A post Keynesian model of growth with di
Socio-Econ. Planet. Sci. Vol. 30, No. 1, pp. 67-76, 1996
Pergmon
0038-0121(95)00026-7
Copyright © 1996 Elsevier Science Ltd
Printed in Great Britain. All rights reserved
0038-0121/96 $15.00+ 0.00
A Post-Keynesian Model of Growth with
Distributional Improvements
JOANILIO RODOLPHO TEIXEIRA and JORGE THOMPSON ARAUJO
Department of Economies, University of Brasilia, 70910-900 Brasilia-DF, Brazil
Abstract--We consider the possibility of utilizing a post-Keynesian approach, based on the tradition of
the Classical-Cambridge-England research programme, to show that a less unequal distribution of income
and a greater output can be complementary and not necessarily conflicting policy targets. Our model
constitutes a basis, we argue, for a post-Keynesian macroeconomic alternative to "orthodox packages"
in their concern with programmes of structural adjustment in middle-income developing countries.
INTRODUCTION
Typical orthodox packages of economic policy to promote structural adjustment in the Third
World are often centered on supply side factors. Their neo-classical-cum-monetarist perspective,
namely the neo-classical underpinnings of the monetarist approach to the balance of payments are
well known [7, pp. 306-308].
Such programmes tend to concentrate on issues associated with allocative efficiency, the role of
price signals or productivity and thrift. They embrace the idea that the process of development is
hampered by low savings and by policy induced market imperfections. Furthermore, based on the
usual pressumption that the rich tend to save and the poor to consume, austerity programmes often
suggest that attempts to redistribute income from profit-receivers to wage-earners lead to a
reduction in total savings and investment, and thus reduce growth.
This vision is reinforced by the Kuznets inverted U-curve hypothesis, stressing a perverse
association between inequality and levels of income in the earlier stages of the development process.
Needless to say, this proposition is not well-suited for policies to alter the alleged conflict between
growth and distribution in the Third World.
Recent studies tend to show that there is little evidence to support the view that the relationship
between growth and distribution is a very simple one. In this regard, Anand and Kanbur's careful
study [1] throws considerable doubt on the empirical status of the inverted U hypothesis.
We propose an alternative theoretical framework to the orthodox macroeconomic policy. Our
post-Keynesian model arises from the belief that an approach rooted in the Cambridge-England
tradition has much to contribute to the understanding and treatment of economic problems
aflicting developing countries. Instead of treating growth and distribution as conflicting goals, we
explore potential complementarities between them, once the policy issues are phrased in terms of
specific targets and specific tools.
Since post-Keynesianism is generally not familiar to most economists with standard economic
training, we first outline its theoretical framework and identify its main influences. Post-Keynesians
tend to focus their attention on macroeconomic aspects of income distribution, capital accumulation, growth and taxation. In the 1950s and 1960s, mainly through the works of the outstanding
Cambridge-England economists, Piero Sraffa, Michael Kalecki, Nicolas Kaldor, Joan Robinson,
Richard Kahn and Luigi Pasinetti, this approach entered a phase of strong development. In the
1970s and 1980s, the theory and approach were extended and refined in the works of R. Goodwin,
H. Minsky, P. Davidson, S. Weintraub, G. Harcourt, P. Sylos-Labini, I. Steedman, S. Marglin,
K. Bhaduri, L. Taylor, D. Harris, A. Eichner and othersA"
?For a survey on the theoretical perspectives of the Post-Keynesians see Harcourt [5], while Baranzini [3] lays the
microeconomicfoundation of the post-Keynesiantheory of income distribution and wealth accumulation. Ref. [4] is a
challenging book dealing with different stands among Post-Keynesians.
67
68
Joanilio Rodolpho Teixeira and Jorge Thompson Araujo
Nevertheless, one can argue that "post-Keynesians have not succeeded in getting their message
through" [5, p.1]. Geoffrey Harcourt suggests that this is due to the "difficult and controversial
economic issues upon which they have embarked, partly because of the diversity of theories which
they have generated and partly because of the ideological suspicions of much of the profession
today" (p. 1).
