Downshifting in the Fast Lane: A Post-Keynesian Model of a Consumer-Led Transition

Eric Kemp-Benedict,Emily Ghosh

doi:10.3390/economies6010003

Abstract

If the world’s countries seriously tackle the climate targets agreed upon in Paris, their citizens are likely to experience substantial changes in production, consumption, and employment. We present a long-run post-Keynesian model for studying the potential implications of a major transition on macroeconomic stability and employment. It is a demand-led model in which firms have considerable but not absolute freedom to administer prices, while household consumption exhibits inertia. Firms continually seek input-saving technological improvements that, in aggregate, tie technological progress to firms’ cost structures. Together with firm pricing strategies and wage setting, the productivities of different inputs determine the functional income distribution. Saving and investment, and production and purchase of consumption goods, are undertaken by different economic actors, driven by income and capacity utilization, with the possibility that productive capacity exceeds, or falls short of, effective demand. The model produces business cycles and long waves driven by technological change. We present results for a “downshifting” scenario in which households voluntarily withdraw labor, and discuss the implications of downshifting for stability, growth, and employment. We contrast the downshifting scenario with ones in which households reduce consumption without withdrawing from the labor pool.

Highlights

Shifting to a low-carbon economy is vital to limiting global temperature and curbing dangerous levels of climate change
We follow ecological economics in viewing economies as open systems embedded in societies, which are embedded in nature (Costanza et al 2012)
From evolutionary economics we draw the idea that economies are normally out of equilibrium (Schumpeter 1928; Nelson and Winter 1982), and from Blatt (1983) that the average state of the economy may differ substantially from the equilibrium

Summary

Introduction

Shifting to a low-carbon economy is vital to limiting global temperature and curbing dangerous levels of climate change. World leaders committed themselves to climate action when over 195 countries (UNFCCC 2016) signed the historic Paris Agreement and pledged to take appropriate climate mitigation actions to restrict global temperature increases to below. Proposed country actions submitted as of November 2016 are insufficient to meet the temperature limit (Climate Action Tracker 2017). To prevent further warming, it will be essential to keep most of the remaining fossil fuels in the ground (McGlade and Ekins 2015; Benedikter et al 2016). Because fossil fuel consumption has underpinned human development in the last two centuries, there is great reluctance to transition to different fuels. Given the urgency of the climate challenge, the question before us is: how can we accelerate a low-carbon transition? Given the urgency of the climate challenge, the question before us is: how can we accelerate a low-carbon transition? Recommendations tend to focus on technological choice and investment

Methods

Results

Conclusion