In this fascinating interview of heterodox economist Bob Rowthorn, he makes a very interesting point about the importance of capacity utilisation and fixprices in Keynesian economics, in terms of the differences between the views of Keynes in the General Theory and Kalecki (N.B. the video may start at an earlier point than I set it at in Mozilla Firefox!).
Now I have not looked carefully into this, but does anyone know any good literature about this subject, and specific references in Kalecki’s work?
The crucial point is that Keynes was opposed to nominal wage cuts (for reasons explained in Chapter 19 of the General Theory), and his analysis there seems to assume a flexprice world (Hayes 2006: 178: “The General Theory itself is a ‘flex-price’ system, but not of Hick’s Walrasian type”) as a concession to the neoclassical theory of Keynes’s day, in order to show that even flexible prices and wages do not necessarily cure unemployment.
But, once we have a mark-up pricing world with adjustments in capacity utilisation where prices are generally relatively inflexible, then expansion of aggregate demand does not simply cause inflation as it would if prices were generally flexprice.
And once we move to the real world of fixprices (the world of mark-up prices and capacity utilisation as in Kalecki’s models), Keynesian economics simply becomes an even stronger and more robust theory of modern market economies.
BIBLIOGRAPHY
Hayes, Mark. 2006. The Economics of Keynes: A New Guide to The General Theory. Edward Elgar, Cheltenham.
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I'm probably being stupid, but could you clarify the 2nd last paragraph?
ReplyDeleteIn our world with widespread mark-up prices that are relatively inflexible with respect to demand, when governments stimulate the economy by increasing demand and even when there is a private sector investment boom, the major consequence is direct increases in employment and output, not inflation (which is likely to be much more subdued).
DeleteBy contrast, if you assume a flexprice world, a major consequence of a credit boom or Keynesian stimulus will be inflation as well as increases in output and employment.
Kalecki wrote an entire theory of economic dynamics based on his fix-price model of the economy. It's very readable if you know basic algebra but you should get an idea even if you don't.
ReplyDeletehttp://www.amazon.co.uk/Theory-Economic-Dynamics-Cyclical-Capitalist/dp/0853450811/ref=sr_1_1?ie=UTF8&qid=1391094387&sr=8-1&keywords=kalecki+theory+of+economic+dynamics
That's great. Thanks.
DeleteBy the way, LK, did you ever read the refutation I did on hyperinflation using an administered price and flexible output framework?
ReplyDeletehttp://www.nakedcapitalism.com/2013/03/philip-pilkington-hyperinflation-the-libertarian-fantasy-that-never-occurs.html
"We should pay attention here because it highlights a strange truth about your average right-wing libertarian economic commentator: namely, that they view a capitalist economy as being a remarkably fragile organism. Rather than being a robust machine that grinds over external disturbances, the right-wing libertarian views the system like a spinning plate: impressive to watch, beautiful even, but ultimately fickle and feeble. This, of course, is what reinforces their conservatism – because, the truth of the matter is that right-wing ideology, whenever it goes beyond crude self-interest, is almost always grounded in fear and insecurity.
DeleteThe reality, however, could not be further from this. In fact, as history has shown us so many times, capitalist economies are extremely robust. They are dynamic, flexible and absorb change like no other socio-economic system. "
I've often thought this myself, and it is a brilliant observation (though I suppose I would say "managed capitalism" or "real world capitalism", because it always has government intervention to stabilise it).
In fact, that is a marvelous piece: I will link to it in due course!
DeleteHere we go:
Deletehttp://socialdemocracy21stcentury.blogspot.com/2014/01/philip-pilkington-on-myth-of.html
Haha! Thanks. That was a sort of mental purge that I wrote when I had a long lunchtime. I was watching a lot of those cranky Austrian videos like you linked to in the post at the time. Those guys are shockingly dumb.
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