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*> Hello Andrew.
*

*> Thanks very much for stating your argument about Grossmann so clearly
*

*> which I think is correct. The breakdown is because of insufficient
*

*> surplus value, and hence, as you suggest, excess demand If I may I would
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*> like to show my critique of Grossmann using your equations. You may or may
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*> not agree.
*

*>
*

*> You assume a single product corn and state your model as:
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*>
*

*> W[t] = C[t] + V[t] + S[t] (1)
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*>
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*> K[t] = W[t] - C[t+1] - V[t1] (2)
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*>
*

*> W is total value, while C, V, and S are constant and variable capital and
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*> surplus-value. K is capitalists' personal consumption.
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*>
*

*> Breakdown occurs when capitalist consumption becomes negative:
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*>
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*> K[t] < 0 (3)
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*>
*

*> which implies that
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*>
*

*> W[t] < C[t+1]+V[t+1] (4)
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*>
*

*> Now introducing my own modifications, which I don't think are
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*> controversial, let:
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*>
*

*> C[t+1] = C[t] + dC (5)
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*>
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*> V[t+1] = V[t] + dV (6)
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*>
*

*> where dC and dV are the changes in constant and variable capital between
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*> periods t and t+1. Substituting (5) and (6) together with (1) into
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*> equation (2):
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*>
*

*>
*

*> K[t] = C[t] + V[t] + S[t] - C[t] - dC - V[t] - dV (7)
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*>
*

*>
*

*> Cancelling out:
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*>
*

*>
*

*> K[t] = S[t] - I[t] (8)
*

*>
*

*> where I[t] = dC + dV, that is investment I[t] is equal to the change in
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*> constant and variable capital. Equation (8) shows that capitalist
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*> consumption (K) is the difference between total profits (S) minus
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*> investment (I). Now this identity is open to interpretation. Grossmann
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*> views capitalist consumption as a residual amount of total profits left
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*> over after investment has been accounted for. An alternative perspective,
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*> following Kalecki, is to write the equation as:
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*>
*

*> S[t] = I[t] + K[t] (9)
*

*>
*

*> For Kalecki capitalists 'as a class determine by their expenditure their
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*> profits and in consequence the aggregate production' (Kalecki's Collected
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*> Works, Vol II, p. 25). They earn what they spend instead of spending what
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*> they earn. Profits in equation (9) are therefore determined by investment
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*> and capitalist consumption, by the (productive and unproductive) spending
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*> of capitalists. From this perspective capitalist consumption (the main
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*> part of it) is autonomous, instead of being treated as a passive residual
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*> as in (8). Kalecki has the model
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*>
*

*> K[t] = B* + bS[t] (10)
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*>
*

*> Where B* is the autonomous component of capitalist consumption and b is
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*> the remaining smaller part which depends upon profits. Substituting (10)
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*> into (9) we have by manipulation:
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*>
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*> S[t] = (B*+ I)/(1-b) (11)
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*>
*

*>
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*> In this model capitalist consumption and investment generate profits via
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*> the multiplier 1/1-b. Instead of treating capitalist consumption as a
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*> passive residual it is an active component in the generation of profits.
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*> As Marx writes in Theories of Surplus Value, 'the capitalists can consume
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*> an increasing part of their revenue' and 'to a certain extent therefore
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*> they also constitute a market for one another (Marx, 1969, p. 482).
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*>
*

*> As is well known, Kalecki's model is an interpretation of Marx which
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*> represents a monetary theory of production. You assume, Andrew, a corn
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*> model to represent Grossmann, and I think this is very apt. Grossmann
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*> treats surplus value like a surplus of corn which each year is available
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*> for redistribution. If there is not enough available then, as you rightly
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*> state, there is excess demand, and the system breaks down. If, however,
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*> we view capitalism as a monetary economy, then capitalists are not
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*> constrained by such a physical surplus. Capitalists spend money M which
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*> via M-C-M' generates the funds which are available via the circulation of
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*> money capital to fund their consumption requirements. In a monetary
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*> economy it is capitalist (money) spending which drives the system not the
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*> physical surplus. Once we take this viewpoint it is nonsensical for
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*> capitalist consumption to drift towards zero and become negative. If we
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*> view some of (money) capitalist consumption as autonomous then the
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*> multiplier generates additional profits which provide the necessary
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*> funding.
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*>
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*> As Marx makes clear in Capital Volume III, it is not a shortage of surplus
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*> value that provides the problem for the system, but the 'monstrous
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*> proportions' of surplus value (Marx, 1981, 352). The onset of crisis is
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*> likely because this volume of surplus value cannot be realised. I agree
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*> with you, Andrew, that the problem in Grossmann is one of excess demand,
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*> but in Marx (and Kalecki) the problem is one of insufficient demand.
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*>
*

