THE RECONSTRUCTION OF POLITICAL ECONOMY

THE RECONSTRUCTION OF POLITICAL ECONOMY

By the same author RATE OF PROFIT, DISTRIBUTION AND GROWTH: TWO VIEWS THE THEORY OF ECONOMIC GROWTH THEORY OF CAPITAL (forthcoming)

The Reconstruction of Political Economy An Introduction to Post-Keynesian Economics J. A. KREGEL with a Foreword by Joan Robinson SECOND EDITION M

J. A. Kregel 1973, 1975 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First edition 1973 Reprinted 1974 Second edition 1975 Published by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in New York Dublin Melbourne Johannesburg and Madras ISBN 978-1-349-81525-8 ISBN 978-1-349-81523-4 (ebook) DOI 10.1007/978-1-349-81523-4 This book is sold subject to the standard conditions of the Net Book Agreement. The paperback edition of this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired 'Out, or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser.

To my Father

Contents List of Figures Foreword by Joan Robinson Preface to the First Edition Preface to the Second Edition viii ix xv XIX Part One 1 Preparing the Way 3 2 Skeletons of the Past 19 3 Definitions and Assumptions 34 Part Two 4 The Basic Model - the Consumption Sector 53 5 The Basic Model - the Capital Goods Sector 68 6 Golden-Age Growth and Neutral Progress 77 7 The Choice of Technique 87 Appendix 94 8 Exercises with the Basic Model 98 Part Three 9 Value, Distribution and Measurement 111 10 An Alternative Pricing Explanation I31 11 Money Variables, Real Variables and Financial Assets 154 12 An Open Economy 172 Part Four 13 Alternative Post-Keynesian Analyses - I 187 14 Alternative Post-Keynesian Analyses - II 194 15 Where Do We Go From Here? 201 Appendix: Taxation and Expenditure by Government 210 References 221 Index 225

List of Figures 7 A.l Harcourt's diagram showing capital reversal and double switching for two techniques of production 97 10.1 Price level in the consumption sector 132 10.2 Price level with higher ratio of investment to consumption 133 10.3 Pricing for the firm 139 10.4 Pricing at less than full employment 145

Foreword When I came up to Cambridge, in October 1921, and started reading economics, Marshall's Principles was the Bible, and we knew little beyond it. levons, Cournot, even Ricardo, were figures in the footnotes. We heard of 'Pareto's Law', but nothing of the Walrasian general equilibrium system. Sweden was represented by Cassel, America by Irving Fisher, Austria and Germany were scarcely known. Marshall was economics. There is a deep-seated conflict in the Principles, of which Marshall himself was uneasily aware (especially in connection with 'increasing returns') between the analysis, which is purely static, and the conclusions drawn from it, which apply to an economy developing through time, with accumulation going on; but somehow we managed to swallow it all. When I returned to Cambridge.in 1929 and began teaching, Piero Sraffa's lectures were penetrating our insularity. He was calmly committing the sacrilege of pointing out inconsistencies in Marshall, and at the same time revealing that other schools existed (though they were no better). The elders reacted by defending Marshall as best they could, but the younger generation were not convinced by them. The profound inconsistency between the static base and the dynamic superstructure had become too obvious. Professor Pigou, long before, had worked the static element in Marshall's theory into a neat logical scheme. He introduced the concept of the equilibrium size of firms to rescue Marshall from the dilemma between increasing returns and perfect competition. This was being taught as the orthodox interpretation of Marshall, though many points in it were under dispute. Recently I have used Pigou's name as a convenient label for the static element in Marshall and credited Marshall himself with the dynamic element [92]. Perhaps this is too flattering to Marshall. Both elements were present in his thinking and he showed great agility in appealing, in each context, to whichever would best suit his purpose of presenting a mollifying picture of the private-enterprise economy.

