[OPE-L:3486] Re: accumulation: disequilibrium dynamics

Gerald Lev (glevy@pratt.edu)
Sun, 20 Oct 1996 08:09:39 -0700 (PDT)

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Since Steve K made reference to "effective demand" in [OPE-L:3482], I want
to take this opportunity to write about a topic that I think is very much
related to our discussions on the FRP and forms of technical change. Since
I don't know what Steve's position is on the following, no suggestion is
made on my part that he either agrees or disagrees with what follows.

The question I want to pose is: how will firm decisions related to
technical change and output be affected by both market and aggregate

The traditional Keynesian position is that labor and investment demand are
*derived demands* dependent on the level of aggregate demand. I believe
this to be a fallacy arising from the lack of what some call
"microfoundations" in Keynesian theory (and also related to the lack of a
short-run model for investment behavior).

How will demand affect the decisions made by *individual* business firms
related to technical change and output under *competitive* conditions?

Of course (in reality), firms will attempt to forecast market demand
before deciding on the level of output and investment for the next period.
Of course (also), they have no way of knowing _ex ante_ whether their
demand forecasts will be shown to be accurate _ex post_.

Let's assume, however, that the firm's market demand forecasts *are* shown
to be accurate _ex post_. How will that forecast affect the decisions by
individual firms in the market?

Since everybody on this list seems to like illustrations with numbers,
consider the following hypothetical illustration:

o number of firms in market: 100
o commodity produced: thingamajigs (TJ)

Let's consider the investment decisions by firm Z.

Firm Z *accurately* (by assumption) forecasts the demand for TJ's in the
next period to be 1 million. They produced 1,000 TJs in the last period.
The demand for TJs in the last period was also 1 million.

What do they do? Demand is constant from the last period to the next. Does
that mean that their output level (1,000 TJs) will *also* remain constant
in the next period?


The *individual* firm is not primarily concerned with either market or
aggregate demand. They are concerned primarily with *individual profit*.

Suppose firm Z introduces a new process technology which increases the
productivity of labor and, thereby, lowers their per unit costs of
production. Under these (competitive) circumstances firm Z could decrease
the price of the [homogeneous] commodity TJ that they sell in the market.
They would then, with reason, expect to sell *more than* 1,000 TJs and see
an increase in their profit margin.

While, by assumption, the market demand for TJ's remains constant, firm Z
has every reason to increase output above 1,000. Of course, if the market
demand for TJ's is 1 million, this would present an upward boundary for
output that they would not go beyond in the next period. However, since
they are motivated by *individual profit* they have every reason to
increase technical change and output.

I think this whole questions has relevance for the Okishio discussions.
Yes (*of course*), no firm will take actions which they know in advance
will lower their rate of profit. However, the individual firm is not
motivated by a desire to increase the *general* rate of profit. Their
decisions are motivated by a desire to increase the *individual firms*
profitability. It is for this reason that I don't think that we can
understand the dynamics of the LTGRPD unless we also consider competition
and the distribution of surplus value (and the possibility of surplus
profits by individual capitalists).

In Solidarity,