Despite this, once we take into account the way in which the Structuralists in Latin America
have looked at the question of growth and distribution, it is not surprising to encounter some
common ground between them and the Cambridge school. The synthesis is especially apparent in
the work of Taylor [15].t
Post-Keynesians, in opposition to neoclassical theorists, possess a fundamentally distinct vision
of production and distribution. Among other things, they usually do not employ the traditional
production function and often assume a fixed capital-output ratio. Furthermore, they take into
consideration socio-economic classes (or groups), as opposed to representative individuals. They
also assume a flexible aggregate saving ratio based on socio-economic classes. In their models,
economic and political institutions (governments, for instance) play an important role in
determining economic outcomes.
Taylor [15], as far as we know, was the first to foresee the possibility of utilizing a post-Keynesian
approach, based on the theory of growth and distribution, to deal with short/medium run economic
policy in developing countries. He connected Kaldor's model [8] to the well-known Harrod-Domar
formula [6]. Here, we extend his approach in various directions substituting Kalecki [9] for the
Harrod-Domar growth model as the relevant connection and taking into account a wide variety
of post-Keynesian contributions [2, 10, 11, 12, 19-25].
Among other things, we consider the effective role of governmental ownership of public
enterprises and the profits derived from such an activity. We open the model to international
trade and analyze the possibility of a surplus (deficit) in the Balance of Payments. Most
importantly, we contemplate the government's redistributive role through taxation and public
expenditure. We direct our attention to the problems of economic policy in middleincome developing countries. We assume throughout that money and other asset markets can
be ignored, with interest rates pegged by the monetary authorities. Furthermore, we are
mainly concerned with a "stagnationist" environment in the sense that the term is used by
Taylor [16, p. 72], i.e. wage-led growth, rather than an "exhilarationist" or profit-led growth
environment.:~
THEORETICAL F R A M E W O R K
The Harrod-Domar type of models emphasize the importance of aggregate savings behavior in
the process of economic growth. However, one can extend such an analysis, as Kaldor [8] did, by
disaggregating the sources of savings (S) in national income (Y). Provided that there are different
savings propensities out of wage income (W) and profit income (P), and taking into account that,
in equilibrium, savings equals investment (I), the following conditions must hold:
Y-
W + P,
S = I = scP + SwW,
where sc and s,, are saving propensities from profits and wages,
(0 < sc < 1, 0 < s,, < 1, s~ > sw). Therefore, we have the Kaldorian function:
(1)
(2)
respectively
tActually, Taylor's books [15, 18] as well as his articles [16, 17] play a leading role in this connection.
~/Although it is worthwhile to pursue an inquiry into the links between "functional" and "personal" distribution of income,
to maintain unaltered the post-Keynesian general framework of analysis, we do not explore this connection here. Surely,
the macro-distribution problem--what might be called the division into functional shares whether of income or of assets,
has a complex and important relationship with the size distribution. This is considered in most studies that investigate
the relationship between growth and inequality. However, this link is not well understood. Overall, inequality may be
regarded as a function of inequality within the two social classes, and inequality between them. We assume the case of
zero within-class inequality.
A post-Keynesian model of growth
69
Y
S = i = (s~- sw) ~ +s~
(3)
where s and i are, respectively, the aggregated propensity to save and participation of investment
in the national income.
On the other hand, the significant feature of the model developed by Kalecki [9] to deal with
variation in the rates at which various economic quantities grow over time are well known. His
basic formula for the potential rate of growth of the national income, denoted here by 0, is:
O-
~-t-
~ Ytt -fit+#,,
(4)
where vt is the incremental capital-output ratio, (1/vt), It/Yt is the productive effect of investment,
ft stands for the capacity-reducing effect of continuous obsolescence (wear and tear) and ~ is the
fraction of improving capacity utilization. If it stands for the relative share of productive
accumulation, assuming that it, vt, ft and/~t are constant during the planning horizon, it follows
that:
0 =v-li-f
+lz.
(5)
Substituting (3) into (5) we have:
O = v -l Sw+(So+Sw)~ - ~ + # .
