Postkeynesian Theory of Production and Distribution

1. Postkeynesian (PK) theory of production and distribution – selected problems I. Keynesianism, neo-Keynesianism, post-Keynesianism 1. Nature of the so called Keynesian revolution in economics • Keynes: rejection of neo-classical equlibrium concept • Main research area: short-term unequlibrium and adjustment processes ( a difference with regard to monetarists) • Rejection of economic liberalism (model of anti-cyclical state interventionism) • Missing component: original (own) microeconomic theory (generally, the acceptance of neo-classical MPT and MDT) 2. Grand neo-classical synthesis (Samuelson): combination (fusion) of Keynesian macroeconomics (demand oriented theory of aggregate income) with essental theorems of neo-classical microoeconomics (production and distribution theory in particular)  a new (eclectic) model of state interventionism

2. PK production and distribution theory 3. Neo-Keynesianism (new Keynesian macroeconomics) • Genesis: incapability of Keynesian equlibrium theory to explain some phenomena related to general unequlibrium (in particular: simultaneous occurrence of high unemployment and inflation rate  Philip’s curve ; critique by both monetarists and representatives of New Classical Macroeconomisc (NEC theory of general equlibrium under the assumption of rational expectations) • Natural rate of unemployment and NAIRU (Not Accelarating Inflation Rate of Unemployment) • Nature of neo-Keynesian economics: theory of short-term equlibrium under the circumstances of price rigidity (sticky prices of goods and wages) > market clearing through quantities and not through prices • Price stickiness means that prices are reluctant to change despite changes in demand or in input prices (costs) • Two special cases of price stickiness: sticky-down and sticky-up

3. PK production and distribution theory 4. Postkeynesianism: general profile • Most radical critique of NCE within the mainstream economics. What is more, in contrast to Keynesianism and neo- Keynesianism, one can not speak of its gradual incorporation into the mainstream economics. • Continuation of Keynesian macroeconomics, with overall rejection of neo-classical microeconomics, and MPT/MDT in particular • Numerous references to classical economy (classical political economy) in the way of interpreting the mechanism of performance of capitalist (market) economyneo-Ricardianism. Based on this, a proposal of entirely new (with many references to classical political economy) interpretation of main categories of production and distribution theory (labor and wages, capital and profit, interest rate and others) and, consequently, a new growth theory

4. PK production and distribution theory 4. Postkeynesianism: general profile - cont. • New interpretation of all essential categories related to production and distribution proposed by Postkeynesian economics is mostly based on the criticism of neoclassical economics (MPT and MDT) • Methodological differences in relation to NCE: • Rejection of NCE equlibrium concept • Historicism of PKE vs. neoclassical ahistoricism: critique of the ahistoricism of mainstream neolasscial economics includes the concept of "historical time" instead of neoclassical "logical time" • Undertaking of the analysis of social and institutional conditions of economic phenomena and processes ". It is also connected with emphasizing pivotal role of socio-institutional factors in economic development and subsequent criticism of "technical" character of neoclassical microeconomics • Cognitive holism (vs. neoclassical cognitive individualism) and cognitive realism (vs. neoclassical/mainstream instrumentalism) • Non-homogenous nature of Postkeynesian economics

5. PK production and distribution theory II. Main research areas within PK economics • Critique of neoclassical MPT/MDT • Lack of relevance of essential categories and statements of MPT/MDT with respect to the economic reality and incapability of empirical identification of those categories (with reference to postulates of critical rationalism) • Internal consistence (conformity) of MPT/MDT (main area of controverses about the capital theory) (interdependence of two above mentioned directions of PK critique of NCE) • Functional distribution in the approach of PKE

6. PK production and distribution theory II.1. Critique of MPT/MDT • Generally: rejection of the possibility of constructing (existence) the aggregate (macroeconomic) production function as a foundation for explaining the proportions of functional distribution of social product • Incapability of aggregation of capital in technical or natural units (due to heterogenous character of capital as the production factor) • The above mentioned aggregation is, conditionally, if at all, possible at the level of enterprise (microeconomic production function) or – with respect to time –ex ante (never ex post) • In economic reality, capital can be aggregated when prices of physically heterogenous capital goods are known (it requires that prior to this aggregation we know the rates of profit (rates of interest)

