Lecture notes on accumulation theories Heterodox Theories

1. Lecture notes on accumulation theoriesHeterodox Theories Sergio CesarattoProfessore ordinario di Politica economicaUniversità di SienaDipartimento di Economia Politica e Statistica (DEPS)Piazza San Francesco 753100 Siena338 1768793sergio.cesaratto@unisi.ithttp://www.econ-pol.unisi.it/cesaratto/http://politicaeconomiablog.blogspot.com/

2. Growth course 3Heterodox theories • We shall consider 3 groups of theories: • Cambridge equation (circa1950s-1970sKaldor, Joan Robinson, Pasinetti) • Neo-kaleckian models (circa 1980-2011 Lavoie, Marling and Badhuri and many others) • Sraffian authors (1990-2011) distinguished in: First Sraffian position (FSP)  mainly at RM3; (b) the supermultiplier approach Serrano and others. • Consensus on the Keynesian Hypothesis (Kaldor-Garegnani, hereafter KH): investment is independent from saving both in the short and in the long run (for the neoclassical/neo-keynesians independence in the short run only) • No consensus on specific models, but wide consensus in policy issues: aggregate demand is the driver of growth.

3. How to solve the Harrodian instability problem In Solow v adjusts through the neoclassical substitution mechanisms in order that GAGw We shall review 4 heterodox attempts to solve the Harrodian problem: Cambridge equation: s varies in order that Gw -> GA (S adjusts to I) Neo-Kaleckians: ua becomes the “new normal” so no instability would arise (extra-saving comes from a higher degree of capacity utilisation that becomes the “new normal”) FSP: extra-saving comes from a higher degree of capacity utilisation and later from the new capacity created, but CS give up the idea of the economy converging to Gw, so avoid the instability problem Sraffian supermultiplier: reject the Harrodian context, make gross investment (the source of troubles) induced by an external anchor to growth (autonomous demand).

4. Workers spend what they earn, capitalists earn what they spend • Heterodox models tend to share this Kalecki’s dictum. • Capitalists decide their autonomous spending (investment and luxuries)) by having access to credit (endogenous money  loans create deposits). Through the multiplier (and supermultiplier) process income X is created, part goes as wages W to workers that can thus spend, and part as profits P to capitalists that can thus return their loans to the banks. • X = W + P = C + I + Z. • Assuming cw = 1 and cc = 0, W = C (Workers spend what they earn) • Then P = I + Z (capitalists earn what they spend)

5. The Cambridge equation and its critics • The equations are • where sc is the marginal propensity to save of capitalists (workers do not save  classical hypothesis),  are profits, r is the profit rate • Solving the system scrK=I  scr=I/K and recalling that I = K • we get the famous Cambridge equation • Given v = K/Y, gk  gy

6. Observation • Note that • where  is the profit share (P/X) • The term sc/vnreminds of Harrod’s Gw. • The connection is complete recalling that sc(scP/X) = S/X = s so chat Gw = s/vn • It is important to note that in equilibrium Harrod’s warranted rate is always respected, whatever the theory (it must, it is just a dynamic expression of I=S). In equilibrium all cats are grey. Theories like cats are, so to speak, visible only in disequilibrium. (Take another example: competition prices are equal to production costs in all theories, but they are not determined in the same way by, say, the labour theory of value, Sraffa or the marginalists).

7. Digression on grey cats • Recall Solow’s fundamental equation Dy = sy – nk • In the steady state equilibrium sy = nk, or sy/k = n, and given that k/y = vn, s/v =n. The warranted rate s/v in Solow is a full employment path equal to n. • I want you to note chat in any model the steady-state solution “contains” (or “respects”) Gw = s/v • In equilibrium all cats are grey (this is important to rejecy sone FSP criticism to the supermultiplier)

8. The main characteristic of the Cambridge equation is in the idea that the rate of accumulation gk decided by the entrepreneurs influences the normal income distribution[1] that thus becomes endogenous and subordinated to the rate of accumulation • Assume that capacity is fully utilised. Suppose that the entrepreneurs decide a higher level of investment financed out of credit creation. The larger investment expenditure would compete with the existing nominal consumption expenditure out of the given nominal wages. The result is that capacity would be transferred from the wage goods to the capital goods sector, wage goods become more expensive and real wages fall. The larger production of capital goods thus leads to a change in income distribution from (real) wages to profits and to a saving supply adequate to the larger level of investment. In terms of equation [1], gk is the independent variable that, given sc, determines rn: • Gk  rn • [1] The adjective ‘normal’ implies a situation where, given the real wage and the technical conditions of production, a normal rate of profit prevails.