x The Reconstruction of Political Economy I worked out a theory of imperfect competition, inspired by Sraffa's article (published in English in Economic Journal, December 1926) on 'The Laws of Returns under Competitive Conditions', against the background of Pigou's static analysis. My aim was to attack the internal logic of the theory of static equilibrium and to refute, by means of its own arguments, the doctrine that wages are determined by the marginal productivity of labour. Meanwhile a much more powerful attack on equilibrium theory was being mounted by Keynes. It was obvious enough in real life that a free market does not guarantee equilibrium, for the world economy had fallen into the great slump, but it took a long time to find out where the mistake lay in the theory and to sketch out a new approach. Unbeknownst to us, Michal Kalecki, writing in Polish, evinced the same solution, in the main, as Keynes. His version of the General Theory of Employment was less rich than Keynes's but in some respects more coherent. He brought imperfect competition into line with the analysis of effective demand and laid the basis for what is nowadays called the 'Cambridge' theory of distribution. In 1940, as a distraction from the news, I began to read Marx. Seeing Capital in the light of the Keynesian revolution, I found much in it that the professed Marxist seemed to have overlooked. They had replied to Keynes with the slogans of sound finance and the gold standard. Only Kalecki had seen the point of the schema of expanded reproduction in Volume II of Capital and he had built a 'Keynesian' theory on them. For me, the main message of Marx was the need to think in terms of history, not of equilibrium. This, of course, was the message of the Keynesian revolution too, but I had applied it only in short-period terms. I had been so much under the influence of Pigou's methodology that I had written a 'Longperiod Theory of Employment' in terms of comparisons of stationary states with different rates of interest. Now I began to catch a glimpse of an approach that would emancipate us from the dominance of equilibrium analysis. As for the labour theory of value, I could not make out what the fuss was about. It seemed obvious that the transformation problem, that is, finding a system of prices yielding a uniform rate of profit for all capitalists, was just a puzzle (though it was not solved till Sraffa showed the way). Nothing of importance could tum on it.

Foreword Marx had a way of expressing his views of history and politics in bits of algebra. I did not think that pointing out and correcting mistakes in the algebra could affect the force of Marx's view of history and the powerful political doctrine that he derived from it. The 'law of value' in the sense of the diagnosis of exploitation in the capitalist system as a whole cannot stand or fall with a theory of the prices of particular commodities. But some fundamentalist followers of Marx were offended at the mere suggestion that his algebra needs to be corrected. There was an important point of substance, however, mixed up in the algebra. If there is a long-run tendency for the rate of profit to fall, there must be a tendency for wages to rise in terms of commodities. This, not the transformation puzzle, is the inconsistency between Volume I and Volume III, and it has never been satisfactorily sorted out. The other difficulty in Marxian theory is the relation of moneywage rates to prices. If Marx really believed that trade unions could raise the share of wages in the value of output merely by raising money-wage rates, why did he think it necessary to have a revolution? It seemed to me that Keynes, or rather Kalecki, was a great help to the Marxists in clearing up contradictions - whatever the fundamentalists may say. Certainly it is not so easy nowadays for the academic economists to dismiss Marxian theory as pure rubbish, which they were formerly happy to do. After the Second World War, the economists accepted Keynes, and governments accepted responsibility for maintaining a high and stable level of employment, each for its own national economy. The centre of interest then shifted to the problem of long-run growth. Responding to the challenge of Roy Harrod's Towards a Dynamic Economics I set about to try to make a generalisation of the General Theory. A long-run theory requires to deal with the rate of profit on capital. Keynes had been concerned only with the state of expectation about future profits - the 'marginal efficiency of capital'; Kalecki dealt with the share of gross profit in the value of output; Marx appeared to have two incompatible theories; Harrod seemed to confuse the rate of profit with the rate of interest on rentier wealth. Sraffa's introduction to Ricardo's Principles gave invaluable hints, but the treatment of the subject in his Production of Commodities by xi

