Saturday, December 16, 2017

Peter Cooper — A Notion of Demand-Led Growth

A key purpose of demand-led growth theory is to extend the ‘principle of effective demand’ to contexts in which productive capacity is best considered variable rather than fixed. The central idea is that, over any time frame, it is demand that determines output, and demand-led variations in income that adjust planned leakages to planned injections. Once it is acknowledged that capacity is variable, it becomes clear that the adjustment of output to demand, and planned leakages to planned injections, can be achieved not only by utilizing existing capacity more fully, but by expanding capacity through investment....
A Notion of Demand-Led Growth
Peter Cooper


AXEC / E.K-H said...

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 since 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 correct systemic Employment Law is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<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 rhoF=W/PR leads to higher employment.

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

Item (i) and (ii) is 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 rhoF 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 see cross-references Employment

Noah Way said...

The medical term for unrestrained growth is cancer.

Growth for growths sake is suicidal.

There is an absolute glut of everything, and falling revenue is compensated for by increased production at lower margins. Which in turn means disposing of the last round of gross material consumption.

Matt Franko said...

“There is an absolute glut of everything”

Yes but that is not well recognized..

Matt Franko said...

Like if you were getting ready for a big game and invited some friends over and went to Costco and got 2 giant 5 lb bags of tortilla chips ...

you put out a small bowl on the table on front of the TV and then the chips would be all eaten out of the bowl and everyone would say “we’re out of chips!”....

Meanwhile you still have 2 giant 5 pound bags in the pantry closet...

Matt Franko said...

Then you would fill the bowl back up and they would say “boy! good thing we demanded more chips or they would never have shown up in the bowl!” Ignorant that you picked up 10 pounds of chips at Costco the day before...