*> Sorry that this is so long, but would very interested in your response.
*

*>
*

*> Andrew (Trigg)
*

*>
*

*> In reply to OPE-L 3203:
*

*>
*

*> Hi, Andrew.
*

*>
*

*> You wrote:
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*>
*

*>
*

*> "I'm coming into this debate late but am I right in hearing that Andrew
*

*> is arguing that the Grossmann/Bauer model breaks down because of excess
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*> demand."
*

*>
*

*> Yes.
*

*>
*

*> "The reason it breaks down I would argue, is that demand is not modelled
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*> at all. Instead of the bulk of capitalists' personal consumption being
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*> treated as autonomous - Kalecki shows this empirically - it is treated as
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*> a passive residual which shrinks to nothing."
*

*>
*

*> It is true that capitalists' personal consumption is treated as a
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*> residual. But that isn't the same thing as demand. You are forgetting
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*> about the productive demand -- demand for means of production and wage
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*> goods. All surplus-value is assumed to be "realized," so *total supply*
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*> equals *total* demand. Demand for means of production and wage goods is
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*> given exogenously -- the former grows at 100.a., the latter at 5%.
*

*> Since total demand is determined by total supply, and all but one
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*> component of demand is given exogeneously, this last component,
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*> capitalists' consumption, is a passive residual. It is the difference
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*> between total supply and productive demand.
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*>
*

*> Now note that capitalists' consumption becomes *negative* as time
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*> proceeds. The moment at which it becomes negative is the moment of
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*> "breakdown." In other words, the difference between total supply and
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*> productive demand becomes negative. Or, in still other words, productive
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*> demand eventually exceeds total supply. Hence, "the Grossmann/Bauer
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*> model breaks down because of excess demand."
*

*>
*

*> And it really is a matter of excess demand in *physical* terms. I could
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*> develop this point in terms of two departments, but it is easier to work
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*> with one. So assume a single product (corn). The model is then:
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*>
*

*> W[t] = C[t] + V[t] + S[t].
*

*>
*

*> K[t] = W[t] - C[t+1] - V[t+1]
*

*>
*

*> W is total value, while C, V, and S are constant and variable capital and
*

*> surplus-value. K is capitalist consumption.
*

*>
*

*> Breakdown occurs when capitalist consumption becomes negative:
*

*>
*

*> K[t] < 0
*

*>
*

*> which implies that
*

*>
*

*> W[t] < C[t+1] + V[t+1].
*

*>
*

*>
*

*> Now note that the unit value (or price), P, of the commodity at the end
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*> of period t must be the same as its value at the start of t+1, since this
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*> is the same time. Hence:
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*>
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*> W[t] = P[t]*X[t]
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*>
*

*> where X is the physical output (supply) of period t;
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*>
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*> C[t+1] = P[t]*A[t+1]
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*>
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*> where A is the means of production employed (demanded) in t+1; and
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*>
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*> V[t+1] = P[t]*B[t+1]
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*>
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*> where B is the total real wage bill, means of subsistence demanded, in
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*> t+1.
*

*>
*

*>
*

*> Plugging these relations into our inequality:
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*>
*

*> W[t] < C[t+1] + V[t+1]
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*>
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*> P[t]*X[t] < P[t]*A[t+1] + P[t]*B[t+1]
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*>
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*> X[t] < A[t+1] + B[t+1].
*

*>
*

*> So "breakdown" occurs when physical supply, X, falls short of physical
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*> demand for means of production + subsistence, A + B.
*

*>
*

*> The reason this occurs, fundamentally, is that demand for means of
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*> production grows at a faster rate than supply of total output. Recall
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*> that
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*>
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*> C[t+1] = Co(1.1)^(t+1),
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*>
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*> so that
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*>
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*> A[t+1] = {Co/P[t]}(1.1)^(t+1).
*

*>
*

*> And recall that
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*>
*

*> W[t] = Co(1.1)^(t) + (Vo + So)(1.05)^t, so that
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*>
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*> X[t] = {Co/P[t]}(1.1)^(t) + {(Vo + So)/P[t]}(1.05)^t.
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*>
*

*>
*

*> There must therefore come a time when demand for new means of production
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*> outstrips total supply:
*

*>
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*> A[t+1] - X[t] > 0, i.e.,
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*>
*

*> {Co/P[t]}(1.1)^(t+1) - {Co/P[t]}(1.1)^(t) - {(Vo + So)/P[t]}(1.05)^t > 0
*

*>
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*> 0.1*Co(1.1)^t - (Vo + So)(1.05)^t > 0
*

*>
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*> (1.1/1.05)^t > 10(Vo + So)/Co.
*

*>
*

*>
*

*> So, as I said, it is all a matter of excess demand in physical terms.
*

*>
*

*>
*

*> Andrew Kliman
*

**Next message:**Fred B. Moseley: "[OPE-L:3282] Re: Two prefaces"**Previous message:**Allin Cottrell: "[OPE-L:3280] Re: Re: Re: Re: Re: Re: starting points"**Messages sorted by:**[ date ] [ thread ] [ subject ] [ author ]

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