Post-Keynesian Macroeconomics

Oct 26, 2020 in Economics Essays
Post-Keynesian Macroeconomics Essay Sample

Class Conflict and Capitalist Economies

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Post-Keynesian macroeconomics can be summarized in six key propositions. First, employment and unemployment are influenced by the product market as opposed to the labour market. Second, involuntary unemployment is real and often results from a deficient demand as opposed to imperfections in the labour market. This implies that removal of imperfections of the labour market will not necessarily reduce the level of involuntary unemployment. Third, post-Keynesian macroeconomics see aggregate supply and aggregate demand as important aspects of macroeconomic theory. Fourth, it is important to differentiate between monetary and barter economy. Fifth, in the quantity theory of money, relationship starts from right as opposed to the left. Finally, according to post-Keynesian macroeconomics investors determine the level of investment in the capitalist economies (Atzeni 2013). In the Kaleckian model, the labour conflict and competition in the labour market are seen as distinct economic factors, which have different effects and operate via different channels. This seeks to understand how class conflict impact capitalist economies. In achieving this, class conflict operates via the labour market under assumption that there is a negative relationship between unemployment and capacity utilization. In this context, class conflict act as a proxy the rate of unemployment.

Kaleckian Model

Competition between firms affects income shares and mark-up whilst competition in the labour market affects income distribution between managers and workers. In return, income distribution affects aggregate demand of the labour market, which is different from the effects of competition on the labour market. According to Kaleckian model, it is important to make a distinction between capitalists and workers as well as capitalists investment expenditure. In essence, workers spend their income while capitalists gain from what they spend (Odekon 2010). The assumption here is that in closed economies with little government interference, capitalists investment expenditure is equal to the total amount of profits. However, in a complex and more realistic model, trade surplus and government deficit must be factored in. In such scenario, aggregate profits are dependent on capitalists investment expenditure plus trade deficit and budget deficit (Sawyer, 2008). On the other hand, profit share is dependent on capitalist investment expenditure and the impacts of class conflict on the labour market. It is important to note that profit share in capitalist economy is generally higher than the wage share.

According to Kaleckian approach, functional income distribution in a capitalist economy is dependent on a mark-up pricing of firms in uncompetitive markets. This is especially true for the industrial sector. In the primary sector, on the other hand, any change in the demand causes changes in prices unlike in the former sector where shifts in demand lead to shifts in the level of output and extension of the capacity utilization. This implies that under this approach capacity utilization is treated as an endogenous variable (Sawyer 2008). In a well-developed capitalist economy, the Kaleckian approach can be used to explain the effect of class conflict on the income redistribution, investment expenditure and consumption expenditure. It is also worth noting that in a labour market where full employment has not been achieved, supply also can be used as a variable and prices as being dependent on the mark-up of unit costs. Alternatively, normal cost pricing or mark-up pricing can be used for cost pricing.

Under the Kaleckian approach, it is assumed that a mark-up is covering fixed capital depreciation and overhead labour costs as well as gross profits including dividends and interests. This helps to consider increased salaries of the capitalist managers. Given a specific mark-up and a unit variable cost for a full-capacity output, both retained profits and gross profits will fluctuate pro-cyclically to counter the counter-cyclical variation in the unit overhead costs (Galbraith 2009). Therefore, the price of output in the industrial sector will be a function of a mark-up, nominal wage rate, labour-output ratio and the unit price of inputs. Assuming that technical production conditions remain constant, a shift in the gross profit share will be caused by changes in a mark-up, rising costs of raw materials, decreased nominal wage rate or increased exchange rate (Lavoie 2015). A decrease in nominal wage rate implies that regular workers will earn less income as compared to capitalist managers, who will continue gaining from retained profits while the value of shareholders will continue to increase as well. Household income continues to shrink prompting financial institutions to step in and cater for the situation through credit facilities. This, in turn, will stimulate a relative growth in consumption expenditure as compared to investment expenditure.

Income Redistribution, Investment and Consumption Expenditure

Arguably, capitalist economies consist of two components. The first component is a cartelized sector characterized by constant profit margins. The other component is a more competitive sector characterized by fluctuating profit margins with prices rising and falling during the economic booms and recession respectively. Competition in the cartelized sector is based on increasing productive capacity rather than prices. In this context, during the economic boom the sector experiences excessive capacity, which consequently reverses the boom. This results from stable profit margins, which leads to a relative decrease in demand as compared to production capacity. This also results in reduced employment, which causes more unused capacity. In addition, rising unemployment causes decreased demand where firms belong to the competitive side of the economy (Kriesler 2016). This also stimulates a fall in profit margins and prices, which implies that the output in the second sector will not decrease with the same magnitude as in the cartelized sector.

