Principle Of Effective Demand Research Articles

RECOLLECTIONS OF MY TIME AT THE HISTORY OF ECONOMICS SOCIETY

The History of Economics Society (HES)—together with its Journal of the History of Economic Thought (JHET)—has played an important role in my activities as a historian of economic thought, from my early exciting days as a graduate student in 1994–95 to my term as HES president in 2016–17, and beyond. As I join the celebrations of the fiftieth anniversary of the HES, I would like to offer some historiographic perspectives on its history as based mostly on my shared memories and personal trajectory. My first participation at a HES conference took place in 1994, when I presented a paper in the history of macroeconomics. Those meetings were presided, at Babson College (Boston), by Laurence Moss, who used the “Perlman system” of paper presentation by the discussants followed by reactions by the authors. I was lucky to have Bradley Bateman as my discussant. Brad kindly agreed with the argument of my paper about Frederick Barnard Hawley’s anticipation of John Maynard Keynes’s principle of effective demand, published two years later in the History of Political Economy (HOPE).

A Short Period Sraffa-Keynes Model for the Evaluation of Monetary Policy

ABSTRACT This paper develops a short period, one sector, Sraffa-Keynes model that can be used for the evaluation of various recommendations outlined in the Post Keynesian monetary policy literature. The model is characterised by the principle of effective demand, Sraffa or target-return pricing (which integrates the determination of key distributive variables and allows for short run cyclical variation in prices), conflict inflation, endogenous money and a basic approach to monetary policy in the Smithin–Wray tradition of fixing the policy rate to achieve low or specified rates of unemployment. The model is calibrated to the Australian economy and subjected to two standard macroeconomic shocks, a demand shock and a cost shock. After each shock, the economy returns to long period equilibrium characterised by the achievement of the target rate of return, desired capacity utilisation and Sraffian prices of production. Active monetary policy that targets employment, reduces the depth and duration of recessions in this model compared to a ‘park-it’ approach but at the cost of increased volatility in income distribution. Flexible prices (where firms respond to the additional costs of running the capital stock at other than full capacity) are shown to have similar effects to monetary policy.

Towards the Culturalization of Macroeconomics: A Veblenian Contribution

Conventional macroeconomics cannot be the basis for a pragmatic understanding of the behavior of the financial model of capitalism in which we live and for drawing practical economic policies. Its most important problem is the relegation of key monetary and financial institutions, which entrap the analysis into a self-regulated markets illusion. This article argues that Thorstein Veblen’s post-Darwinian cultural and processual analysis of the business enterprise system provides ideas, principles and foundations that can leverage a contribution to an evolutionary recontextualization of macroeconomics. The analysis focuses attention only on the role that the evolution of pecuniary habits of mind and routines have in episodes of unsustainable balance sheets, liquidity crunches and debt-deflation processes and marks out the cultural foundations of financial fragility and instability and of the principle of effective demand.

The Role and Importance of Liquidity Preference, Marginal Efficiency of Capital, and Marginal Propensity to Consume in Keynes’s General Theory

This article builds an understanding of Keynes’ General Theory as an advancement upon the Classical theory of economics with the introduction of new postulates including analysis of the propensity to consume, marginal efficiency of capital and the concept of the rate of interest. Based upon Keynesian General Theory, the key concepts, and variables of Liquidity Preference, Marginal Efficiency of Capital, and Marginal Propensity to Consume are familiarized and elaborated in terms of their role and importance in theory. Different references have been cited to support the interpretations as originally presented in Keynes’s General Theory. Literature has widely discussed the vital postulates of Keynes on the principle of effective demand, the consumption function, multiplier and interest rate, interest rate and investment. These postulates take account of the subjected variables and elaborate on the importance of these in Keynes General theory and models. Furthermore, the criticism of General theory is discussed, and conclusions are drawn at the end of the article.

