[OPE-L:3490] Re: accumulation: disequilibrium dynamics

Steve Keen (s.keen@uws.edu.au)
Sun, 20 Oct 1996 19:20:13 -0700 (PDT)

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No argument with Jerry here,

and this is one reason why aggregative models of the type I'm currently
working on (where all firms are aggregated into one sector) can't give as
rich a picture as you could give if you worked at an individual firm level.

At aggregative levels, all you can do is presume the impact of competitive
forces on industry aggregates such as markups, etc.--so that the situation
in Jerry's example would be modelled as probably not indicating a change in
markups (though there can be effects from tech change, inter-sectoral
forces, etc.).

But there's reason to be wary of fallacies introduced by simplifying
assumptions at this level too. The mention of "homogeneous products" below
is one. If you work at the individual firm level, then IMO you're beholden
to work with heterogeneous products as well, and define industries by breaks
in relative elasticities of demand.

I think these considerations take us out of the realm of mathematical
modelling and into computer (evolutionary) modelling.



>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,
Steve Keen
Senior Lecturer
Economics & Finance
University of Western Sydney
PO Box 555 Campbelltown NSW 2560
s.keen@uws.edu.au (046) 20-3254 Fax (046) 26-6683