Sunday, January 07, 2007

A Post Keynesian Model of Growth and Distribution (Part 1 of 4)


This series of posts presents a model in which an economy grows smoothly at a steady rate. The model postulates a certain institutional setting, namely advanced capitalism. Households save in this model by purchasing financial assets. They do not own individual capital goods to lend to firms. Corporations choose the rate of growth. In some sense, investment decisions are exogeneous or autonomous. Steady-state rates of growth are demand-constrained, not supply-constrained.

In Joan Robinson’s formulation, the purpose of this type of model is not to predict the future path of a capitalist economy. Rather, it is an analytical tool depicting necessary conditions for a smoothly growing capitalist economy under certain assumptions about institutions. In addition to the assumptions mentioned above, the model postulates that decision-makers follow certain rules of thumb or heuristics. This type of model can be used to assist one in identifying contradictions or aspects of capitalist economies that prevent smooth growth from being achieved from a current position.

The particular formulation of the model I present is unoriginal. I draw heavily on a paper by Scott Moss. This paper clarifies the logic of the inclusion of a corporate sector in this family of models. I deviate from Moss’ formulation in that I assume continuously differentiable microeconomic production functions, rather than fixed coefficients. I do this to emphasize the consistency of this model with marginal productivity, properly understood. The references I give at the end of the last post in this series are highly selective.

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