Classical-Keynesian Political Economy, not Neoclassical Economics, is the Economic Theory of the Future

ABSTRACT This article implies that the time is ripe for a new paradigm in economic theory comprising classical (Ricardian) and Keynesian elements of analysis. The central Section Five presents the basic equations of classical-Keynesian political economy, the price and the quantity equation, based on three constitutive principles: the classical labour value and surplus principles and the Keynesian principle of effective demand. Subsequently, two employment mechanisms implied in the super-multiplier relation, the classical-Keynesian quantity equation, are mentioned, the internal and the external employment mechanism. Section Seven provides an analysis of the actual situation on the basis of the external employment mechanism, associated with cumulative processes of increasing disequilibria and inequalities. Given this, it ought to be replaced by the internal employment mechanism, allowing for Keynesian employment and distribution policies (Section Eight). However, the internal mechanism can only be implemented if a new world economic order is brought about, based upon a supranational currency, that is, Keynes's bancor, to ensure balance of current account equilibria worldwide. Section Ten sets forth Keynes's social liberalism, the social philosophy underlying classical-Keynesian political economy, the fundamental social ethical value of which is the Common Good. Social Liberalism thus emerges as the alternative to Capitalism and Socialism.

International competition, income distribution, and North-South uneven development under the balance of payments constraint

This study builds a North–South trade and growth model and investigates the effect of a change in each country’s income distribution on economic growth in both countries. The North is assumed to be a demand-led Kalecki-type economy with the markup pricing rule and the principle of effective demand, while the South is a supply-led Lewis-type economy with surplus labor and hence, the real wage is fixed. Furthermore, it is assumed that international competition influences the markup rate of North firms. The following four main results are obtained. First, in the short-run equilibrium, an increase in the bargaining power of capitalists of the North increases (decreases) the economic growth rate of the North if the North exhibits profit-led (wage-led) growth. Such an increase in the bargaining power of capitalists of the North necessarily decreases the economic growth rate of the South. Second, in the short-run equilibrium, an increase in the profit share of the South decreases (increases) the economic growth rate of the North if the North exhibits profit-led (wage-led) growth. Such an increase in the profit share of the South can either increase or decrease the economic growth rate of the South. Third, in the long-run equilibrium, an increase in the bargaining power of capitalists of the North decreases (increases) the economic growth rates of the North and the South if the North exhibits wage-led (profit-led) growth in the short-run equilibrium. Fourth, in the long-run equilibrium, an increase in the profit share of the South increases (decreases) the economic growth rates of the North and the South if the North exhibits wage-led (profit-led) growth in the short-run equilibrium.

The evolution of Patinkin’s interpretation of Keynes’ principle of effective demand

Don Patinkin (1922–1995) was both an eminent theoretical economist and a great historian of economic thought. In the latter field, his focus was on Keynes’ “principle of effective demand” from Chapter 3 of the General Theory. Having submitted a first interpretation of the “principle” in 1976 – in which he claimed that it contains major flaws – Patinkin revisited the subject several times over the next couple of years. In this process, his interpretation changed markedly. The aim of this paper is to trace (and to comment on) the evolution of Patinkin’s interpretation of the theory of effective demand.

Effective Demand and Prices of Production: An Evolutionary Approach

The paper develops a critique of and a (partial) solution to Say's Law Marxism, defined as the employment of Say's Law within the Marxist framework. The critique is based on the notion that expectations and effective demand are constitutive of labor values and prices of production. Socially necessary labor cannot be determined solely from the supply side. The (partial) solution to Say's Law Marxism rests on the development of an evolutionary model that integrates the principle of effective demand in the short run and the formation of prices of production in the long run. The equalization of profit rates in the long run and the formation of prices of production as attractors of market prices depend upon the realization of profits in the short run and, therefore, are subject to the principle of effective demand. The model employs replicator dynamics from evolutionary game theory to formalize competition at the firm level. The replicator equations also formalize the adoption of new production techniques and the nonlinear feedback effects between individual decisions and unintended macroeconomic outcomes.

Marx Meets Keynes in the Classroom: Teaching a Simple Model of Modern Capitalism

ABSTRACT This paper presents a pedagogical model of the way modern capitalism works, which can be taught by using one single graph. Specifically, we extend earlier research by introducing features of the monetary theory of production [Graziani 1994. La Teoria Monetaria Della Produzione. Montepulciano: Editori del Grifo; Graziani 2003. The Monetary Theory of Production. Cambridge: Cambridge University Press] and distribution [Pivetti 1991. An Essay on Money and Distribution. London: Macmillan] into an existing model of the principle of effective demand [Andini 2009. ‘Teaching Keynes’s Principle of Effective Demand Within the Real Wage Vs. Employment Space.’ Forum for Social Economics 38 (2–3): 209–228.]. The resulting framework can be used for teaching a number of relevant economic propositions, which are consistent with the Marxian/Keynesian tradition in political economy. Among these, it is argued that both labour exploitation and ‘final finance’ loans play a fundamental role for the capitalist system to be money-profitable on aggregate.

