A Post-Keynesian Policy Model (original) (raw)

Wage policy in an open economy Kalecki-Kaldor model: A simulation study

This paper discusses a Post-Keynesian model of income, production and trade. The one-country, one-sector model features Kaleckian investment demand, Kaldorian productivity and a labor market module based on a wage–price spiral. The model is first presented for a closed economy with exogenous real wages; second, for a closed economy with endogenous real wages; third, for an economy open to trade with endogenous real wages. Simulations with different calibrations show key characteristics of the model. Monte Carlo simulations over reasonable parameter ranges shed some light on the effectiveness of wage policies in open economies.

Supply and demand in Kaldorian growth models: a proposal for dynamic adjustment

2020

This paper analyses the dynamic adjustment of supply and demand in Kaldorian growth models. We discuss how the growth rate of a country given by the demand constraints may adjust towards the growth rate given by the supply-side (and vice-versa), presenting the necessary conditions for this adjustment. Our main conclusion is that, for a monopolistic economy, where firms invest to maintain a constant level of capital utilisation, there are no capital constraints and hence the degree of capacity utilisation is not affected by this adjustment. Nevertheless, depending on specific conditions, an economy may face labour constraints, and thus an adjustment mechanism is necessary. The Palley-Setterfield approach for this dynamic adjustment brings a possible reconciliation to supplyand demand-side long-term growth rates. It emphasises the endogeneity of the income-elasticities of demand for imports and the Verdoorn coefficient to utilisation capacity. However, some considerations about labour...

The Stability of Full Employment. A Reconstruction of Chapter 19Keynesianism

1999

In the vein of chapter 19 of Keynes's "General Theory" the following study investigates the dynamic properties of the traditional Keynesian model of the neoclassical synthesis. The dynamics (stability vs. instability, monotonic vs. oscillatory adjustment) is examined - in the absence of active stabilisation policy, that is assuming, in particular, monetary policy to follow Friedman's constant money growth-rule - by appending a wage Phillips curve (with inflationary expectations) and adaptive expectations (with rational expectations as a limiting case) to the static model. Furthermore two regimes are distinguished: on the one hand the "flexible- interest-rate-regime" where the nominal interest rate is free to move and on the other hand the "zero-interest- rate-regime" (similar to the Keynesian "liquidity trap") where the non-negativity restriction on the nominal interest rate becomes binding. Some of the conclusions are (i) that altho...

MODELING KEYNES WITH KALECKI AND FINANCE

A basic comparative dynamics Excel-based post-Keynesian teaching model (called the KK Model) was presented by the authors at the Ninth Post Keynesian Conference two years ago and published in a revised form in a recent book called Keynes and Macroeconomics After 70 Years: Critical Assessments of The General Theory. This paper presents a second version: the Keynes-Kalecki-Finance (KKF) Model, which adds Kalecki's "increasing risk" to the profitability gap as two of the mechanisms that drive investment, and consequently economic growth, in a monetised production economy. The aim of this paper is to use profitability and finance to show how different a post-Keynesian version of competition is to neoclassical economics. By beginning with perfect (or "free") competition at this early stage of modeling Keynes and Kalecki in a non-equilibrium complex dynamics approach, the simulation experiments conducted using a Causality Matrix show that the simulation outcomes reflect post-Keynesian theory, even in a competitive world. Three objectives are achieved in this paper. At a theoretical level, the whole of the Causality Matrix exercise shows that the two mechanisms of profitability gap and increasing risk can operate in a "free market" competitive economic model with flexible prices and money wages. At the experimental level, the perturbations identified through the Causality Matrix delivered a surprising cluster of results which show that there is a strong effective demand effect from a series of upward perturbations of many initial values and parameters. At the pedagogical level, it is demonstrated that a non-equilibrium dynamic computer model exhibiting post-Keynesian features within a completely flexible competitive environment is a clear antidote to the current raft of static neoclassical perfect competition models used to teach students how the economy works. NOTE: The Excel spreadsheet of the KKF model may be obtained by emailing Colin Richardson at: c.richardson@imperial.ac.uk.

A kaldorian model of economic growth with labour shortage and major technical changes

Structural Change and Economic Dynamics, 1996

This paper presents an export-led model of growth and fluctuations. It explains the growth path of an economy which, having entered the international market with a competitive price level, (i) accelerates economic growth and expands export share in world trade, (ii) approaches a labour shortage that raises wages and worsens both competitiveness and economic growth, and (iii) reacts with a shock of technical change that restores previous dynamics but starting from a higher wage level. Point (i) is made on the basis of the Kaldorian model of cumulative causation, point (ii) on the Goodwin model of cycle in growth and distribution of income, and point (iii) on an idea of Schumpeter. The model is able to capture a typical experience of industrialisation in the most successful LDCs.

A neo-Kaldorian approach to structural economic dynamics

Structural Change and Economic Dynamics, 2015

Although the Structural Economic Dynamic approach provides a simultaneous consideration of demand and supply sides of economic growth, it does not fully take into account the possible role played by demand in the generation of technical progress. From a neo-Kaldorian perspective, this paper seeks to establish the concepts of demand and productivity regimes in an open version of the pure labour Pasinettian model. In order to derive the demand regime, a disaggregated version of the Keynesian multiplier is derived for an open economy, while the productivity regime is built in terms of disaggregated Kaldor-Verdoorn laws. The upshot is a multi-sector growth model of structural change and cumulative causation, in which an extended version of the Pasinettian model to foreign trade may be obtained as a particular case. Furthermore, we show that the evolution of demand patterns, while being affected by differential rates of productivity growth in different sectors of the economy, also play an important role in establishing the pace of technical progress.

