MACRO

WS 2002/03

KEYNES

• Keynes: uncertainty• Keynes: do flexible wages help?• Keynes: inflation (prices)• Summing up: Classicals and Keynes

• Neoclassical labor market• deriving labor demand• How is unemployment possible?

NAIRU

• Non-accelerating inflation rate of unemployment

• Bargained Real Wage Curve vs. Labor Supply Curve

• Price Setting curve (vs. Labor demand curve)

• Notion of Equilibrium

NAIRU, 2/2

• Full model

• Assumptions about AD(p)

• Policy conclusions

BRW

• W = w0 + w1*U + PE

• Curve depicts bargaing equilibria

• What will shift the curve?

• What effects labor‘s bargaining position

• LABOR SUPPLY

• individual optimizing decision

Price setting curve

• P = m + MPL + WE

• price setting in imperfect competition

NAIRU - Equilibrium ?!

• Is there unemployment at the NAIRU?- Yes

• Is there involuntary unemployment at the NAIRU? -- YES!!!

• What happens if unemployment is less than the NAIRU? -- inflation accelerates

• Why should actual U return to the NAIRU?

A NAIRU model

• Wage setting: W = w0 + w1*U + PE

• Price setting: P = m + MPL + WE

• Demand: AD = a0 + a1*P

• Employment: U = f(AD)

Effects of inflation

• Why should demand (AD) fall if inflation rises?

• Money supply effect (Keynes effect)

• Real wealth effect (Pigou effect)

• but: Fisher effect

• central bank policy (?)

Policy conclusions

• To affect NAIRU: weaken bargaing position of labor

• unemployment benefits, labor market regulations ...

• Is the NAIRU theory Keynesian? Yes and No!

KALDOR (1908-86)

• part of Cambridge Circle around Keynes

• One of the major post-Keynesian economists after WW II

• growth theory

• distribution

• cumulative causation

• worked as economic advisor

Kaldor (1955/56)

• Foundation of Post-Keynesian theory of distribution

• effective demand in the short run: determines output

• effective demand in the long run: determines income distribution

4 theories

• Ricardo

• Marx

• Neo-Classical/Marginalist

• ‚Keynes‘

Ricardo

• Class theory of distribution

• 3 classes: workers, capitalists, landlords

• wage fixed by subsistance level

• diminishing returns only in agriculture: rent determined by MP of land

• profits: residue after rents and wages (surplus principle)

• rents will rise -> stagnation

Marx

• All value created by labor (labor theory of value)

• conventional/subsistance wage because of ‚industrial reserve army‘

• surplus gets distributed between profits and rents

• profits are reinvested (competition)• profit rate will fall due to tech. reasons

Marginalists/Neo-Classical

• General substitutability (not Ricardo!)

• w=MPL; r=MPK=dY/dK

• (Kaldor:) what is the meaning of ‚capital‘? (capital controversy)

• How do you know the value of capital without knowing income distribution?

• Distribution as special case of price theory

‚Keynes‘/Kaldor

• Effective demand: multiplier (I S)

• in the short run: investment determines output (and employment)

• in the long run: full employment (by assumption)

• long run: investment determines income distribution!

‚Keynes‘/Kaldor 2/2

• Different saving propensities between profit (sR) and wage income (sw): sR > sw

• for simplicity assume sw = 0

• then S= sR.R

• then I = sR.R

• macroeconomic theory of income distribution

Exercise

• Y=C+I

• I=I0

• S= sR.R (= assume that sw=0)

• note that R=Y-wN=Y-w/LP.Y (N=Y/LP)

• solve for Y* by S=I

• LONG RUN: interpret Y*=... , if Y is fixed. What can determine what?

Solow model (1956)

• Standard neoclassical growth model

• Production function• savings function• steady state

• What about the labor market?• What happened to I=S ?

Exercise 1 (labor share)

• What is the ‚wage share‘ (wL/Y) in a neoclassical world with a Cobb Douglas production function?

