December 17, 2017

Demand-led and wage-led growth

Comment on Peter Cooper on ‘A Notion of Demand-Led Growth’


Peter Cooper argues within the Keynesian framework: “The Keynesian or Kaleckian view is that normally the economy is operating inside the ultimate supply limit to a degree that is determined by demand. The economy is therefore regarded as demand constrained under normal circumstances.”

Peter Cooper has not realized that Keynesian and Kaleckian macro is already dead for 80+ years.

Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63) This elementary two-liner is conceptually and logically defective because Keynes never came to grips with profit. (Tómasson et al.) Kalecki’s profit theory is not any better.#1 Because neither pro- nor anti-Keynesians realized the lethal methodological blunder, After-Keynesian employment theory is false until this very day.#2

To cut the meticulous formal derivation short, an elementary version of the axiomatically correct systemic Employment Law is shown on Wikimedia AXEC62:

From this equation follows
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρE>1 indicates credit expansion, a ratio ρE<1 indicates credit contraction of the household sector.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown in growth does the opposite.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. The Employment Law is composed of measurable real and nominal variables and is therefore testable.

Item (i) and (ii) are familiar since Keynes. But Keynesian macro is incomplete. The correct employment multiplier is composed of the expenditure ratio and the factor cost ratio. The ratio ρF as defined in (iii) embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

So, there are two policy levers and what has to be done is to combine demand-led and wage-led expansion in order to get out of unemployment. The post-Keynesian preoccupation with demand is ultimately ineffective because each increase in the expenditure ratio can be counteracted by a decrease in the factor cost ratio. Therefore, economic policy must control both ratios.

The bottom line is that Peter Cooper’s post is a senseless repetition of arguments that were already false 80+ years ago.#3

Egmont Kakarot-Handtke

#1 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 For details of the big picture see cross-references Employment

Related 'Robots, exploitation, and the reproducible economy' and 'Settling the Phillips Curve for good' and 'Full employment through the price mechanism' and 'NAIRU, wage-led growth, and Samuelson's Dyscalculia'.