Price flexibility and full employment: a common misconception

This paper highlights and builds upon Michio Morishima’s sadly neglected thesis that multi-market economies should be envisaged, and modelled, as over-determined systems, in that the number of conditions to be satisfied for equilibrium exceeds the number of unknowns (equilibrium prices and quantities) to be discovered. This understanding undermines the comfortable supposition (underpinning both New Keynesian and New Classical theoretical approaches) that, even when the economy is not in a position of full employment, a potential equilibrium solution does exist which - if not instantly, at least eventually – will be achieved by market forces. In other words, contrary to the conventional view, observed price and wage stickiness should be considered as contributing to macroeconomic stability rather than inhibiting adjustment to full employment equilibrium. A further casualty of the Morishima perspective is the common textbook rationalisation that the Keynes theory applies only in the short run (with sticky prices) while the classical analysis comes into its own (with flexible prices) in the longer term.Price flexibility; General equilibrium (macro) models; Walras' Law and Say's Law; Over-determined systems

Still More On Why We Should Bury The Marginal Productivity Theory Of The Price Of Capital: A Supplementary Note

The purpose of this note is to supplement the author’s earlier remarks on the unsatisfactory nature of the neoclassical account of how the return on capital is determined. (See Strathclyde Discussion Paper 12-03: “The Marginal Productivity Theory of the Price of Capital: An Historical Perspective on the Origins of the Codswallop”). The point is made via a simple illustration that certain matters which are problematical in neoclassical terms are perfectly straightforward when viewed from a classical perspective. Basically, the marginalist model of the nature of an economic system is not fit for purpose in that it fails to comprehend the essential features of a surplus-producing economic system as distinct from one merely of exchange

THE TEXT BOOK BLACK MAGIC, or, how to make the Keynes theory disappear

This paper looks into the question of how it can come about that, not uncommonly, contemporary macro textbooks start their exposition in Keynesian fashion, but end up presenting an essentially classical account. Using a typical textbook for illustration, our diagnosis is that when the AD/AS model is introduced into the discussion, then things go wrong. The AS analysis rehabilitates a pre-Keynesian conception of the working of the labour market, while uncritical and ill-informed use of the AD function effectively ‘tames’ aggregate demand by making it manipulable in such a way as to accord with conditions of labour supply. Not surprisingly, Keynes’s vision of the functioning of the macro system gets lost along the way.AD/AS Model; Labour Market - Keynesian and Classical Models

An Issue With Own-rates : Keynes Borrows From Sraffa, Sraffa Criticises Keynes, and Present-day Commentators Get Hold of the Wrong End of the Stick

Scholars who in recent years have studied the Sraffa papers held in the Wren Library of Trinity College, Cambridge, have concluded from Sraffa’s critical (but unpublished) observations on Chapter 17 of Keynes’s General Theory that he rejected Keynes’s central proposition that the rate of interest on money may come to ‘rule the roost’, thus dragging the economy into recession. While Sraffa does indeed express dissatisfaction with Chapter 17, the commentators have, we believe, misunderstood his concern: we suggest that he was unhappy with the ‘own-rates’ terminology employed by Keynes rather than with the substance of the theory developed in Chapter 17

'Right Back Where We Started From' : From 'the Classics' to Keynes, and Back Again

The purpose of this paper is to highlight the curiously circular course followed by mainstream macroeconomic thinking in recent times. Having broken from classical orthodoxy in the late 1930s via Keynes’s General Theory, over the last three or four decades the mainstream conventional wisdom, regressing rather than progressing, has now come to embrace a conception of the working of the macroeconomy which is again of a classical, essentially pre-Keynesian, character. At the core of the analysis presented in the typical contemporary macro textbook is the (neo)classical model of the labour market, which represents employment as determined (given conditions of productivity) by the terms of labour supply. While it is allowed that changes in aggregate demand may temporarily affect output and employment, the contention is that in due course employment will automatically return to its ‘natural’ (full employment) level. Unemployment is therefore identified as a merely frictional or voluntary phenomenon: involuntary unemployment - in other words persisting demand-deficient unemployment - is entirely absent from the picture. Variations in aggregate demand are understood to have a lasting impact only on the price level, not on output and employment. This in effect amounts to a return to a Pigouvian conception such as targeted by Keynes in the General Theory. We take the view that this reversion to ideas which should by now be obsolete reflects not the discovery of logical or empirical deficiencies in the Keynes analysis, but results rather from doctrinaire blindness and failure of scholarship on account of which essential features of the Keynes theory have been overlooked or misrepresented. There is an urgent need for a critical appraisal of the current conventional macroeconomic wisdom