• Hint: take the profit maximising employment level and solve the expression for wL/Y

Exercise 2 (steady state)

• Derive the equilibrium growth rate in a Solow model?

• Take production function (with k=K/L)

• and savings function

• What has to hold in equilibrium? dk/dt=0 !

• What is the equilibrium k ?

Exercise 3 (comp. statics)

• What happens in the Solow model if the savings rate increases?

• What happens in population growth increases?

Solow model with tech. progress

• Labor augmenting tech change (g)

• express k in terms of ‚effective‘ labor units

• in the steady state: gY = g

Solow model: summary

• Simple neoclassical growth model

• assumes full employment

• production and savings function

• k grows with population and exogenous technical change

• income distribution does not matter

Endogenous growth theory

• What is endogenous? Tech progress

• builds on neo-classical (Solow) growth model

• increasing returns model because of endogenous tech progress

Ideas

• Technology: how inputs are transformed into outputs

• Ideas/knowledge improve technology

• Ideas are non-rivalrous increasing returns to scale imperfect competition

• Are ideas public goods? (excludability?)

Technological progress

• Tech progress depends on research effort: A=A .LA

• = productivity of R&D time researchers

• Exercise: what is balance growth?

• gA=constant

Other EGT's

• Externalities from capital stock

• 'learning by doing'

• Schumpeterian growth

Optimal R&D?

• Remember: ideas externalities

• market solution will not be optimal. Why?

• Researcher looks at his own benefit, not the one to society (ignores knowledge spill-overs).

• ‚stepping on toes‘

• consumer surplus (imperfect competition!)

Solow and EGT

• exogenous vs. endogenous growth economy grows in equi (in EGT)

• perfect vs imperfect competition

• convergence vs. divergence

• driving forces are the same: technology and preferences

• How useful is this discription of tech progress?

• Stationary state• perfect competition• convergence of

countries

• Endogenous growth• imperfect competition• divergence possible

What is neo-classical econ?

• Methodlogical individualism (profit and utility max) ?

• Market clearing?

• Assertion that markets lead to optimal results ("invisible hand") ?

Growth, distribution and employment: An ountline

6E n og e no u s g ro w th

5S o lo w m o d e l

n e o -c lass ica l g ro w th

2n e o -c lass ica l la b o r m a rke t

3N A IR U

7R o b in son

P o s t-K e yn es ia n g ro w th

7K a le cki

P o s t-K e yn es ia n g ro w th

8B o yer

R e g u la tion the o ry

4K a ld or

1K e yn e s vs. C la ss ics

Post-Keynesian Growth

• Principle of effective demand in LR

• income distribution

• conventional, not rational behavior

• "historical time"

• investment as driving force

• non-clearing labor market in the LR

Investment

• Investement (I) - accumulation (I/K)

• investment = long term commitment

• (fundamental) uncertainty about the future

• conventions to deal with uncertainty

• conventions -- institutions

• expected profits! -> I=I(R)

• "animal spirits" (exog. Inv.)

Short run

• Inv exog

• Sav sR>sW

• Distr exog

• Exercise1: solve for Y*

• I=I0

• S= sW W+ sR R= sW(1-)Y+ sR Y• Discuss the multiplier

Robinsonian growth

• Assumes full capacity utilization

• accumulation depends on profits demand determines distr! (Kaldor)

• Exercise 2

• accu: I/K=gI(r)= g0+g1r

• savings: S/K= gS(r)=sr

Kaleckian growth

• Variable capacity utilization

• why? Imperfect competition

• exogenous income distribution

• why? Mark-up pricing (imperf. comp)

• power relations between capital and labor

• endogenizing distribution?

Exercise 3

• Note: r= z=(R/Y)(Y/K)

• Distr =0

• Accu gI=g0+g1 +g2z

• Sav gS=s z• What is equilibrium growth?