9. A graphical representation: the wage-profit frontier on the left-hand side and the CE gk = sc rnon the right-hand side

10. The idea is that because of the larger investment expenditure, aggregate nominal demand and therefore, given full capacity utilisation, prices will be higher. However, since the nominal wage bill and nominal consumption expenditure are unvaried, real wages fall permitting to capitalists to realise their desired investment. • Let us try a simple way to show how in the CE context the investment decisions by the entrepreneurs are able to divert resources from the wage goods sector to the investment sector • Corn economy, p = price of corn (in £), W = given nominal wage-bill, I = investment, X = full capacity output • W + Ip = Xp or W/(Xp) + I/X = 1 • Suppose capitalists intend to invest more I’ > I, and p  p’ • W + I’p’ = Xp’ or W/(Xp’) + I’/X = 1. Given that p’ > p then W/p’ < W/p but I’p’/p’ > Ip/p

11. Criticism • From an empirical point of view, the association of higher growth rates to a change of income distribution in favour of profits is not particularly robust. If anything, real wages would tend to rise during periods of faster accumulation and higher labour demand as a consequence of the greater workers’ bargaining power, and tend to fall during downswings when the ‘industrial reserve army’ increases. Not surprisingly, both neo-Kaleckian and Sraffian authors criticise the Cambridge equation approach (Garegnani 1992: 63; Lavoie 2006: 111-2). In short, they both single out the capacity of capitalism to accommodate an upsurge of capital accumulation by resorting to a fuller rate of utilisation of productive capacity without the necessity of changes in income distribution, as we shall explain below. Rowthorn (1981) has been particularly influential among the former group of economists; Garegnani (1992) among the second.

12. Neo-kaleckian criticism: the degree of capacity utilisation varies when investment changes, neither prices nor real wages • The underutilisation of capacity is explained by Rowthorn by recalling Kalecki and Steindl idea of a ‘monopolistic economy which is operating well below full capacity’ (Rowthorn 1981: 1). In such an economy, ‘prices are relatively inflexible and firms respond to change in demand by varying the amount they produce. When demand is depressed firms respond by reducing the amount they produce, whilst keeping their prices constant. This reduction in output has no effect on real wage rates, but it does reduce both the level of capacity utilization and the rate of profit' (ibid.). Symmetrically, in the case of an investment upsurge, ‘there is no need to reduce real wages, and the extra profits required to stimulate investment can be generated simply by increasing output and bringing idle capacity into use’ (ibid.). What is more, a fuller capacity utilisation may accommodate both a rise in real wages and of profits and ‘total profits may rise despite the fact that real wages have increased’ (ibid.). • You note that the (actual) profit rate depends on the degree of capacity utilisation

13. Summing up what we have said so far • Harrod: if, moving from a dynamic equilibrium in which S = I or gs = gI , investment decisions vary, then no adjustment of S to I is possible (or better, S adjusts to I through a higher ua, but the attempt to restore un creates instability). • CE: if, moving from a dynamic equilibrium in which S = I or gs = gI , investment decisions vary, then S adjusts to I through a change income distribution (the normal profit rate rises) that affects s. • NK: if, moving from a dynamic equilibrium S = I or gs = gI , investment decisions vary, then S adjusts to I through a higher degree of capacity utilisation and the consequent rise in the actual profit r, without affecting real wages). Instability seems to be avoided by the NKs by neglecting the attempt by capitalist to return to un.

14. Sraffian criticism • Sraffian authors distinguish between full, normal and (average) effective degrees of capacity utilisation (by contrast in Rowthorn we met full and actual degrees only). The normal degree of capacity utilisation is defined as • where is the expected normal output when capacity is originally installed[1] and is the capacity installed, with (in general). • The main reason why entrepreneurs install additional capacity over average expected output is to be able to meet sudden peaks of demand and not let unsatisfied customers to turn to competitors. Thus it depends both on expected normal output and on the expected amplitude of the trade cycle peaks. [1] Normal output is that forthcoming at normal prices with capacity utilised at its normal level.