Kaleckian Investment and Employment Cycles in Postwar Industrialized Economies

The role of the welfare state in the post-war industrialized economies has recently be- come a major topic. Using a Kaleckian framework we consider an economy where investment depends positively on the rate of return on capital and negatively on the rate of employment. This allows for a possible integration of Kalecki's (1943) analysis of the political aspects of full employment. We use Okun's law to link the goods market with the labor market. We separate laws of motion for wage and price in∞ation in order to integrate the role of chang- ing income distribution into this framework of efiective demand and employment dynamics. There is a balanced growth path solution for this model which however is likely to be locally unstable. From the global perspective, the turning points in long lasting phases of strong economic growth are given by an increasing reaction of investment, and of flscal and mon- etary policy, to the consequences resulting from full employment and the evolv...

Modelling Keynes with Kalecki By

2010

The starting point for neoclassical interpretations of Keynes's system is 'Modelling Keynes with Hicks'. Students are thereby misled into believing that Keynes analysed a general equilibrium exchange economy (summarized by the IS curve, with production merely an 'exchange with nature') in which the underlying barter transactions were obscured by a 'veil of money' (summarized by the LM curve). However, Keynes himself strongly emphasised that his analysis applied to a monetary production economy, one in which both aspects were well integrated. By contrast, the starting point for post-Keynesian interpretations of Keynes's system should be 'Modelling Keynes with Kalecki'. It is true that Keynes's quaesitum can be understood by a close reading of both volumes of his Treatise on Money and then the General Theory, but his analysis was lengthy and complex, with hardly any mathematics or graphs deployed. Keynes, in fact, criticized the use of mathematical models to understand complex reality: "[I]n ordinary discourse … we can keep 'at the back of our heads' the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials 'at the back' of several pages of algebra which assume they all vanish." (Keynes, 1936, pp. 297-8) 2 However, modern economics teaching practice demands mathematical models that track rigorous arguments in an erudite manner. Post-Keynesian instructors need a mathematical modelling tool of comparable simplicity to Hicks's IS-LM framework to help students understand how a capitalist monetary production economy actually works, sans pure exchange and the veil of money. Michał Kalecki was a Polish auto-didactic economist who used engineering-based mathematical tools to explain the modern capitalist monetary production economy. Kalecki's prior claim, and the depth he added, to the Keynesian approach was first identified by Joan Robinson (Robinson, 1965). A more recent analysis (Chapple, 1991; 1995) delineates the relationship between Kalecki's theory of modern capitalism and Keynes's General Theory. These studies reinforce our position: the need for a simple mathematics-based model of Keynes's approach that cannot be hijacked by the mainstream, forming a basis for policy analysis and praxis that the heterodox economics community can use as a teaching method utilising equations and spreadsheets. This chapter sets out first the intellectual foundations of using Kaleckian insights to provide a heterodox version of Keynes's model of capitalism and then expounds the 'in principle' argument for a simple modelling approach that can serve as a teaching aid. Secondly, the equations and identities of our dynamic Keynes-Kalecki (KK) Model are listed, with exogenous growth rates for the supply of labour and its average productivity. This model is capable of tracking the real capital stock through simulated historical time as it physically depreciates and is renewed via real investment outlays. The KK Model is deployed to demonstrate Kalecki's vision of the long period being but a succession of short periods. Using this view of historical time, we demonstrate the effects of various policy recommendations in a capitalist economy facing a doubling of the growth rate of its labour supply, based on three different institutional settings: (i) the Entrepreneurs' lower money wage growth and work intensification policies; (ii) the Trade Unionists' higher money wage growth and job sharing policies; and (iii) Kalecki's planned market economy based on maintaining a viable profitability gap to ensure entrepreneurs grow investment at whatever rate is needed to maintain a zero unemployment steady state in the long term. This chapter goes on to explain how a researcher could make this core macroeconomic model more realistic and worthy of being calibrated against statistical databases. Finally, certain conclusions are drawn concerning reality and its treatment in both neoclassical and post-Keynesian economics. The KK Model's equations and identities in Appendix A, together with time series plots of various policy outcomes in Appendices B through G, complete the chapter. THE INTELLECTUAL CAPITAL UNDERLYING THE KEYNES-KALECKI MODEL The simple thesis that this modelling exercise is built on is that Keynes alone will always be susceptible to being hijacked by neoclassical economists, due to the links that the mainstream inevitably will find among Keynes's tangled Marshallian roots. However, incorporating the major elements of Kalecki's approach into Keynes's system will provide a model impregnable to the 'bastardisation' that has happened (and will continue to happen) to Keynes's General Theory model on its own. The two elements of Kalecki's thought that need to be incorporated into Keynes's system are the dynamics of investment and profits and the distribution of income based on class. Perhaps then a more developed version of this KK Model can be applied to macroeconomic policy (with the political business cycle being integral), leaving government with only this option: to provide a thorough-going reform of the process of capital formation. Such a programme could radically transform capitalism into a society that uses markets for the public interest (with profit incentives and risk-taking intact) rather than for the private interests of a very few.