“Introduction to Post-Keynesian Economics”, part 3: Growth Models

Chapter 5. The Long Period: Old and New Growth Models

5.1 The Old Post-Keynesian Growth Models

Post-Keynesians are well known for their models of growth, first developed by Cambridge economists Kaldor and Robinson in 1956. To examine these models, we’ll need some definitions. K is the capital stock, the growth rate g = I/K, and the profit rate r = P/K. Next, we refer back to Kalecki’s profit equation from last chapter.

5.2 The new Kaleckian model

In these newer models founded on the principle of effective demand, the profit rate is exogenous instead of the utilization rate. All adjustments are now done through quantities. Say there’s an increase in aggregate income, either from higher capitalist consumption or higher real wages. As discussed in the previous chapter, this will increase output, and therefore capacity utilization in the short term. Capitalists will then increase investment in order to counteract the decrease in spare capacity. In short, higher effective demand leads to an increase in the growth rate in the long run. And as we’ll see, on the macro level, firms will fail to bring utilization back down to normal levels in the face of this increase in aggregate demand.

5.3 Extensions and criticism of the Kaleckian model

The Kaleckian model above doesn’t have much of a role for supply-side conditions, so we’ll examine them in this section. Let’s discuss the natural growth rate: the sum of the rate of technical progress plus the labor force growth rate. If the natural growth rate is less (or greater) than the real growth rate, then unemployment will continuously increase (or decrease). Yet in the Kaleckian model, real growth rates reach an equilibrium independent of the natural growth rate. Yet in the real world, unemployment doesn’t continually increase or decrease. So, the model is incomplete.

6. General Conclusions

Post-Keynesians believe capitalism by itself fosters waste, instability, unemployment, and low aggregate demand. Contrary to mainstream stories, this is not due to regulation, a lack of competition, or price stickiness. In fact, administered prices, norms, and legislation (like capital controls) actually help stabilize the economy. But many post-Keynesians, like Keynes himself, believe capitalism can be efficient if buttressed by a state that provides infrastructure, public services, and helps equalize the income distribution while boosting aggregate demand.

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