Keynes’ treatment of dynamics and stability in a monetary economy: the role played by expectations from the Tract on Monetary Reform to the General Theory

Contrary to the commonly accepted view, Keynes’ static treatment of the effective demand principle in his General Theory should be considered more as an achievement than as an incomplete proof. The Tract investigated the fluctuations due to short-term forecasting errors. Next, the Treatise extended the analysis of expectations’ mismatches to the determination of the level of investment. Hence the major achievement of the General Theory can be located in its demonstration of the possible existence of an underemployment equilibrium due to the indeterminacy of long-term expectations.

A Reconsideration of the Role of Demand in Malthus’s Theory of Accumulation*

Abstract This paper is concerned with the role of effective demand in Malthus’s theory of accumulation expounded in his Principles of Political Economy. As is well known, Keynes praised Malthus for being a forerunner in identifying a lack of effective demand as a cause of depression in economic activity and a constraint on growth. There have since been many interpretations in the literature of Malthus’s position by reference to his arguments against Say’s Law in contending the possibility of “general gluts” and to his theory of capital accumulation. We begin by examining Malthus’s conception of the supply-side factors that determine what we call, “potential accumulation”, being accumulation that is not constrained by demand. The paper then considers the role of effective demand in Malthus’s well known contention of the possibility of “general gluts” and, connectedly, in his theory of demand-constrained capital accumulation. On this basis, we then appraise whether Malthus’s theory anticipates Keynes’s principle of effective demand by reference to the debate on this question in the literature, showing that while Malthus lacked a meaningful saving-investment analysis, he does provide insights important to the modern demand-led approach to growth.

Can Shiozawa’s, Morioka’s and Taniuchi’s Microfoundations for Evolutionary Economics (2019) Serve As the Microfoundations for “… Post-Keynesian Economics “ (2019, p.vii)? The Answer Is Definitely Yes if Post –Keynesians Can Break Away From Joan Robinson’s Anti-Mathematical, Anti-Formalist Views

Can Shiozawa’s, Morioka’s and Taniuchi’s Microfoundations for Evolutionary Economics (2019) Serve As the Microfoundations for “… Post-Keynesian Economics “ (2019, p.vii)? The Answer Is Definitely Yes if Post –Keynesians Can Break Away From Joan Robinson’s Anti-Mathematical, Anti-Formalist Views

Permanent Demand and Private Investment in the General theory: an empirical investigation

We empirically test some Keynes’ (and post Keynesians’) assertions relative to the multiplier-accelerator principle. By means of the nonlinear causality test proposed by Diks and Wolski (2016), we conclude that in the United States domestic private investment is driven by permanent demand. We explain that this result is consistent with Keynes’s principle of effective demand in the long run. We hope this paper helps consolidating the potential consensus among Keynesian, Kaleckian and Sraffian economists initiated by the work of Allain (2015).

On the Monetary Nature of the Principle of Effective Demand

Since the publication of The General Theory the relationship between money and the principle of effective demand has been a matter of never-ending studies by the Keynesian economists. There are at least three different ways to explain this relationship. The first explanation lies in the liquidity preference theory. The second, points out that the decisions to accumulate a kind of money differing from a commodity obtained by labor may cause a level of aggregate demand insufficient to absorb the level of income corresponding to full employment. Finally, the third explanation is associated with the endogenous money theory. The first aim of this paper is to highlight the limits of these analyses. The second aim is to present a different explanation of the monetary nature of the principle of effective demand based on Schumpeter’s analytical approach which underlines the role of bank money in a capitalist economy.

Karl Marx: an early post-Keynesian? A comparison of Marx's economics with the contributions by Sraffa, Keynes, Kalecki and Minsky*

This paper compares Marx's economics with those by Sraffa, Keynes, Kalecki and Minsky. The paper takes an ‘ex post’ view on the matter and looks at the output side of the respective authors, but not at the input side. This means no attempt is made to study in a systematic way whether and to what extent Sraffa, Keynes, Kalecki and Minsky were individually influenced by Marx's work. First, the relationship between Marx's theory of value and Sraffa's reformulation of the classical theory of prices and distribution is reviewed. Then the relationship between Marx's and Keynes's monetary theory is examined, relying on an interpretation of Marx's theory of value as a ‘monetary theory of value’. Next, some light is shed on the Marx–Kalecki connection, focusing on Marx's theory of simple and extended reproduction and the built-in, although not fully elaborated, ‘principle of effective demand’ and the related theories of distribution and accumulation. Finally, Marx's and Minsky's views on financial instability and crises are scrutinised. It is concluded that Marx should not be considered as an ‘early post-Keynesian’ but rather as an important forerunner of modern post-Keynesianism, with certain similarities, but also some important differences, and several areas of compatibility.

