mechanisms
rsf  1 ( r *  rsf )
s f    2 ( rsf  r*)
• Firms may raise their target rate of return when
the actual rate is above the target.
– By doing this, running at an over-normal rate of
utilization, they may succeed in achieving the target
rate of return.
• Firms may also decide to decrease their retention
ratio sf (thus distributing more dividends), as long
as the actual profit rate is below the target.
– This is similar to the Shaikh I mechanism. But the
utilization rate remains endogenous here.
Conclusion
- The Kaleckian model is more flexible than
the critics of the textbook version suppose
Further developments:
- Financial sector instability and ‘real’
instability
- Role of labour supply (endogeneity channels)
- Integration of economic policies