Roncaglia on Sraffa and Wittgenstein : Further Comment

This paper considers whether, as suggested by Roncaglia (1978), there exists, in how they relate to foregoing ideas, a similarity between Sraffa’s approach in the Production of Commodities by Means of Commodities to the theory of value and Wittgenstein’s later linguistic philosophy as expressed in the Philosophical Investigations. McLachlan and Swales (1998) take the view that no such affinity exists. We dispute the McLachlan and Swales assessment on the grounds that, in the works in question, Sraffa and Wittgenstein – each with reference to his own sphere of interest – are, in an analogous manner, denying the possibility of analysing, as previously (neoclassical orthodoxy, the Tractatus theory of language) thought feasible, all problems in economics or linguistics in terms of a single, all-comprehending general theory, and implying or indicating that the appropriate approach is instead to seek to understand economic and linguistic phenomena by analysis which is specific to the problem in hand and which sets that problem within the appropriate social context

The Text Book Black Magic, or, How to Make the Keynes Theory Disappear

This paper looks into the question of how it can come about that, not uncommonly, contemporary macro textbooks start their exposition in Keynesian fashion, but end up presenting an essentially classical account. Using a typical textbook for illustration, our diagnosis is that when the AD/AS model is introduced into the discussion, then things go wrong. The AS analysis rehabilitates a pre-Keynesian conception of the working of the labour market, while uncritical and ill-informed use of the AD function effectively ‘tames’ aggregate demand by making it manipulable in such a way as to accord with conditions of labour supply. Not surprisingly, Keynes’s vision of the functioning of the macro system gets lost along the way

Did Keynes in the General Theory Significantly Misrepresent J S Mill?

It has been alleged that J M Keynes, quoting in the General Theory a passage from J S Mill’s Principles, misunderstood the passage in question and was therefore wrong to cite Mill as an upholder of the ‘classical’ proposition that ‘supply creates its own demand’. We believe that, although Keynes was admittedly in error with respect to, so-to-say, the ‘letter’ of Mill’s exposition, he did not mislead readers as to the ‘substance’ of Mill’s conception. The purpose of this paper is to demonstrate that J S Mill did indeed stand for a ‘classical’ position, vulnerable to Keynes’s critique as developed in the General Theory

"Drop the Dead Donkey" : a Response to Steven Kates on the Subject of Mill's Fourth Proposition on Capital

Steven Kates has recently (2015a) attempted to explain and justify J S Mill's paradoxical "fourth proposition on capital", which states that "demand for commodities is not demand for labour", a proposition which notoriously – over generations – has baffled many eminent commentators. Kates intends to resolve the puzzle by offering "a proper understanding of Say’s Law as it was understood by Mill and his contemporaries." We conclude that Kates does indeed reveal the logic of Mill's proposition, making it clear that from Mill's lost "supply-side" perspective, it is in no way puzzling or paradoxical. However, at the same time it becomes evident that Mill's whole position is undermined by his acceptance of the untenable belief that "demand is constituted by supply", which leaves us with the clear understanding that his fourth proposition, despite Kates's rationalisation and defence thereof, as well as certainly being paradoxical, is simply untrue

Revisiting Cantillon's Admirable Theory of Distribution and Value

This paper returns to an issue I discussed in a review article published some twenty years ago** The subject under discussion was Anthony Brewer’s 1992 study*** Richard Cantillon: Pioneer of Economic Theory. That review provided a vehicle for consideration of Cantillon’s theory of value, particularly for questioning Brewer's rejection of Cantillon's analysis, on the ground that he (Brewer) understood it to propose a dead-end "land theory of value" which attempted to account for equilibrium relative values in terms of quantities of "land embodied". In the present paper a fuller critique of that land-embodied interpretation of Cantillon's value theory is presented. From what might be described as a Sraffian perspective, we – contrary to Brewer - interpret Cantillon as offering a perceptive and valid analysis of the operation of the market mechanism in the case of a surplus producing system in which distribution is determined - exogenously to the price system - by social factors of property ownership and economic power. We suggest that, given Cantillon's view (in a pre-industrial context) of land as a country's principal economic resource, he may be said to have told a general story associating equilibrium commodity prices ("intrinsic values") with the quantity and quality of land employed in production. Appreciating that an approach in terms simply of physical quantities of land could not serve to explain relative values under the complexity of real world conditions, he expressed his understanding in the form of a "cost of production theory" explaining intrinsic values as represented by the costs – comprised of wages and rents measured in money – incurred by entrepreneurs for the use of heterogeneous inputs of land and labour. Labour costs can be translated into land costs via Cantillon's "Par". These production costs reflect both the use of resources and the balance of economic power within society. Thus, on the subject of "intrinsic value" we read Cantillon as following not a crude land-embodied treatment, but instead a cost of production approach, an approach which would be further developed by the Classics and Marx as appropriate to later economic and social conditions