This goes against intuition, which considers saving as only positive. Of course the solution is to not promote a policy in which consumers spend like crazy. So fiscal policy has to be relaxed if consumers want to save a lot. Intuition derived out of learning New Consensus Economics will lead one to believe that raising real wages will lead to a fall in profit rates.
The paradox of costs, in its static version, says that a decrease in real wages will not raise the profits of firms and will instead lead to a fall in the rate of employment. Its dynamic version has been proposed by Robert Rowthorn.
Titles in this series
It says that rising real wages relative to productivity can generate higher profit rates. This flies in the face of a microeconomic analysis that would demonstrate that lower profit margins generate lower profit rates. But if higher real wages generate higher aggregate consumption, higher sales, higher rates of capacity utilization and hence higher investment expenditures, profit rates will be driven up.
So while it may be beneficial to an individual firm to reduce wages and get a higher profit rate, it will be the reverse if everyone tries to do it. The reason is because almost everything in the economy gets produced with labor. If you raise the minimum wage, the increased income to those with jobs will also boost labor demand indirectly somehow, activist and businessman Nick Hanauer figured this out when a whole lot of econ-trained think-tankers missed it!
So Smith indeed concedes that the profession missed it out. But the attribution is incorrect. All this was figured out by Michal Kalecki in the s. So while the supply-demand analysis is correct, it should be used more carefully. So increases in real wages raises consumption and this leads to higher production plans which requires more labour.
So because of the principle of effective demand, the reverse of what the New Consensus Economics says is true. And also—without proof—it should be easy to see this in a stock-flow consistent model. Raise the wage rate and see the effect on output and employment. As simple! But may be not. If say only the minimum wage is raised, although unemployment will fall in the short run, medium and long run effects can still be either way.
So if fiscal policy is not relaxed, i. So fiscal policy also needs to be relaxed. So a global policy response is needed in the long run. At any rate, we are far from the simplification of New Consensus Economics which starts off with a rise in unemployment due to a rise in real wage rises.
The short run effect is completely the opposite. Click the picture to see the documentary in a new tab. Toporowski also appears in the documentary above. The importance of national accounts and flow of funds is underemphasized by economists. Economists confound income flows with financial flows, but matters of national accounts were kindergarten stuff for Kalecki. With such advantage, Kalecki made a huge amount of progress in his work on economic dynamics. A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:.
This shift is partly the result of the prolonged aftermath of the global financial crisis and the increased realization that equilibrium interest rates have been declining for decades. It is also partly due to a better understanding of economic policy from the experience of the last eight years, including new empirical research on the impact of fiscal policy as well as observations of the reaction of sovereign debt markets to the large increases in debt as a share of GDP in the wake of the global financial crisis.
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- Post-Keynesian Ideas For A Crisis That Conventional Remedies Cannot Resolve.
- MICHAL KALECKI ON THE ECONOMICS OF CAPITALISM;
- Thoughts On Economics: Michal Kalecki, One of the Greatest Economists Ever?
- Mixed Methods Research: Merging Theory with Practice;
His book, Essays in the Theory of Business Cycles , published in Polish in , clearly states the principle of effective demand in mathematical form. Michal Kalecki swam into my ken just after the publication of the General Theory of Employment, Interest and Money, in The small group who had been working with Maynard Keynes during the gestation of the book understood what it was about, but amongst the public as a whole it was still a mystery. Kalecki, however, knew it all. Michal never made any claim for himself and I made it my business to blow his trumpet for him, but most of the profession including Keynes just thought that I was being kind to a lame duck.
He showed that it is investment, not private saving, that brings about capital accumulation; that a government deficit, in a slump, will increase employment; that cutting wages only makes the slump worse; that the rate of interest depends upon supply and demand of the stock of money, not on the flow of saving, and that it is the forward-looking expectation of profits that induces firms to accumulate. The question of glory did not seem to me to be important.
As Michal was the first to admit, his ideas would have taken a long time to establish while with Keynes they burst upon the world as a revolution. But I was deeply impressed by the fact that two thinkers of such different background and habits of thought could arrive at the same diagnosis of the economic situation.
Monthly Review | Marx, Kalecki, and Socialist Strategy
Logic is the same for everybody; the same logical structure, if it is not fudged, can support quite different ideologies, but for most social scientists ideology leaks into the logic and corrupts it. In the natural sciences, it is common enough for the same discovery to come almost simultaneously from two independent sources. The general development of a subject throws up a new problem and two equally original minds find the same answer, which turns out to be validated by further work.
In the history of economic thought, the case of the discovery of the theory of employment by Keynes and Kalecki is unique. I have a few points to add, which may not be contradictory to that post. And in a sentence that sums up post-crash Britain, he identifies one of the principal sources of resistance as "so-called 'economic experts' closely connected with banking and finance" along with "big business".
The opposition posed by this coalition of bosses and financiers is motivated by three factors. First, they want as little government interference in the economy as possible; second, they don't want the state expanding into new areas and so doing them out of business.
But the thing that really keeps the capitalists awake at nights is the boost to workers' confidence that will be provided by a heathy jobs market. They will demand more pay, better working conditions, perhaps even a say in how their companies are run.
Fully employed, well-paid Britons will have more cash to buy things, so a healthy economy supported by the government is better for corporate profits than a sick one. Rather an insecure and cowed workforce than a confident and boisterous one. But it's Kalecki's "political business cycle" that sums up the world we're in now.
Rather than opting for public investment and a healthy recovery, Britain is stuck in a slump that austerity and a blind trust in private-sector vigour is only deepening. But the parallels don't stop there. Last week, the day after MPs voted through a bill for real-terms cuts year upon year in benefits for the jobless and the low-paid, newspapers led on government briefings that the butchering of the welfare state would not stop there. Next, the FT reported, winter fuel allowance would be for the chop.
Meanwhile, living standards for those in work are also under attack: through wages that are falling further and further behind inflation and government schemes to sacrifice workplace rights in return for share options. For those slow on the uptake, there is always William Hague, telling Britons to " work harder ". The rhetoric is also echoed in our media.
Great Thinkers In Economics Series
Last Friday, the Guardian's librarians went through all the British tabloids and broadsheets since Up to , they found that Fleet Street was quite restrained in its use of the term "scrounger": a mere 46 mentions when discussing benefits or welfare for all of In , though, that shot up to mentions, and last year mentions. As for shirkers v strivers, the false opposition du jour, newspapers did not use the phrase at all until Last year, the total was In the first two weeks of , the press had already racked up 30 mentions. Whether from politicians or the press, these justifications for austerity are getting more strident even while evidence of austerity's failure is stacking up.
It may be that Britain goes into a third recession this year; it is certainly not going to enjoy a recovery.