7. II.1. Critique of MPT/MDT – cont. • According to the PKE, in the neoclasical MPT/MDT we have to do with conscious identification (or confusion) of two notions: • Capital as the resource of financial means (assets); only in this interpretation capital may be regarded as a stock of homogenous assets • Capital as a resource of physical (technical) means (assets) • Final conclusion: the amount of capital (in the macro scale) ever depends on the interest rate (as the unit reward of capital) and wage rate (as the unit reward of labor) it is theoretically described by the so called Wicksell’s price effects

8. II.1. Critique of MPT/MDT–Wicksell’s price effects

9. II.1. Critique of MPT/MDT–Wicksell’s price effects • Value of k does not depend on prices of production factors only if the relation w/r is constant (rectilinear w-r curve; being also called factor price frontier) • Accordingly with MPT/MDT, the constancy of w/r relation must denote the constancy of K/L relation • If K/L=const, then the substitution between K and L is impossible, which means the NEC macroeconomic production function does not exist

10. II.1. Critique of MPT/MDT • In the real economic world, one can not speak of continous substitution between production factors. but of discrete (discontinous, step) substitution (Leontieff production function). The respond of NCE on this critique was the concept of the so called surrogateproduction function by Samuelson • In the real world, we have frequently to do with cases that the transition towards more capital intensive technologies is accompanied by the increase in interest/profit rate (which contradicts the MPT/MDT: the higher the capital intensity of technology /economy the lower the unit reward of capital )

11. II.1. Critique of MPT/MDT • It is in practice not feasible to separate (1) the increase in product brought about by the substitution of labor for capital, and (2) that increase which is caused by disembodied technological change/progress (as it results from the concept of macroeconomic NCE production function)  PK concept of the technological progress function by N. Kaldor • economic growth, as expressed in the long-run by the growth of labour productivity, is ever a joint result of growing capital intensity and investmentsinnew technologies • investments in new technology depend on innovation possibilities and propensity of entrepreneurs to save and invest • in the process of equlibrium growth, labour productivity grows at the same pace as capital intensity

12. II.2.Essential PK categories and theorems concerning the functional distribution • Adoption of the assumption about the existence of class structure of the society (in accordance with the tradition of classical economy) • Functional distribution of social product (GDP, NI) is mostly (though not exclusively) institutionally and not technologically (as in NEC) determined; first of all, results from the bargaining power of social classes  collective bargaining theory • Historically determined level of living (maintenance) costs of workers is the main factor shaping the proportions of functional distribution • Profits and are residual revenues (rejection of MPT statements also with respect to labor and wages)

13. II.2. Essential PK categories and theorems concerning the functional distribution • Laboristheonlyrealproductionfactor (reference to theclassicaleconomy, neoricardianism) • Concept of the so calledreal capital (as thecritique of NCE approachtowardsthe capital ) • Capital whichexistsat a given point of time isthe (phisical) embodiment of time of labor of past periods • Fromtheprospective point of view, capital representsthis part of laborresource(in terms of labor time) beingcurrentlyavailable to thesociety (economy) whichcan be usedinthefuture(in order to make investment increasingphysicalproducticecapacity) • Thevalue of capital everdepends on unit rewards (prices) of capital (r) and labor (w)  Wicksell’spriceeffects

14. II.2. Essential PK categories and theorems concerning the functional distribution • Wages are not determined by marginal productivity of labor) (critique of MPT), though it may influence the wage/salary level and differentiation • In the long (historical, secular) term, wages changes in accordance with changing level of workers’ living (maintenance) costs (direct reference to the concept of natural wage in classical economy) • Market (current) level of wages is a magnitude which is secondary with respect to the rate of profit and results from the following (theoretical) reasoning: 1. There exists a historically determined (average, commonly accepted, normal etc.) rate of profit 2. From this rate of profit results a given value of capital 3. Wages have (ought) to reach a level that by this value of capital the above mentioned rate of profit is attained

15. II.2. Essential PK categories and theorems concerning the functional distribution • In realeconomy, therate of profit (of interest) dependsmerely on investment decisions (hereconsistinginincreasingtheamount of physical capital) and propensity to saving of entrepreneurs. • Itis so evenwhenthereoccursavings of workers(orpensioners) (workers/pensioners as owners of the part of existing capital)  the so calledPassinetti’sparadox