15. Normal positions and fully adjusted positions • A normal degree of capacity utilisation is an essential feature of the Sraffian theory of normal (long period) prices and distribution. However, on the other hand, FSP economists are sceptical about a theory of accumulation that implies that, on average over long stretches of time, capacity is on average normally utilised (what Vianello named “fully adjusted positions”). Let us therefore examine these two seemingly opposite claims and how these economists try to reconcile them. This discussion, that unfortunately sounds sometimes exoteric, is relevant not just as part of the Sraffian criticism to the Cambridge equation, but also for the subsequent debates with the neo-Kaleckian and within the Sraffians.

16. Normal positions and fully adjusted positions (cont.) • To begin with, according to Sraffian authors ‘long-period prices …are the prices determined on the basis of conditions of production that can be defined as normal, and hence a particular degree of utilization of capacity, which we can also indicate as “normal”’ (Ciccone). • What it is rejected is the claim that for pn to prevail the absolute size of capacity must be fully adjusted to effectual or to effective (aggregate) demand so to realise a normal degree of utilisation on all plants. • For memory: • Effectual demand (from Adam Smith) is defined as the demand that is forthcoming in a single industry at the normal price. • Effective demand is demand forthcoming at the aggregate level when prices are normal in all sectors.

17. When effectual demand varies pn may prevail through variations in ua • Assume that in one industry effectual demand (the demand of the commodity at its normal prices) rises, so that pm > pn. Competition leads firms in the industry to raise the degree of capacity utilisation to meet the higher effectual demand and to re-establish pn. • So precisely through a higher degree of capacity utilisation, output rapidly adjusts to Effectual Demand and pm pn (Ciccone) • [NB the adjustment of pm to pn takes place at a ua which is different from un, so that ra would be different from rn. At the same time, however, a process of adjustment of capacity to the new level of effectual demand would take place and the rate of profit that firms expect on the newly installed equipment is the normal rate of profits.] • So Sraffian economists may conclude that through variation of u, the gravitation of pm pn is quite a rapid and effective process while the normal rate of profits (and related un) is prevailing “at the margin” guiding the investment decisions of firms.

18. Normal positions and fully adjusted positions (cont.) • So, although in the economy as a whole a tendency of aggregate capacity to adjust to aggregate demand is always at work, with respect to the gravitation of prices it is indeed not necessary that capacity is fully adjusted, but only that “at the margin” and in each industry a sufficient number of competing firms are endeavouring such an effort to make the tendency to a normal profit rate effective. • The idea is that the effective (micro) gravitation of prices and distribution towards the long period positions is less demanding and faster than the (macro) full adjustment of aggregate capacity which is more likely to be frustrated by the changes of long run aggregate demand. • These arguments are shared by all Sraffian economists. They diverge, however, about how to treat accumulation (the divergence is of method not of substance). We have a “first Sraffian position” (Garegnani/Trezzini/Palumbo/Ciccone) and the followers of the “Sraffian supermultiplier”.

19. Difficulties of the first Sraffian position • According to the FSP a (say) higher ga is accommodated by a higher degree of capacity utilisation and ra (as in Rowthorn) , but it leaves rn unaffected (as seen this may prevails even without full capacity adjustment). • But, having accepted the Harrodian framework, the FSP seems in troubles to deal with the gravitation of the economy towards a normal degree of capacity utilisation, which is however admitted. • The escape this difficulty, they argue that the study of the normal path of the economy (steady state paths) is useless. • This view may appear as a post hoc ergo propter hoc argument due to the difficulty of escaping from the dilemma between the CE which respect the KH, is stable but violates Classical distribution theory; and Harrod which is consistent with exogenous distribution, but is unstable. • A “third way” is taken by the NK: to retain both (i) and (ii) they renounce to a growth path with a normal degree of capacity utilisation • A “fourth way” is take by the followers of the SM that break the Harrodian framework.

20. The inconsistent Harrodian Triangle

21. The canonical first-generationneo-Kaleckian model (a very simple model) • The first equation (similar to the CE), the saving equation, expresses the rate of growth of the capital stock permitted by capacity saving for given levels of the saving rate – for simplicity profits are the only source of savings - and of the actual profit rate. • Eq.1 • The second equation expresses the rate of growth of K as a function of the long term growth of sales expected by firms (animal spirits?). • Eq.2 • The third equation states that the actual profit rate is a function of the actual rate of capacity utilisation, given the actual profit share  and the capital coefficient vn. • Eq.3 • Eq. 4 gs = gi

22. Comparison with the CE model • Using the same presentation used for the CE the model would be: • It is enough to devide the first three equations by K to obtaon the previous formulation. • the unknowns are g, ra, ua • let us derive the 3° eq. (which is actually the differentia specifica with the CE

23. Solving the model • By simple substitutions we obtain: eq.4 • The long run goods market equilibrium is where: • So we obtain: eq.5 • Equations [2] and [4] can be drawn in the space g-u, as shown in the top part of figure (1). Equation (3) is drawn in the lower part (as profit curve PC): a higher ua implies a higher ra.