• What does demand-led growth mean?

PK growth: comparison

SR Robinson Kalecki

Inv exog gI(r) gI(,z)

Saving S(Y) gS(r) gS(,z)

distr exog endog exog.

PK growth

• Key variables: accumulation and distribution

• Robinson vs. Kaleckian model: fixed vs. flexible capacity utilization

• flex cap.util. -- exog. distribution

• How long is the long run?

Neo-classical vs. PK

• Main driving forces:• technology

(substitution)• preferences• rational individuals• full employment

• Main driving forces:• investment (animal

spirits)• distributional conflict• classes• non-clearing labor

market

Theory of régulation

• Developed in 70s and 80s

• combining economic and institutional analysis

• régulation = self-regulation of a system

• the system is a system of institutions

• ... that shapes the behaviour of actors

Institutions

• Institutions, not markets, provide stability

• institutions are outcome of political struggles and compromise

• institutions shape behaviour

Crises and régulation

• 2 types of crises: small (business cycles) and big (structural)

• structural crises = crises of mode of regualtion (+accu regime); similar to long waves

• examples for structural crises: 1930s, 1970s

Mode of regulation

• Composed of the following "institutional forms":

• wage and labor nexus (wages, work org.)

• monetary regime (what is money?)

• competitive relations

• forms of state interventions

• international regime

Regime of accumulation

• Describes macroeconomic system

• income distribution and demand formation

• sectoral balance

• macro ec. development has to be complementary and is determined by institutional setting

Exercise

• Try to make an overview table and describe:

• 3 periods: pre-30s; 1945-70s; 1980-now

• 5 structural forms

Competitive vs. Monopolist R.

• Decentralized wage contracts cyclical wages

• small competing firms

• gold standard• British hegemony

• minimal state

• Collective bargaining stable wages

• large corporations that set prices

• 'credit money' • US hegemony, Bretton

Woods• Keynesian welfare state

Patter of business cycle

• Strong cycles• inflation and deflation• cyclical wages

• Modest cycles• creeping inflation• steadily rising real

wages

"Fordism"

• Ford: high wages high demand• workers become an important source of

demand (mass consumption: cars ...)• high demand high investment high productivity growth : Competitive regulation + intensive

accumulation (productivity growth): mass production + mass consumption

Theory of rég. and growth

• institutions!

• Complementarity within institutional forms and between MoR and RoA

• distribution, demand, investment, productivity growth

• close to, but not married to, post-Keynesian approaches

GROWTH

• Neoclassical: preferences (time preference) + technology

• Kaleckian: demand (autonomous investment) + income distribution

• Regulationists: institutional structure (complementarities between institutions)

DISTRIBUTION

• Marx: class struggle, tendency of the rate of profit to fall due to mechanization

• Neo-classical: technology (MPL) and preferences

• NAIRU: bargaining outcome• Kalecki: exogenous (bargaining, market power)• Robinson/Kaldor: accumulution (saving out of

profits has to finance accu)

EMPLOYMENT

• Neo-classical: full employment (tech&pref)

• Keynes: SR: demand

• NAIRU: u* such that inflation is stable; bargaining positions (labor market inflexibility)

• post-Keynesians: no LR equilibrium unemployment

Kaldorian growth

• Cumulative causation: no stable equilibrium, but once off the equilibrium forces pull economy further away

• independent demand (Keynesian)

• endogenous (induced) tech progress Interaction of demand regime and

productivity regime

Induced tech. progress

• Economies of scale

• learning by doing

• division of labor

Neo-Kalodorian model

• Demand growth: y = y0 + y1.x

• Productivity growth: x = x0 + x1.y

• Interpretation of y1 and x1

• Emphasis of role of exports for pdy growth (in manufacturing)

Class, 11.12.02

• Summary & comparison

• open questions for exam (review of models)

• (if time:) neo-Kaldorian growth model

• feedback