Uma tentativa de integração entre Keynes e Kalecki: investimento e dinâmica

RESUMO Keynes e Kalecki foram os precursores dos modelos de dinâmica baseados no Princípio da Demanda Efetiva e atribuíram ao investimento papel central para aquela. Kalecki retrata uma dinâmica cíclica regular associada ao efeito dual e defasado do investimento. Já o modelo de Keynes descreve uma dinâmica potencialmente instável, resultado das decisões baseadas em expectativas formuladas sob incerteza. Este artigo tem como objetivo construir uma interpretação integradora das visões dos autores, possibilitando uma melhor compreensão dos fatos estilizados que mostram que a dinâmica capitalista é marcada por fases de regularidade cíclica que são eventualmente quebradas, dando lugar à instabilidade.

Stock Market Volatility Tests: A Classical-Keynesian Alternative to Mainstream Interpretations

We examine the neoclassical interpretations of Shiller’s tests on stock market volatility and analyze their theoretical and empirical limitations. We then show that volatility can be interpreted in an alternative way in the light of a new macroeconomic model whose main innovative feature is that it relates dividends to the Classical concept of “normal distribution” and stock prices to the Keynesian “principle of effective demand.” While a relatively stable normal rate of profit determines dividends, the continuous fluctuations of investment, income, and saving and the related portfolio choices influence the demand for shares and provoke stock prices volatility with respect to dividends. The Classical-Keynesian model is then extended to contemplate also a “financial instability hypothesis” and a “monetary circuit.” Neoclassical and alternative stock market models are presented here by adopting a comparative approach—that is, a single system of equations in which the causal relations among its variables change according to the theory examined.

Hoarding, saving, and the paradox of thrift in a financial economy

In a paper in this journal (Rowe 2016), Nicholas Rowe argued that excessive hoarding of money, not excessive thrift, causes the failure of Say's law and that an increase in the desire to save, by itself, will not lead to the paradox of thrift. This comment argues Rowe's analysis has three fundamental errors: (i) he uses definitions of thrift and hoarding that are profoundly different from Keynes's; (ii) by essentially dealing with a Walrasian world, he fails to account for the principle of effective demand; and (iii) his parables fail to account for the separation of investment and saving decisions. While Rowe's parables are inadequate for understanding the Keynesian theory of monetary production, I show that, even in such parables, incorporating financial assets restores the paradox of thrift without hoarding. The key assumption for the paradox of thrift is not hoarding but the separation of investment and saving decisions. The parable is simplistic, but a similar inference can be drawn from a more detailed elaboration of the saving and investment in a financial economy by Davidson (1968).

Demanda efetiva no longo prazo e no processo de acumulação: o debate sraffiano a partir do projeto de Garegnani (1962)

Resumo O artigo discute a evolução do projeto sraffiano, iniciado em 1962 por Garegnani, de desenvolver uma teoria da demanda efetiva de longo prazo. Tratamos tanto dos aspectos metodológicos quanto analíticos, começando com a questão da compatibilidade entre o princípio da demanda efetiva e a abordagem clássica do excedente. Discutimos as relações entre os graus efetivo e normal da utilização da capacidade e o problema do caráter dual do investimento. A seguir relacionamos estes conceitos com a noção de posições de longo prazo e a análise do processo de ajustamento da capacidade à demanda no processo de acumulação de capital.

The principle of effective demand under modern finance: An exploration in the traditions of Kalecki and Keynes

The paper explores the principle of effective demand in the context of modern financialization. The traditional ?two-sector? model is extended to include banking and finance sectors to examine the implications of the interaction between real and financial sector for effective demand in a closed economy. The analytical framework developed in the paper provides an intuitive understanding of the problem of effective demand in the investment led and consumption led regimes under financialization. It also brings out the underlying dynamics in terms of transfer of profit between the sectors that renders macroeconomic vulnerability in these regimes.