xii The Reconstruction of Political Economy Means of Commodities was still unpublished. Where was a theory of the rate of profit on capital to be found? A rate of profit is a return pro rata to a quantity of capital. I posed the question - does a quantity of capital mean a list of specified machines, stocks of materials and means of subsistence; or does it mean a sum of money, of which the purchasing power over investible resources depends on wage rates and prices? To my surprise, this question aroused a fury of indignation. 'Everyone except Joan Robinson knows perfectly well what capital is.' It became a standing joke in the profession - 'As Mrs Robinson is not in the room, I suppose I may speak of a quantity of capital.' But the only answer to my question that anyone offered was to say that if the capital goods were 'malleable' the question would not arise. No amount of teasing could shake this position. The description of capital goods as putty, jelly, 'steel', leets or ectoplasm was cheerfully adopted when expounding new growth models; and although, after the 'reswitching debate' in 1966, Professor Samuelson had to admit that he had lost faith in jelly, these descriptions are still being used today. The argument was not really anything to do with the problem of valuing capital. It was concerned with reconstructing a pre Keynesian equilibrium in which the accumulation of means of production is governed by the desire of society as a whole to save, and where full-employment is guaranteed by real wages finding the level at which the existing stock of jelly will be spread out or squeezed up to employ the available labour. To reconstruct equilibrium, it is necessary to escape from history. The purpose of 'malleable capital' is to overcome the difference between the future and the past. The situation in the teaching of economic theory at the present time is unsatisfactory, not to say shameful. I have been trying for the last twenty years to trace the confusions and sophistries of current neo-neoclassical doctrines to their origin in the neglect of historic time in the static equilibrium theory of the neoclassics and at the same time to find a more hopeful alternative in the classical tradition, revived by Sraffa, which flows from Ricardo through Marx, diluted by Marshall and enriched by the analysis of effective demand of Keynes and Kalecki. The economics of equilibrium is a Moloch to which generations

Foreword of students are still being sacrificed. I hope that I have been able to rescue a few here and there, not in order to offer them an easy life but to appeal for their help in the serious task of developing an analysis that deals with the economic problems of the world in which we live. JOAN ROBINSON xiii

Preface to the First Edition Political Economy, as it was understood by the Classical economists, stands today discredited by both the neoclassical theory that took its place and by the Keynesian short-period theory of effective demand. The 'neoclassical synthesis' which integrates Keynesian short-period and neoclassical long-period theory leaves the Classics in the stone-age of economic science, historical ancestors without modern application. To historians of economic theory the triumph of the neoclassical synthesis should appear as most inappropriate, for the basis of Keynes's formal training in the economics of Ricardo and Marshall left a strong imprint on his own contributions to economic theory. It would seem more appropriate to link Keynes's own theory with the long-period theory of the classical political economists. The possibility of such a relation has become obvious with the post Keynesian construction of a long. period theory based on Keynes's short-period theory which closely resembles, in both content and concern, the classical theory of Ricardo and Marx. Thus I have seen fit to call the combination of Keynes's shortperiod theory and the post-keynesian extension of that theory into long-period terms a Reconstruction of Political Economy in the sense of the Classics. A reconstruction in the sense that the approach shares the problems and concerns of classical Political Economy with the inclusion of the theory of effective demand in a monetary economy (or without Say's Law and the Quantity Theory of Money). In this sense a Keynesian theory has no place in a neoclassical synthesis and cannot be attached to the neoclassical concept of equilibrium. The relation of post-keynesian theory to the Classical is quickly seen from the emphasis that this theory places on social relations, the distribution of income and the analysis of an economy that changes and grows over time. This Keynesian reconstruction of Political Economy was not at first apparent to readers of Keynes and owes most to the 'generalisation of Keynes's General Theory' by Professor Joan Robinson. In the presentation of the post-keynesian reconstruction of Political

