[OPE-L] Fwd: Aggregate demand (was profits)

From: glevy@PRATT.EDU
Date: Sat Feb 12 2005 - 10:41:43 EST

------------------- Original Message ----------------------------
Subject: Aggregate demand (was profits)
From:    "Jurriaan Bendien" <andromeda246@hetnet.nl>
Date:    Sat, February 12, 2005 10:05 am


I think that what Kalecki and Mandel correctly pointed out as regards the
Keynesian-type theory about the relationship between aggregate demand and
aggregate investment is that it fails to distinguish adequately between
types of demand and types of investment. Specifically,

1. You cannot simply assume that savings are necessarily invested, even if
 the state intervenes, and you have to look at what they are invested in -
 thus, you have to distinguish between idle (liquid) funds, productive
investment, unproductive investment, luxury spending and armaments
spending,  which have differential effects on economic growth.

2. Different social classes have a differential propensity to consume,
invest and save. There really isn't a simple and tight "zero sum game"
such  that, in aggregate, what is not consumed is saved, what is not saved
is  consumed, and what is saved is (productively) invested. In this
respect, I  think Marx's analysis of the parameters of economic
reproduction is still  very insightful; an economy doesn't simply consist
of consumers and  investors as in the neoclassical paradigm, and we ought
to distinguish  between types of investment and types of consumption
differentiated by  social classes.

Additionally, given Okun's law, an increase in labor productivity and in
the  size of labor force can mean that real net output grows without net
unemployment rates falling (the phenomenon of "jobless growth"). Jim
Devine  comments that: "As a result of growing international integration
and labor  abundance, wages are being equalized world-wide, tending toward
the lowest  common denominator. The equalization is modified by
inter-country  productivity differences. But capital mobility tends to
undermine the  productivity advantage of the core countries".
The US CBO commented a while ago that "Because income is either consumed
or  saved, and spending is either consumption or investment, the
current-account  balance equivalently measures the extent to which the
United States saves  more than it invests. Hence, another way of viewing
the fall in the  current-account balance since 1991 is to observe that
[internal] saving in  the United States fell increasingly short of the
amount necessary to finance  domestic investment."
What I am suggesting is that the real relationship of saving, consumption
and investment might be a little more complex, if we look at the empirical
 pattern of saving & investments and imports/exports of commodities and
capital more closely. My own hunch about "surplus capital" is basically
that  there is in reality a plethora of capital (i.e. not really a
"problem of  saving"), it's just that the current concentration,
distribution and  placement of capital does not tend to promote sustained,
cumulative  job-creating growth.

That situation is explained more by profitability relativities,
semi-automation, risk perceptions, the international mobility of capital,
and the desire for guaranteed returns on capital under conditions of
producer and market monopolies. Simply put, modern capitalism seems to
have  lost a lot of its "enterpreneurial drive" and becoming more
"parasitic",  i.e. overall, a lot of "innovation" revolves around
techniques of  speculation, luxuries and securing property rights, rather
than setting up  new businesses producing new products for a mass market
(other than in the  IT sector perhaps) - for business starts data, see

for USA: https://www.dnb.com/newsview/economic.htm#bizstart ;

for Europe:
for Japan: http://www.nli-research.co.jp/eng/resea/econo/eco040401.pdf

As far as I am aware, classical Keynesian-type demand-management first
came  to the "crunch" in the 1970s (the phenomenon of stagflation). In the
case of  New Zealand, which I studied, government stimulation of aggregate
demand in  the 1970s had the effect simply that enterprises raised their
output prices;  and from about 1977 there was an "investment strike" in
the wake of high  inflation and falling profitability. In response, the NZ
government borrowed  overseas to start a whole series of major
infrastructural development  projects (which however did not create a lot
more jobs and faced escalating  costs), but by 1983 the NZ government
instituted a rent freeze, a wage  freeze and a price freeze. In 1984, the
Keynesian program collapsed through  lack of political support, giving way
to an extremely rapid (and
increasingly unpopular) program of market deregulation, privatisation and
abolition of producer subsidies, causing large chunks of the New Zealand
economy to be bought up by the multinationals. However, in the US, a
vastly  larger and wealthier country with a much larger state apparatus,
Keynesian-type programs have lasted much longer.


PS - as regards an historical  retrospective on the growth of the world
market, a useful article is: Cornelius Torp, "Weltwirtschaft vor dem
Weltkrieg. Die erste Welle oekonomischer Globaliserung" [World economy
before the world war; the first wave of economic globalisation] in
Historische Zeitschrift, vol. 279, no. 3, December 2004. Torp refers to
the  research by Angus Maddison, Arthur Lewis, Paul Bairoch etc. and
provides  among other things a table of the value of exports as percentage
of GDP for  advanced capitalist countries 1870-1987, suggesting that for
the advanced  capitalist countries, this ratio on average more than
doubled across a  century. However, Torp points out that such comparisons
do not really answer  the question of what fraction of GDP could be
internationally traded anyway  at different points in time, given that
e.g. in the course of a century, an  increasing proportion of GDP
consisted of services. I could add that export  values are of course not
the same as physical export volumes; the latter may  grow faster than the
former, if average unit output prices decline.

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