Full Employment Equilibrium Research Articles

Guaranteed Growth of Income

PROFESSOR DOMAR, several years ago, raised interesting question of whether a governmental guarantee that income would grow at full-employment equilibrium rate of growth will actually call forth sufficient private investment to generate increase in income necessary to maintain full employment [1]. This note will call attention to certain pitfalls for unwary explorers of Domar's challenging work. In Domar model, a equals increase in productive capacity of economy, s equals that increase for individual firm associated with a unit of investment, while a equals average and marginal propensity to save. Then, assuming that investment which does not depend on growth in income (via acceleration principle) is completely absent and eschewing consideration of the numerous practical questions that income guarantee would raise, Domar argues, If economy starts from equilibrium position, expected rise in income of Yac -will require investment equal to Yaals [1, see p. 145]. If a equals Domar continues, . . a mere guarantee of a rise in income (if taken seriously by investors) will actually generate enough investment and income to make guarantee good without necessarily resorting to a government deficit. But, . . if a is appreciably below s, investment will probably fall short of savings and equilibrium will be destroyed [1, see p. 146]. Now, by magnitude of investment which an expected rise in income of Yaa will require, Domar must mean aggregate of investment undertaken by each individual entrepreneur under assumptions: (1) that each entrepreneur knows (is 100% certain) that he will experience increase in demand for his products which is exactly proportionate to guaranteed increase in national income and (2) that each entrepreneur will operate under conviction (held with 100% certainty) that each unit (or dollar) of investment which he undertakes will raise his productive capacity by amount s. With these two assumptions, we may state that entrepreneurs will seek to expand productive capacity by amount Yaa but that their initial effort in this direction will involve aggregate investment of Yaals. Then, of course, if a is less than s, amount of investment forthcoming must be less than Ya and, in accordance with multiplier theory, income must fall. However, if it were appropriate to view problem on basis of these assumptions-and Domar must indeed so envisage problem

The Analytical Value of Employment-Equilibrium Models

Among the general types of employment-behavior models which can be conceived and which might prove useful for one purpose or another are those displaying: (a) initial full-employment equilibrium, (b) initial underemployment equilibrium, (c) initial disequilibrium leading to terminal full-employment equilibrium, (d) initial disequilibrium leading to terminal underemployment equilibrium, (e) continuous disequilibrium. In turn, each of these types may reveal different patterns of employment behavior. Thus (c) and (d) may show either a slow or a rapid and either a direct or a fluctuating movement towards terminal equilibrium. Likewise, plateaus of temporary equilibrium may be inserted through appropriate assumptions; and, in the case of the terminal underemployment equilibrium, the terminal position may be represented as a central axis or as an upper or lower limit of the earlier fluctuations.

Some Observations on Professor Lange's Analysis

i. The reading of Professor Lange's last book on Price Flexibility and Employment' aroused in my mind three sets of observations which I should like to pursue in this paper. Firstly, I propose to discuss the general assumption, implicit in Professor Lange's analysis, regarding the substitutability among factors of production.2 The second set of considerations is related to the element of irrationality which is contained in human behaviour. Particularly, I shall try to make clear the difference between human action and human thought, and thereby see whether and to what extent it is possible to draw relevant deductions from Professor Lange's analysis. Finally, I shall consider the true effects of movements of the rate of interest, as one of the allegedly most important stabilisers of full employment equilibrium. But before I go on with my observations I shall try to summarise (I hope correctly) Professor Lange's analysis.