Transcript Post-Keynesian macroeconomic paradoxes Paradox of thrift

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
 Higher saving rates increase output per
head (Solow model) or increase growth
rates (New endogenous growth).

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

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.

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)

The mainstream case of diminishing returns;
Effective vs Notional demand,
with given real wages and autonomous demand
Profit maximization
Notional demand
for labour
q
qs
qd
AD = w.N + a.p
RAD = w/p + a
RAD
B
W
q(N)
A
(w/p)fe.N
C
a
NA
Nfe
The distance WC represents real profit
NB
N
Effective demand with diminishing returns
and profit maximization: general view
w/p
NS
NnotD
(w/p)fe
A
B
NeffD
AD=AS
W
NA
Nfe
NB
N
w/p
Effective demand with diminishing returns
and profit maximization:
With flexible prices, move to W’ then K
NS
NnotD
(w/p)K
K
W’
(w/p)W
B
(w/p)fe
NeffD
AD=AS
W
NK
Nfe
N
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
(w/p)fe
A
B
NeffD
AD=AS
W
NA
NK
Nfe
N
Effective demand with diminishing returns
and profit maximization;
Higher autonomous spending, move to W
w/p
NS
NnotD
K
(w/p)K
(w/p)fe
AD > AS
A
NeffD
AD=AS
W
AD < AS
NA
NK
Nfe
N
Effective demand with constant returns:
The post-Keynesian case
w/p
NS
pr
(w/p)fe
NeffD
(w/p)1
a1/pr
N1
Nfe
N
The post-Keynesian case: effect of an
increase in real autonomous expenditures
w/p
NS
pr
(w/p)fe
NeffD
(w/p)1
a1/pr
N1 a2/pr
Nfe
N
PK instance of multiple equilibria:
The low equilibrium is the stable one
w/p
NS
T
H
(w/p)high
NeffD
(w/p)0
(w/p)low
B
Nfe-low N0D
S
N0 Nfe-high
N
The detrimental impact of higher productivity if
real wages remain constant
NS
w/p
pr2
(w/p)fe2
pr1
(w/p)fe1
NeffD
a/pr2 a/pr1
N2
Nfe
N
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
Stability in the Robinsonian model
gs
g
H
gi
gh*
g0
gs = sp.r
gi =  + .re
gb*
B
rb *
ra
r0
rh*
r
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
r1 *
r2 *
r
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 *
u0*
us
u
g
The Kaleckian paradox of costs: effect of a
reduction in
gs
gi
costing margins
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
u0* u1
u1*
u
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.
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)
g
The Marxist story: return to the standard rate
gs
of capacity utilization
gi
g1*
g0
g2*
gs =sp.r
gi =  + .(u-us )
 = (u-us)
d/dt = - 
u
PC
r
ED
r1 *
r = f.u/v
p = (1+)(w/pr)
w/p = pr/(1+)
f = / (1+)
r 2 = rs
us
u1*
u