(6)
We are now in a position to reach an interim conclusion about some of the implications of a
change in the share of profits in income, as well as a variation of the wage as a share of income,
on the rate of growth. From (6), ceteris paribus, it follows: aO/d(P/Y)= (sc-Sw)V-l> 0 and
~O/d(W/Y)= -(so-Sw)V -1 < 0 , since P / Y + W / Y = 1 and O
Pergmon
0038-0121(95)00026-7
Copyright © 1996 Elsevier Science Ltd
Printed in Great Britain. All rights reserved
0038-0121/96 $15.00+ 0.00
A Post-Keynesian Model of Growth with
Distributional Improvements
JOANILIO RODOLPHO TEIXEIRA and JORGE THOMPSON ARAUJO
Department of Economies, University of Brasilia, 70910-900 Brasilia-DF, Brazil
Abstract--We consider the possibility of utilizing a post-Keynesian approach, based on the tradition of
the Classical-Cambridge-England research programme, to show that a less unequal distribution of income
and a greater output can be complementary and not necessarily conflicting policy targets. Our model
constitutes a basis, we argue, for a post-Keynesian macroeconomic alternative to "orthodox packages"
in their concern with programmes of structural adjustment in middle-income developing countries.
INTRODUCTION
Typical orthodox packages of economic policy to promote structural adjustment in the Third
World are often centered on supply side factors. Their neo-classical-cum-monetarist perspective,
namely the neo-classical underpinnings of the monetarist approach to the balance of payments are
well known [7, pp. 306-308].
Such programmes tend to concentrate on issues associated with allocative efficiency, the role of
price signals or productivity and thrift. They embrace the idea that the process of development is
hampered by low savings and by policy induced market imperfections. Furthermore, based on the
usual pressumption that the rich tend to save and the poor to consume, austerity programmes often
suggest that attempts to redistribute income from profit-receivers to wage-earners lead to a
reduction in total savings and investment, and thus reduce growth.
This vision is reinforced by the Kuznets inverted U-curve hypothesis, stressing a perverse
association between inequality and levels of income in the earlier stages of the development process.
Needless to say, this proposition is not well-suited for policies to alter the alleged conflict between
growth and distribution in the Third World.
Recent studies tend to show that there is little evidence to support the view that the relationship
between growth and distribution is a very simple one. In this regard, Anand and Kanbur's careful
study [1] throws considerable doubt on the empirical status of the inverted U hypothesis.
We propose an alternative theoretical framework to the orthodox macroeconomic policy. Our
post-Keynesian model arises from the belief that an approach rooted in the Cambridge-England
tradition has much to contribute to the understanding and treatment of economic problems
aflicting developing countries. Instead of treating growth and distribution as conflicting goals, we
explore potential complementarities between them, once the policy issues are phrased in terms of
specific targets and specific tools.
Since post-Keynesianism is generally not familiar to most economists with standard economic
training, we first outline its theoretical framework and identify its main influences. Post-Keynesians
tend to focus their attention on macroeconomic aspects of income distribution, capital accumulation, growth and taxation. In the 1950s and 1960s, mainly through the works of the outstanding
Cambridge-England economists, Piero Sraffa, Michael Kalecki, Nicolas Kaldor, Joan Robinson,
Richard Kahn and Luigi Pasinetti, this approach entered a phase of strong development. In the
1970s and 1980s, the theory and approach were extended and refined in the works of R. Goodwin,
H. Minsky, P. Davidson, S. Weintraub, G. Harcourt, P. Sylos-Labini, I. Steedman, S. Marglin,
K. Bhaduri, L. Taylor, D. Harris, A. Eichner and othersA"
?For a survey on the theoretical perspectives of the Post-Keynesians see Harcourt [5], while Baranzini [3] lays the
microeconomicfoundation of the post-Keynesiantheory of income distribution and wealth accumulation. Ref. [4] is a
challenging book dealing with different stands among Post-Keynesians.
67
68
Joanilio Rodolpho Teixeira and Jorge Thompson Araujo
Nevertheless, one can argue that "post-Keynesians have not succeeded in getting their message
through" [5, p.1]. Geoffrey Harcourt suggests that this is due to the "difficult and controversial
economic issues upon which they have embarked, partly because of the diversity of theories which
they have generated and partly because of the ideological suspicions of much of the profession
today" (p. 1).
