Post-Keynesian Economics: Kalecki, Kaldor, Minsky, Eichner, and Steindl
Kalecki: Investment and Profit
How are prices determined?
Prices are based on cost and profit margin.
How is investment financed, and what factors determine it?
Investment is financed by internal funds (retained earnings and depreciation) and external funds. Determinants of investment include:
- Internal funds
- Profit mass
- Capital stock
How is the rate of profit determined?
Large companies have greater access to lower-cost financing, leading to higher earnings and increased internal funds. This creates a disparity between company size and capital generation.
What are the effects of profit mass on investment and capital stock?
Profit mass positively affects investment. However, increased capital stock negatively affects the rate of profit per unit of capital. Investment initially increases profit, but subsequently, increased capital stock depresses the rate of profit.
How is increased risk explained?
Increased external financing and investment increase the risk of not recouping invested capital. Spare capacity depresses investment, except in closed economies. Higher investment increases the risk of not recouping invested capital.
Kaldor: Technical Change and Accumulation
How does technical change relate to accumulation?
Kaldor doesn’t distinguish between technology changes from variations in capital (K) relative to labor and those induced by technical investment and innovation. The ability to absorb capital (increasing the stock of equipment relative to labor) depends on the dynamic technique and the ability to invent and introduce new production techniques. Failure to quickly adopt new techniques limits the accumulation rate.
Technical Progress Function
The increase in productivity is related to the growth rate of the capital stock.
- Section A: Capital-saving inventions
- Point B: Labor-saving inventions
- Increased capital may lead to more labor-saving techniques. However, there’s likely a peak beyond which productivity growth can’t rise regardless of capital accumulation. The TT curve is convex upwards and becomes horizontal after a certain point.
What determines the increase in productivity?
Productivity increases even with constant capital stock. This is due to the company’s ability to adopt new inventions and produce technological innovations. Increased machinery combined with increased labor productivity leads to increased productive capacity and market expansion.
What is the main engine of economic development?
The ability to absorb technical change combined with the willingness to invest capital in business is the main engine of economic development. Continued growth requires increased output from capital investment, and investment must respond to increased output.
Kaldor: Investment and Savings Functions
Savings function: St = f Pt (yt – Pt)
Savings = function of profits + wages (prop รข)
Savings is a function of income. Sw (wage workers) < Sc (capitalist salaries)
S = Sw (Yu) + Sc (u)
Investment function:
Kt = f Yt-1 + B (Pt-1/Kt-1) Yt-1
This equation shows that the capital stock in period t (assumed equal to the desired capital stock at t-1) is a function of the previous period’s output (Yt-1) and a coefficient (B) of the rate of capital gain from the previous period, multiplied by the output of that period.
It = Kt-1 – Kt = (Yt – Yt-1) (f + B (Pt-1/Kt-1)) + B (Pt / Kt – Pt-1 / Kt-1) Yt
Investment at time t is the difference between desired capital (Kt+1) and actual capital (Kt). This equals the increase in output during the previous period (Yt – Yt-1) multiplied by the ratio between capital and desired output in that period (Kt/Yt-1), plus a coefficient (B) of the change in the rate of gain during the period (Pt / Kt – Pt-1/Kt-1) multiplied by the current period’s output (Yt).
Expressed as a proportion of existing capital stock at time t (Kt), investment equals the expected rate of sales growth during the previous period. If the rate of profit on capital is constant, investment equals the real growth rate of sales during the previous period. If the rate of profit on capital is increasing or decreasing, investment will be larger or smaller, respectively.
Minsky: Business Cycle and Financial Instability
Minsky’s Business Cycle and Business Classification
Minsky’s analysis of a monetary economy with financial development and uncertainty leads to an endogenous economic cycle. Fiscal and monetary policies can stabilize capital asset prices. Investment is financed by internal and external funds. Investment financed by short-term liabilities creates a need for cash exceeding projected cash flows. Companies may need to refinance debt, sell assets (whose valuation depends on economic prosperity).
Minsky classifies businesses as:
- Hedge: Cash flow always exceeds payment obligations.
- Speculative: Cash flow initially covers interest but not depreciation, requiring external financing.
- Ponzi: Cash flow is insufficient to pay interest, requiring increased funding.
This classification shows a shift from a robust to a fragile financial system during periods of prosperity. Financial innovations make the financial system vulnerable. Increased deficit spending can sustain corporate profits when investment is low, and a flexible monetary policy can stabilize interest rates.
Financial Instability Hypothesis
Financial instability arises from debt structures not validated by cash flows or asset prices when both are determined by free market forces. Financial innovations, when credit expansion is desired but not allowed by the central bank, lead to instability. Private debt increases. Worldwide deflation from financial deregulation and global financial market integration increases risk.
Eichner: Price Determination and Investment
Price Determination
Profit margins vary depending on the demand and supply of investment funds. The company with greater market power is the price leader, linking price determination to investment decisions.
Risks of Raising Prices to Finance Investment
- Higher prices increase profit rates, attracting new competitors.
- Development of substitutes.
- Government price intervention.
Financing Investment Decisions
Companies should consider how much to raise prices above variable costs and the effect on interest rates.
Steindl: Excess Capacity and Price Rigidity
Why do producers maintain excess capacity?
How does price rigidity occur?
Cost Reduction, Profit Margins, and Internal Accumulation
Progressive companies reducing costs tend to increase profit margins. The elimination of high-cost firms leads to excessive internal accumulation, which tends to reduce profit margins.
Limits on Internal Accumulation
Internal accumulation is limited by industry expansion and capital deepening. It’s the proportion of invested capital over productive capacity.