Post-Keynesian factor shares
Note: I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me. I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂
We are now in an area which is getting well outside my area of knowledge, so I’m hoping these essays will help tighten me up 🙂 . I see there is an essay on Post-Keynesian income distribution work and a following one on Neo-Ricardian income distribution work (which I am marginally more familiar with) – I had thought they were the same thing, so hopefully I learn the difference while reading 🙂
I am sure many of you know more than me – and I’m more than happy to have things explained to me as I’m keen to learn. Just remember, the goal here is to explore ideas about factor shares and what they mean in a distributional sense – not to dig too far into ideology or policy.
The paper starts off by saying Post-Keynesian distribution theories have three distinguishing features (although individual models differ, these factors are shared by Post-Keynesian distribution models):
- Investment is an important determinant of profits
- Investment is independent of savings, savings adapts to investment
- The propensity to save out of profits is greater than the propensity to save out of wages.
The author is focusing on three writer, Kalecki (which is states focuses on the short term, with an interest in understanding cyclical behaviour through a series of short-terms), Kaldor, and Pasinetti (whose focus are on periods of full employment and normal capacity utilisation – so the idealised long-term). Previous factor share discussion were all focused on the “long-term”, an important point to keep in our pocket.
In the Kalecki model, the author notes we can look at two idealised groups – workers and capitalists. In that environment we have an accounting equation, that wages + profit = investment + consumption of workers + consumption of capitalists. Assuming workers consumer all their income, and that planned and actual investment are equal, this implies profits = investment + consumption of capitalists. Now this should be completely unsurprising, essentially we have a group with no outside capital market (workers don’t save, closed economy) so “capitalists” are choosing to both save (investment) and consume out of current income (profit).
We are told profits are set by the capitalists choice of investment and consumption – however the author is quick to point out that it isn’t really a “choice” in the collective sense, instead we have a type of competitive assumption for individual firms (where they are too small to influence aggregate outcomes) and there simply exists a relationship between an level of investment and aggregate profit outcomes as a matter of definition. Note: It is very important to clear up “choice” here – especially since it is not chosen by anyone. It is one of those grammatic quirks from old authors, given their implicit counterfactual of a command and control economy.
So in this context, profitability for an individual firm appears “fixed” over their investment-consumption profile, but in aggregate it is not. Note: This is not a result that solely holds for capitalists – if we allowed wage earners to save this would hold for them. This is where the “worker”-”capitalist” distinction starts to go off though, once workers are saving they become capitalists 😉
Expanding to look at factor shares, my impression is that Kalecki’s key point is that – for a given schedule of returns on investment and a surplus of available labour (which keeps nominal wages fixed) – a lift in aggregate investment leads to a higher prices, profit share, output and lower real wages. The labour market assumptions appear strict here, and unless it is through collusion there is no clear mechanism for why firms collude to increase investment. I’d also note that this is contradictory to industrial economics, where firms push to “precommit to higher output through investment” leads to lower prices and a decline in firm profitability.
I am also very uncomfortable with the talk about investment and consumption determining profits – what does this really mean? It would make sense for expected future profits to determine planned investment and current consumption (Note it does not make sense for investment and consumption to be shifted to adjust expected future profits unless the firm has market power) – but giving a one-way description to variables that are codetermined is messy. Remember, income determines consumption and investment while consumption and investment determine income – that is the general messiness of macroeconomics, hence the importance of clear behavioural assumptions 😉
With how it is framed in the essay, and I hate to say it, I actually find this a very poor basis for “understanding” or “explaining” profit shares even in the short term. We have a passive labour market, a situation where, for some reason, firms coordinate to all invest more lifting output and prices (as marginal costs are rising and firms are competitive) – lowering real wages (by increasing prices) but increasing profit. There is definite behaviour missing: why is labour supply completely inelastic with regards to the real wage? If firms can commit in one thing, why can’t they commit to be anti-competitive instead?
Note: I found this particular presentation of the concepts unpersuasive, I’m open to having people discuss other ways of viewing it to try and persuade me. I’d note that the “cartel” and “monopoly” work sounds interesting, but the above writing was on the section premised on competition.
Kaldor’s focus is instead on long-term outcomes, with full capacity and labour utilisation (due to adjustments in the real wage and profit margin). Furthermore, the propensity to save from profit is higher than the propensity to save from labour income. In this framework, with fixed propensities to save, the income shares depend on the ratio of investment to output.
Kaldor then asks “what determines the investment to output ratio” and “is it independent of the profit share” (if not there is an endogeniety problem).
At this point the discussion on Kaldor ends with these questions left open.
The discussion of Pasinetti starts by adding the fact that workers also make profit income from their past savings in Kaldor’s discussion. However, even given this he is able to show that, over a very long period of time, we would reach a state where the rate of profit is determined by the saving propensity of capitalists alone – not the saving propensity of workers.
I feel as if I need to read this paper directly to go through the derivation, as this seems to assume that the long-term investment to capital stock ratio is independent of the propensity of workers to save – which I am uncertain about.
In terms of factor distributions it follows that the greater the rate of profit in an economy the higher the capital to output ratio is, and the greater the output per worker (labour productivity) the higher real wages are. To give clarity, these are long-term equilibrium relations (with an assumption around exponential growth included) – not descriptions of the path of getting there. Interesting stuff though.
Conclusion
I am a bit uncertain about what I was supposed to get out of this essay. If “neo-classical theory” is the analysis of an aggregate production function, then the prior writing included what seems like a strict class based decomposition of factors, based on a behavioural relationship I’m uncomfortable on, followed by two pieces working on factors shares that could be in terms defined over aggregate production functions.
The analysis of profits, investment, and brief bits on non-competitive behaviour are all useful things – but I am still uncertain how this doesn’t fit into the “neo-classical paradigm” we ran into in an earlier essay.
Another point I think needs to be made clear is that we have to be directly up front about timing. Either aggregates are simultaneously determined, or there is sequential determination that has to do with expectations and/or the physical relationship between aggregates (which can often run both ways through time as a result). The discussion, especially with regards to the first essay, was very patchwork and unsatisfactory on this.