Despite this, once we take into account the way in which the Structuralists in Latin America
have looked at the question of growth and distribution, it is not surprising to encounter some
common ground between them and the Cambridge school. The synthesis is especially apparent in
the work of Taylor [15].t
Post-Keynesians, in opposition to neoclassical theorists, possess a fundamentally distinct vision
of production and distribution. Among other things, they usually do not employ the traditional
production function and often assume a fixed capital-output ratio. Furthermore, they take into
consideration socio-economic classes (or groups), as opposed to representative individuals. They
also assume a flexible aggregate saving ratio based on socio-economic classes. In their models,
economic and political institutions (governments, for instance) play an important role in
determining economic outcomes.
Taylor [15], as far as we know, was the first to foresee the possibility of utilizing a post-Keynesian
approach, based on the theory of growth and distribution, to deal with short/medium run economic
policy in developing countries. He connected Kaldor's model [8] to the well-known Harrod-Domar
formula [6]. Here, we extend his approach in various directions substituting Kalecki [9] for the
Harrod-Domar growth model as the relevant connection and taking into account a wide variety
of post-Keynesian contributions [2, 10, 11, 12, 19-25].
Among other things, we consider the effective role of governmental ownership of public
enterprises and the profits derived from such an activity. We open the model to international
trade and analyze the possibility of a surplus (deficit) in the Balance of Payments. Most
importantly, we contemplate the government's redistributive role through taxation and public
expenditure. We direct our attention to the problems of economic policy in middleincome developing countries. We assume throughout that money and other asset markets can
be ignored, with interest rates pegged by the monetary authorities. Furthermore, we are
mainly concerned with a "stagnationist" environment in the sense that the term is used by
Taylor [16, p. 72], i.e. wage-led growth, rather than an "exhilarationist" or profit-led growth
environment.:~
THEORETICAL F R A M E W O R K
The Harrod-Domar type of models emphasize the importance of aggregate savings behavior in
the process of economic growth. However, one can extend such an analysis, as Kaldor [8] did, by
disaggregating the sources of savings (S) in national income (Y). Provided that there are different
savings propensities out of wage income (W) and profit income (P), and taking into account that,
in equilibrium, savings equals investment (I), the following conditions must hold:
Y-
W + P,
S = I = scP + SwW,
where sc and s,, are saving propensities from profits and wages,
(0 < sc < 1, 0 < s,, < 1, s~ > sw). Therefore, we have the Kaldorian function:
(1)
(2)
respectively
tActually, Taylor's books [15, 18] as well as his articles [16, 17] play a leading role in this connection.
~/Although it is worthwhile to pursue an inquiry into the links between "functional" and "personal" distribution of income,
to maintain unaltered the post-Keynesian general framework of analysis, we do not explore this connection here. Surely,
the macro-distribution problem--what might be called the division into functional shares whether of income or of assets,
has a complex and important relationship with the size distribution. This is considered in most studies that investigate
the relationship between growth and inequality. However, this link is not well understood. Overall, inequality may be
regarded as a function of inequality within the two social classes, and inequality between them. We assume the case of
zero within-class inequality.
A post-Keynesian model of growth
69
Y
S = i = (s~- sw) ~ +s~
(3)
where s and i are, respectively, the aggregated propensity to save and participation of investment
in the national income.
On the other hand, the significant feature of the model developed by Kalecki [9] to deal with
variation in the rates at which various economic quantities grow over time are well known. His
basic formula for the potential rate of growth of the national income, denoted here by 0, is:
O-
~-t-
~ Ytt -fit+#,,
(4)
where vt is the incremental capital-output ratio, (1/vt), It/Yt is the productive effect of investment,
ft stands for the capacity-reducing effect of continuous obsolescence (wear and tear) and ~ is the
fraction of improving capacity utilization. If it stands for the relative share of productive
accumulation, assuming that it, vt, ft and/~t are constant during the planning horizon, it follows
that:
0 =v-li-f
+lz.
(5)
Substituting (3) into (5) we have:
O = v -l Sw+(So+Sw)~ - ~ + # .
(6)
We are now in a position to reach an interim conclusion about some of the implications of a
change in the share of profits in income, as well as a variation of the wage as a share of income,
on the rate of growth. From (6), ceteris paribus, it follows: aO/d(P/Y)= (sc-Sw)V-l> 0 and
~O/d(W/Y)= -(so-Sw)V -1 < 0 , since P / Y + W / Y = 1 and O