As opposed to exemplifying rationalism as a basis for a planned society, a cartelized economy faces numerous challenges during crisis. It has been argued that economic depression leads to decreasing wages, which, in turn, leads to reduced production costs and a subsequent rise of supply. A higher reduction of wages than prices will lead to an accumulation of unsold products hence the supply surplus. This implies that consumption expenditure will increase as compared to investment expenditure. However, if decreased aggregate profits is a result of a relatively decreased output, the value of output for every unit of capital will tend to decrease leading to decreased profits (Shaikh 1997). However, it is worth noting that a fall in the level of investment does not necessarily cause an increase in the level of unemployment. Rather, such a change can lead to a rise in the level of employment because the demand for products increases. Still, the distribution of wages will tend to remain unequal and any conflict in the labour market may result in a rising level of employment.

Capitalisms basic tenet is investing money in the form of capital. As firms invest more of their profits, the economy expands. However, this expansion is attained by shifting costs as capitalists pay smaller wages to the workers facilitating push and pull forces. In this regard, workers either individually/covertly or collectively/overtly through strikes, occupations or slowdowns often resist wage reductions. Over the years, capitalism has led to a decrease in the level of income share from labour. This has been caused by three factors: a change in the sectoral economic composition; increased salaries of capitalist managers and increased cost of production caused by high level of profits claimed by the owners of the production means; and reduced bargaining power of trade unions. Along with current imbalances, shifts in income distribution and deregulation of financial markets have resulted in numerous economic challenges especially for the common labourer. Today, income is redistributed to cater for the salaries of capitalist managers and profit needs of the firms. More importantly, there has been a significant shift in the roles played by financial institutions, actors, and markets, which determine the performance of both local and international economies.

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Capitalist economies are dominated by increased control of financial markets through three major channels. First, such economies are characterized by increased gross profit shares including but not limited to interest payments, dividends and retained profits. This, in turn, has led to a decrease in labour income share and increasing disparity in salaries of capitalist managers and normal workers, which affects household and personal income. Second, there has been an increase in the level of power held by the shareholders as compared to the power od workers and firms (Stockhammer 2015). In addition, the level of return on equity has risen as well as bonds at the disposal of owners of the production means. Equally, the interests of shareholders align with the interests of management as evident by the increasing number of stock option programs, bonuses and short-run performance based pay schemes. This has also caused reduced incentives in relation to investment in the real capital and the firm in general while financial investment has increased over time. The tendency to increase shareholders value through share buybacks and favour of financial investment have negatively affected the abilities of firms to invest in real capital stock enhancing productivity. The final channel is debt-financing and wealth-based consumption, which create a potential to prevent depressive effects of demand on financial investment. These effects result from the redistribution of income and its influence on real investment. The availability of credit opportunities from existing financial institutions implies that consumption will rise in relation to income, which in turn stabilizes aggregate demand (Shaikh, 1977). On the other hand, this also leads to an increased debt-to-income ratio for private households thereby escalating the financial fragility of the entire economy.

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The aggregate demand in modern capitalist economies is largely dependent on an increase in a debt-based private consumption. In other cases, countries have used mercantilist export-based strategies to stimulate demand and to counter redistribution of labour income. In either case, owners of the production means end-up benefiting more than regular labourers. Further, the interests of the top management are aligned with the interests of the shareholders, which creates a class conflict in the form of resistance (Medick 2016). In such scenario, the top management is motivated to make financial investments mainly in the form of dividends and buyback of shares rather than invest in real capital. This also leads to a decline in investment expenditure and a short-run aggregate demand.


According to post-Keynesian macroeconomics, employment in a capitalist economy is dependent on the product market as opposed to the labour market. Conflict in the labour market plays an important role in determining firms approaches to investment decisions and households consumption behaviour. With increased focus on top managements salaries and shareholders value, firms are rapidly shifting from investing in real capital toward focusing on financial investment. Equally, the labour income shares have declined while inequality of distribution of both household and personal income has increased. In essence, lack of incentives to promote capital and financial investment resulting from unequal income distribution has led to reduced investment expenditure and increased consumption expenditure. Since workers earn less, financial institutions have increased their efforts to provide households with credit facilities. In turn, this has instigated increased consumption expenditure financed through the latter type of investment. Other factors that have contributed to the redistribution of income in capitalist economies include deregulation of both labour and financial segments of the economy, reduced governments intervention and globalization of the finance sector.

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