24. The capacity-saving growth function (4), indicated as gs, is an increasing function of u. This is so because a higher u increases the amount of profits extracted by any given level of K, raising the actual r and the saving supply. In drawing the picture we supposed that at the intersection A the equipment is normally utilised (“old normal”), but this is a fluke since this is not typical of this genre of models. In the lower part of the figure we drew equation [3] indicating that in correspondence to un we find the normal profit rate. Figure 1 then shows the case in which long term growth expectations grow from  to ’. The consequence would be a higher u, that in this model can be taken as the ‘new normal’.

25. Notably, the higher capacity savings corresponding to the new accumulation pattern are brought about by the higher actual profit rate corresponding to the higher utilisation rate.But how is the instability problem removed?What is actual is normal: the new normal • From eq. 5 we get eq. 6:  = sc/(vn/ua) • Note that in point A (old normal) •  = sc/(vn/un) = s/(vn/un) if we assume Yn = Yf, un = 1,  = s/vn (If Yn < Yf, then gw = sc/(vn/un) = s/(vn/un). The old normal had necessarily to be an Harrodian equilibrium in which all savings are systematically invested (either because there is economic planning or because capitalists collectively decide so [which is the same], or we were in the old normal by fluke) Anyway it is s/vn that determines a

26. What is actual is normal: the new normal • Looking now at point B: • According to the NK entrepreneurs are content with any actual capital coefficient it happens to be, and the actual ua can also be usefully defined as the the ‘new normal’ ua = unn. • We may similarly define a “new normal” capital coefficient: • ’ = sc/(vn/ua) = sc/(vn/unn) the term vn/ua can be defined as the “new normal” capital coefficient: vnn = vn/ua= (K/Yf)/(Ya/Yf) = K/Ya so that ’ = sc/vnn = s/ vnn (there always be a warranted rate equation hidden behind an equilibrium growth rate) • We thus obtain a “flexible” Harrodian gw = s/ va = s/ vnn

27. What is actual is normal: the new normal • As observed, the initial equilibrium in A is an Harrodian equilibrium, i.e. a is the only growth rate consistent with growth with a normal capacity utilisation (“normal growth”). So to abandon the concept of normal growth is essential for the NK to sustain the KH. • But, as we shall see, they cannot abandon it completely. • In Harrod: if Ga > Gw, ua > un. The attempt by the entrepreneurs to restore un determines instability: recall, if they expect Ge>Gw, then Ga>Ge and they expect an even larger Ge. • NK: if Ga > Gw, ua > un, but ua becomes the ‘new normal’ ua = unn. • So no instability.

28. By comparison, it might be useful to illustrate what would happen in the CE model where the corresponding equations would be (they are derived dividing the equations by K) • Eq. 1 • Eq.2 • Eq.3 • Eq. 4 gs = gi • For memory, eq. (3) in the NK was • In the CE ua = un = Yn/Yf = 1, there is a unique normal degree of capacity utilisation equal to full capacity

29. A rise in the long run expectations from  to ’ causes a change in income distribution, a rise of the profit share  in equation [3] and an upward rotation of the corresponding PC and gscurves, as shown by figure 2. The new equilibrium is thus again characterised by a higher normal profit rate set in correspondence to a normal degree of capacity utilisation. (in a sense, in the CE we have a “new normal” profit rate.

30. Again as a comparison with the CE, note first that we have different wage-profit curves each for any different degree of capacity utilisation

31. In the NK case, a higher growth rate (gs = scr in the right-hand side) is accommodated not by a change in income distribution (as in the CE) but by a change in the degree of capacity utilisation, from old to new normal.

32. The absence of the thrift paradox in these models and how to amend it It can be noted that in both approaches as presented in figures 1 and 2 – ‘Oxford’ and ‘Cambridge’ (Serrano) – a lower marginal saving propensity has no effect of long run term growth, although it affects, respectively, the normal profit rate (rising it since a higher profit share is required to generate capacity savings equal to investment) or the degree of capacity utilisation (rising it through the effect of the higher s on the standard Keynesian multiplier). So, unless we assume that these two effects positively influence investment, there is no ‘thrift paradox’ as one would presumably expect from Keynesian or kaleckian models. It should be noted that, empirically, a higher g should be associated to a higher I/K = S/K, not the opposite as the NKs would like. This is why neoclassical theorists try to endogenize growth sg. This does not imply that we think that sg is true. But we should show that g  I/K.