xvi The Reconstruction of Political Economy Economy I have relied mainly on the works of Professor Robinson, trying to show how they evolved towards a full-fledged alternative to the currently orthodox 'neoclassical synthesis'. That this evolution was not an instantaneous or simple procedure is obvious from the fact that we are now nearly forty years away from the birth of the General Theory but the 'Keynesian revolution stili remains to be made both in teaching economic theory and in forming economic policy' [94]. The broad historical evolution of Professor Robinson's ideas is traced out in the Foreword that she has kindly provided for this book. The major portion of this book is based on lectures that I have given for a number of years to a wide variety of students in a number of different countries. The format attempts to meet three specific problems that I have most widely encountered in the teaching of post-keynesian theory. First of all, most students are well, if not too well, schooled in the nuances of the neoclassical synthesis. This creates a number of communications problems, for much of the nomenclature of the two approaches is the same but has very little in common in meaning. It thus is necessary to place the theories in historical context and to highlight the widely differing intentions of a common terminology. Part One of the book is used for this purpose and is probably the most important and most difficult for the student to grasp. It tries to free the reader from preconceived ideas and methods in order to take up the post-keynesian approach afresh. Second is the problem of time, but here meant in the sense of study time. The post-keynesian literature is large, and not always well integrated. Part Two thus attempts to put the basic method, mechanisms and propositions in their barest and simplest form, trying to prepare the reader for the more difficult original works. Thus the presentation is in no sense complete, but tries to give the flavour of the post-keynesian method. The third problem is the tendency for students (as well as professional economists) to be sceptical about the generality of the theory. Just as Keynes was incorporated (wrongly) as a special case dealing with a special problem (the slump), the post-keynesian theory is often criticised as being not fully general or positive, but only critical and negative, e.g., related only to the criticism of neoclassical capital theory. Thus interest in the theory is limited because it is only a negative critique, not a fully positive alternative approach. This is

Preface xvii to miss the potential contribution of the approach. It is my view that it is such an alternative and should be approached as such. Part Three tries, feebly, to show applications of the alternative approach to various problems. It is not my intention to provide, in toto, this alternative. Much of the work has been undertaken, much is still to be done. Economic theories are not produced pre-packaged to be picked off shop shelves. To ask for an alternative to the neoclassical theory comparable in precision and beauty is naive. But the potential for a truly alternative approach exists, the problem is to expose and explain this potential so that further positive applications can be made. This cannot be done if everyone waits for someone else to do the work. If this book can create an interest in further applications of the post-keynesian approach it will have more than served its purpose. Although the analysis presented in Part Two of the book is based primarily on the contributions of Professor Robinson, it must be recognised that she has not been the only economist to contribute to the post-keynesian revival of political economy. Part Four takes up differences and similarities of the major alternative approaches, all of which are based on the work of Keynes. The discontent with the equilibrium approach of the neoclassical synthesis, and general equilibrium theory in particular, continues to grow. The reader is directed to Kornai's Anti-Equilibrium [40] for a critique by a practioneer of the general equilibrium theory, and a positive alternative approach that has much in common with the post-keynesian approach. Recent works by Kaldor [32] and Harrod [20] which appeared too late to be dealt with in the text are also recommended. As I have already mentioned, the book presents the post-keynesian theory in a form that I have found useful in the class-room and the lecture hall. It is in this sense a very personal interpretation, and is not meant to rework or replace the original contributions, but to prepare the way for their study and further application. To the extent that this presentation is not misleading or misrepresentative I have greatly benefited by aid and criticism from Joan Robinson, P. Davidson and G. C. Harcourt. I am also extremely grateful to J. L. Eatwell for his comments on the revised draft, especially in relation to chapter 9 which I have been able to, hopefully, much improve as a result of his suggestions. For the time and effort that has been given I am greatly indebted. Their good nature, however,

xviii The Reconstruction of Political Economy does not imply full or complete agreement with the manner in which I have treated and applied the material presented. I especially thank Professor Robinson for providing the Foreword. I need not add that this does not implicate her in the sense of providing a seal of approval for the present work, for which I take sole responsibility. J.A.K.

Preface to the Second Edition In the not too distant past a new edition offered the possibilities of rather substantial revision of material, either in line with changes in the author's point of view or in response to comment and criticism. Modern printing technology makes such changes a luxury available only at prohibitive cost in terms of selling price. Under these constraints I have had to be content with the correction of the most glaring printing and editorial errors. This edition, however, differs from the first by the inclusion, as an Appendix, of what was, in an initial draft, the final chapter of Part Three. This material, which deals with government taxation and expenditure, was not included in the final version for I felt that the assumptions necessary to keep it to a length consistent with the treatment of other subjects treated in Part Three were overly restrictive. To work out the full effects under more general assumptions would have required space out of all proportion to their general significance. As I was eventually persuaded to include the material in the Italian edition, and since additions are less costly than changes, I have decided to include the material here as an Appendix. The reader is, however, asked to take seriously the caveats given there.concerning the analysis of different types of taxation (incomes, persons, values and volumes) when the simple assumptions are relaxed. J.A.K.