aggregate demand, income distribution and unemployment · aggregate demand, income distribution and...
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![Page 1: Aggregate demand, income distribution and unemployment · Aggregate demand, income distribution and unemployment Malcolm Sawyer University of Leeds Outline •The importance and nature](https://reader033.vdocuments.site/reader033/viewer/2022050402/5f80011027b65b04736143d6/html5/thumbnails/1.jpg)
Aggregate demand, income
distribution and unemployment
Malcolm Sawyer
University of Leeds
![Page 2: Aggregate demand, income distribution and unemployment · Aggregate demand, income distribution and unemployment Malcolm Sawyer University of Leeds Outline •The importance and nature](https://reader033.vdocuments.site/reader033/viewer/2022050402/5f80011027b65b04736143d6/html5/thumbnails/2.jpg)
Outline
• The importance and nature of aggregate demand in post Keynesian economics
• Investment
• Saving
• Implications
• Some remarks on the supply-side
• Political and social constraints on full employment
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Demand and credit creation
• Demand to become effective has to be financed
• Demand is embedded in a monetary production economy
• Endogenous money and bank credit creation
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Investment
• Investment as a key component of the level of demand and as additions to supply potential
• The interdependence of demand and supply
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Investment
• What influences the level of investment?
• Capacity utilisation
• Profits and profitability
• Credit availability
• 'Animal spirits'
• Technological opportunities
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Saving-investment
• The causal relationship runs from investment to savings
• In a similar vein, for banks causation runs from loans to deposits
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Saving behaviour
• Saving and the distribution of income
• Saving out of wages
• Saving out of profits
• Why are there differences?
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Simple model
• Saving equation
• (S saving, K capital stock, m profit:income ratio, Y output, Yc capacity output, u capacity utilisation)
v
smu
K
Y
Y
Y
Y
Ps
K
sP
K
S c
c
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Simple model
• Investment equation
• Putting them together yields:
• Significance of this result
vsm
vmu
)(
mu
K
I
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Simple model
• Kaleckian proposition
• Where u* is full capacity
• Note roles of s and m in this inequality
mu
v
smu*
*
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Simple model
• Introducing budget deficit (d) and net exports (x) gives:
vsm
vxdmu
)(
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Simple model
• In this approach note:
• The role of investment
• The role of income distribution
• The role of budget deficit
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Capacity utilisation and employment
• This is cast in terms of capacity utilisation: employment can be 'read off' from capacity utilisation but no presumption that there would be full employment even at full capacity utilisation.
• The (likely) need for a long-term budget deficit (and hence the stupidity of the 'fiscal compact')
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A couple of asides
• Financialisation: profits and inequality; effects on investment
• Ecological concerns: lower growth --lower investment
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Supply considerations
• Conflict theory approach to inflation based on competing claims on income which are kept in check through the level of economic activity
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Supply considerations
• Simple pricing equation
• Wage determination
𝑝 = 𝑤 1 + 𝑛 𝑄
𝑄∗ . 𝐿(𝑄)
𝑤
𝑝= 𝜗0 +
𝜗1𝐿 𝑄
𝐿 ∗
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Wage:price ratio
Output
Wage equation Price equation
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Inflation barrier
• The intersection provides a level of output and distribution of income at which inflation would be constant
• This should not be seen as an ‘attractor’
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Inflation barrier
• The price equation would shift with Q* (capacity output): more capacity, more output, more employment
• Inflation barrier should not be seen as related to labour market
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An aside
• Mainstream economics portrays the capitalist economy as stable and full employment as the norm, and deviations from full employment to be explained by shocks, imperfections and policy mistakes
• Post Keynesian economics portrays the capitalist economy as liable to fluctuations and crisis and unemployment as the norm, and full employment to be explained by ‘special circumstances’
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Political and social constraints on full employment
• Creating sufficient demand and the need for budget deficits
• Creating sufficient productive capacity in the right quantity and quality
• Changes in the balance of economic power
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Concluding remarks
The importance of demand for the level of unemployment; and within demand the significance of investment and of income distribution;
Productive capacity of the right quantity and location required for full employment;
The political constraints on the achievement of full employment
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Some reading
• E. Hein and E. Stockhammer (eds.) A Modern Guide to Keynesian Macroeconomics and Economic Policies
• P. Arestis and M. Sawyer, ‘Aggregate demand, conflict and capacity in the inflationary process’, Cambridge Journal of Economics, vol. 29, no. 6, pp. 959-974