33. Normal profit and investment decisions I (a digression on an alternative way to demonstrate the thrift paradox) • Lavoie reports that Joan Robinson assumed that investment is sensible to the level of the normal profit rate – so that if sc falls , given the accumulation decisions, rn rises, and consequently I and then Y rise (another way to show the thrift paradox) • However, the influence of the normal profit rate on investment raises perplexities. Given rn, investment depend on expected effective demand (that forthcoming at the normal profit rate). • Variations of rn have to do with income distribution and only through this they may affect expected effective demand and investment. • A rise/fall of rn may negatively/positively affect investment if expected demand is negatively affected by lower/higher wages.

34. Normal profit and investment decisions II • Therefore, a rise of rn, as such, for no reason would positively affect investment. • Likewise, a lower rn will in general leave gross investment unaffected as long as capitalists fear to leave market shares to competitors: each capitalist is homo homini lupus with respect to her classmates. • Çava sans dire that a rise/fall of ra above/below rn will just signal that ua is above/below un. In both cases gross investment will vary in order to readjust the degree of capacity utilisation and normal profitability (while the long trend of investment is still set by demand for products associated to normal profitability). • As Serrano sums up: “The adequate size of productive capacity does not depend on the level of the normal rate of profit but on the size of the demand of those who can pay the prices that guarantee that the minimum normal profitability requirement is met, irrespectively if  this normal rate is high or low‘.

35. Normal profit and investment decisions III • It can finally be thought that a lower rnis not accepted by capitalists that might recur to an “investment strike” • A lower rndoes not discourage investment since capitalists do not invest as a class (as perhaps Marx and Vianello tend to think), and they do not want to risk loosing market shares by starting an individual “investment strike” (they would be afraid to lose market shares to competitors if they do this) • However, recalling Marx’s dictum “The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie”, a lower rn might induce the government to adopt deflationary economic policies to re-create the industrial reserve army.

36. Full ‘canonical’ NK model:to demonstrate the thrift paradox, the NK model introduces the dependence of investment on the degree of capacity utilisation – so that ifalower s raises ua, gi would rise • A full ‘canonical’ neo-Kaleckian model (Lavoie 2006) does thus contemplate the attempt by firms to adjust capacity to the desired, normal level. The model: • Eq.1 • Eq.2 • Eq.3 • It looks more than suspicious that long run effects of variations of the saving propensity on accumulation relies on what should be regarded as short-run adjustments to restore a normal degree of utilisation

37. By substituting equation [3] in [1], we get Eq.4: • The long run goods market equilibrium is where • that is where, equating equations [4] and [2]: • Equations [4] and [2] can now be drawn, respectively indicated as and in the space g-u, as shown in the top part of figure 3. Also the investment growth function [2] is now an increasing function of u. This is so because a higher degree of capacity utilisation induce firms to invest in order to obtain the desired degree of capacity utilisation. In drawing the picture we supposed again, for the sake of the argument, that at the initial equilibrium A the equipment is normally utilised. Reconsider now the paradox of thrift.

38. Suppose that a rise in real wages causes a fall of the profit share . This causes a rightward rotation of the gs and PC curves in figure 3, respectively. At the initial growth rate g =, the lower capacity savings determine a higher ua0. The higher rate of extraction of profits out of a given capital stock compensates the fall in the profit share, so that the resulting r is to the initial one. The higher u leads then to a higher growth rate of investment and to an even higher rate of utilisation until a new equilibrium is reached in correspondence to ua1.

39. The neo-kaleckian Wage-led growth and the classical wage-profit rate relation • The paradox of thrift is proved, in a growth context, since a lower saving rate leads to a higher growth rate. • These economists also speak also of a ‘paradox of costs’: ‘A higher real wage, and therefore higher costs of production, leads to a higher long-period profit rate. In other words, a reduction in the gross costing margin of each individual firm ultimately leads to a higher profit rate for the economy as a whole’ (Lavoie). • These results, the possibility of wage-led growth accompanied by a higher profit rate, is considered particularly important by neo-Kaleckian authors since it is in sharp contrast not only with the CE inverse relation between real wages and growth rates, but also with the Classical economists inverse relation between real wages and the profit rate.

