Sraffa’s ‘Given’ Quantities of Output and Keynes’s Principle of Effective Demand Sraffa’s ‘Given’ Quantities of Output and Keynes’s Principle of Effective Demand

Keynes SeminarPost Keynesian Study Group

Robinson College, Cambridge13 March 2012

Man-Seop Park, Korea University

• To show how the ‘given’ quantities of output in the Sraffa system can be interpreted as those being determined in accordance with Keynes’s principle of effective demand

• To provide a framework for the long-period analysis of effective demand which is compa- tible with the Classical/Sraffian perspective

2

The objective(s)

• The ‘long period position capital equipment’ /A fully-adjusted position

• ‘The long period position exists in the present’

• Three states of the economy for a long-period analysis

3

Key ideas/concepts

The long period position capital equipment

tK

1tK

*1tK

tK

time

log Klog Y *

tY

tY*tI

tI

4

warranted investment

autonomous investment

long period positioncapital equipment

The size (and composition) of the capital equipment ( ) that would have been utilised at the normal level for a given level of investment

• the autonomy of investment not necessarily

• ‘long period’:(1) ‘fully-adjusted’ to the level of output (= utilised at the normal

level)(2) regarded ‘normal’ with respect to the current state of effective

demand, thus guiding investment in the next period (‘reference point’ /‘centre of gravity’)

K

The long period position capital equipment

K K

5

The long period position capital equipment

tK

1tK

*2tK

tK

time

log Klog Y

*1tY

tY

*1tI

1tI

1tK

2tK

1tY

6

WG

‘realised’

LPP

The long period analysis: three states of the economy

tK

tK

time

log Klog Y *

tY

tY

*tI

tI

The Warranted Growth state

The state of effective demand

The long period position

The ‘realised’ state

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The long period position

‘The long period position exists in the present’:(paraphrasing Garegnani’s reply to Joan Robinson, 1979)

It is in the ‘present’ that the long period position is firmly located; because this is the state of the economy which is being regarded as ‘normal’ with respect to the state of effective demand in the present, it is also the state of the economy that present experience will lead entrepreneurs in general to take into account when they make decisions on their investment in the future.

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(The short-period analysis)

tK

time

log Klog Y

tY

tI

9

*tY

*tI

The relation between the quantities of the means of production and the quantities of output in the respective industries is such that

(1)output is produced at the normal utilisation of the means of production

(2)each type of output is produced of the quantity that is exhausted for gross investment and consumption in the economy as a whole (supply = ‘(effectual) demand’)

A fully-adjusted position

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A fully-adjusted position

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Returns to scale

•Sraffa (1925, 1926) - increasing returns: ‘division of labour’ - decreasing returns: ‘land’

The prices of production:= a ‘set of exchange-values which if adopted by the market

restores the original distribution of products and makes it possible for the processes to be repeated’ (Sraffa, 1960, p. 3)

For the relations between the means of production and output to be repeated,

(1)the means of production must be utilised at the normal level

(2)for each type of output, supply = ‘effectual demand’

A fully-adjusted position

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* * * * *[ ]ig Sx A p

A fully-adjusted position

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[ ]ig Sx Ap

(1 )i i i iJ g x a p

The Warranted Growth state

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i i ixk a

The state of effective demand

– autonomous investment decision in individual industries

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i i iJ z J

- the volume of gross investment- the capacity-generating effect: - the effective-demand-constituting effect: - the autonomy of investment: not necessarily

iJ

iz

1iz

(The recurrence relation)

Some examples:

1(1) 1t tz z

1(2) ( 1)t tz z z

1(3) 1t tz z K K 1(4) 1 1tz K K

16

(7) too complex to formalise (completely autonomous)

The Long Period Position

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The ‘realised’ state

18

( )j i i ij jx g k hd

( )

1i i i i i i ir wx l x p

k p

dp

( )i i i ig J k p

i ig S k p

ii

i

x

x

The ‘realised’ state

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ii

i

x

x

Investment = Saving

-Both in the aggregate and in individual industries

-Investment generates saving in the aggregate

-Saving in the mind of savers is not industry-specific

-Saving is allocated into each industry

the financial market

The financial market

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The financial market

The Kaldor (1966) formulation:

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i i i f i i i i i ig x s rx g x a p a p a p ( 1 1)i

f hS S S

i f i ig s r g

(1) normal utilisation (aggregate) (NU)

i iJ J i i iz J J

(2) full utilisation (individual) (FU)

0 , 1max maxi i iz z z

Constraints for an EDC economy

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(3) full employment (FE)

fi ix l L f

i i i iz x l L

Constraints for an EDC economy

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(1 )(1 )

(1 )(1 )i f i

ii f i

s r

s r

where

(4) self-replacing state (SR)

0i j jix x a 0i i j j jiz x z x a

Constraints for an EDC economy

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(5) financial market (FM)

Illustration: the ‘Hicks-Spaventa’ economy C : golden ageBC : restrained golden ageCD : limping golden age (leaden golden age)AB : creeping platinum ageDE : galloping platinum age

FE NUSR

FM

LPC

A B

D

FM

E

1 max1z 1z

2z

max2z

1

O

FU2

FU1

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OA : (technique)

OE : (financial market)

F : (effective demand)

F

LP

F