40. What is actual is normal: the ‘new normal’ Similarly to above, from eq. [2] and [4] we get: Redefining ua as the ‘new normal’ unn, the denominator on the right-hand side becomes the “new normal” capital coefficient we may obtain a warranted growth rate equal to

41. The NK warranted rate The growth rate is determined by the ‘animal spirits’ a plus an endless attempt b(un – ua) by the entrepreneurs to recover the normal utilisation rate, a never completed attempt that becomes a stable component of the growth rate that might usefully re-defined so that In the words of Lavoie:

42. This is clearly said by Lavoie • “what this really means in terms of our … Kaleckian model is that the parameter  gets shifted as long as the actual and normal rates of capacity utilization are unequal: The reason for this is that … the  parameter can be interpreted as the assessed trend growth rate of sales, or as the expected secular rate of growth of the economy. When the actual rate of utilization is consistently higher than the normal rate (ua>un), this implies that the growth rate of the economy is consistently above the assessed secular growth rate of sales (ga>). Thus, as long as entrepreneurs react to this in an adaptive way, they should eventually make a new, higher, assessment of the trend growth rate of sales, thus making use of a larger parameter in the investment function.”

43. A Karamazovian theory • We observed above that the initial equilibrium in A is an Harrodian equilibrium, i.e. a is the only growth rate consistent with growth with a normal capacity utilisation (“normal growth”). So to abandon the concept of normal growth is essential for the NK to sustain the KH. • But, we see now that they cannot abandon it completely. A term (ua – un) must be retained (that is the term un must be retained) in the “new normal” growth rate since this serves to show the ‘thrift paradox’. • So we cannot re-establish a normal path, since this would imply rejection of the KH and am return to Harrod; so we redefine a “new normal path” that, however, contains an endless attempt to re-establish the old normal path. Moreover, this is essential to show the thrift paradox. • As we shall see, Vianello recourses to the Faust to describe this NK tormented soul, I may recur to the Karamazovian equally divided spirit: the economy must at the same time escape from point A, where Harrod prevails and the KH is not proved, but also try to return to it, in order to show the saving paradox. The result of this drama is that the economy stays in C.

44. The literature has pointed out a number of unsatisfactory aspects of this canonical model. • Core-Sraffian authors (and others) have indicated two: (a) the fragility of a long-run model characterised by a not-normal degree of capacity utilisation; (b) the confusion, in dealing with income distribution, between the normal and the actual profit rate (for a given real wage). • I suggested a third substantial weakness: (c) it is surprising that in the neo-Kaleckian canonical model the long-term role of effective demand relies on the firms’ effort to obtain a normal degree of capacity utilisation. This process is, presumably, a short run process that, however, in the neo-Kaleckian view must never be completed in order to have a lasting effect on the accumulation rate (Achilles must never chase the tortoise). Indeed, the capacity adjusting term in the investment function [2] is not just a due addition in order to testify the attempt by firms to adjust capacity, but all the model desired results bear on their long-run failure to do so. • Let’s begin from (c).

45. Lavoie admits instability • “Once the economy achieves a long-run solution with a higher than normal rate of utilization, say at u0 > un , (after a decrease in the propensity to save …), the constant in the investment function moves up …, thus pushing further up the rate of capacity utilization to u1 and u2, with accumulation achieving the rates g1 and g2, and so on. Thus, according to some of its critics, the Kaleckian model gives a false idea of what is really going on in the economy, because the equilibrium described by the Kaleckian model (point (C)) will not be sustainable and will not last.” (2008: 7). • Below Lavoie’s figure, but I prepared an improved description

47. This is the key Lavoie’s passage (worth repeating) • “what this really means in terms of our … Kaleckian model is that the parameter  gets shifted as long as the actual and normal rates of capacity utilization are unequal: The reason for this is that … the  parameter can be interpreted as the assessed trend growth rate of sales, or as the expected secular rate of growth of the economy. When the actual rate of utilization is consistently higher than the normal rate (ua>un), this implies that the growth rate of the economy is consistently above the assessed secular growth rate of sales (ga>). Thus, as long as entrepreneurs react to this in an adaptive way, they should eventually make a new, higher, assessment of the trend growth rate of sales, thus making use of a larger parameter in the investment function.”

48. NK instability: an improved representation (next slide the complete figure)