1. MACRO WS 2002/03

2. KEYNES Keynes: uncertainty Keynes: do flexible wages help? Keynes: inflation (prices) Summing up: Classicals and Keynes Neoclassical labor market deriving labor demand How is unemployment possible?

3. NAIRU Non-accelerating inflation rate of unemployment Bargained Real Wage Curve vs. Labor Supply Curve Price Setting curve (vs. Labor demand curve) Notion of Equilibrium

4. NAIRU, 2/2 Full model Assumptions about AD(p) Policy conclusions

5. BRW W = w 0 + w 1 *U + P E Curve depicts bargaing equilibria What will shift the curve? What effects labor‘s bargaining position LABOR SUPPLY individual optimizing decision

6. Price setting curve P = m + MP L + W E price setting in imperfect competition

7. NAIRU - Equilibrium ?! Is there unemployment at the NAIRU?- Yes Is there involuntary unemployment at the NAIRU? -- YES!!! What happens if unemployment is less than the NAIRU? -- inflation accelerates Why should actual U return to the NAIRU?

8. A NAIRU model Wage setting: W = w 0 + w 1 *U + P E Price setting: P = m + MP L + W E Demand: AD = a 0 + a 1 *P Employment: U = f(AD)

9. Effects of inflation Why should demand (AD) fall if inflation rises? Money supply effect (Keynes effect) Real wealth effect (Pigou effect) but: Fisher effect central bank policy (?)

10. Policy conclusions To affect NAIRU: weaken bargaing position of labor unemployment benefits, labor market regulations... Is the NAIRU theory Keynesian? Yes and No!

11. KALDOR (1908-86) part of Cambridge Circle around Keynes One of the major post-Keynesian economists after WW II growth theory distribution cumulative causation worked as economic advisor

12. Kaldor (1955/56) Foundation of Post-Keynesian theory of distribution effective demand in the short run: determines output effective demand in the long run: determines income distribution

13. 4 theories Ricardo Marx Neo-Classical/Marginalist ‚Keynes‘

14. Ricardo Class theory of distribution 3 classes: workers, capitalists, landlords wage fixed by subsistance level diminishing returns only in agriculture: rent determined by MP of land profits: residue after rents and wages (surplus principle) rents will rise -> stagnation

15. Marx All value created by labor (labor theory of value) conventional/subsistance wage because of ‚industrial reserve army‘ surplus gets distributed between profits and rents profits are reinvested (competition) profit rate will fall due to tech. reasons

16. Marginalists/Neo-Classical General substitutability (not Ricardo!) w=MP L ; r=MP K =dY/dK (Kaldor:) what is the meaning of ‚capital‘? (capital controversy) How do you know the value of capital without knowing income distribution? Distribution as special case of price theory

17. ‚Keynes‘/Kaldor Effective demand: multiplier (I  S) in the short run: investment determines output (and employment) in the long run: full employment (by assumption) long run: investment determines income distribution!

18. ‚Keynes‘/Kaldor 2/2 Different saving propensities between profit (s R ) and wage income (s w ): s R > s w for simplicity assume s w = 0 then S= s R.R then I = s R.R macroeconomic theory of income distribution

19. Exercise Y=C+I I=I 0 S= s R.R (= assume that s w =0) note that R=Y-wN=Y-w/LP.Y (N=Y/LP) solve for Y* by S=I LONG RUN: interpret Y*=..., if Y is fixed. What can determine what?

20. Solow model (1956) Standard neoclassical growth model Production function savings function steady state What about the labor market? What happened to I=S ?

21. Exercise 1 (labor share) What is the ‚wage share‘ (wL/Y) in a neoclassical world with a Cobb Douglas production function? Hint: take the profit maximising employment level and solve the expression for wL/Y

22. Exercise 2 (steady state) Derive the equilibrium growth rate in a Solow model? Take production function (with k=K/L) and savings function What has to hold in equilibrium? dk/dt=0 ! What is the equilibrium k ?

23. Exercise 3 (comp. statics) What happens in the Solow model if the savings rate increases? What happens in population growth increases?

24. Solow model with tech. progress Labor augmenting tech change (g) express k in terms of ‚effective‘ labor units in the steady state: g Y = g

25. Solow model: summary Simple neoclassical growth model assumes full employment production and savings function k grows with population and exogenous technical change income distribution does not matter

26. Endogenous growth theory What is endogenous? Tech progress builds on neo-classical (Solow) growth model increasing returns model because of endogenous tech progress

27. Ideas Technology: how inputs are transformed into outputs Ideas/knowledge improve technology Ideas are non-rivalrous  increasing returns to scale  imperfect competition Are ideas public goods? (excludability?)

28. Technological progress Tech progress depends on research effort:  A=  A .L A = productivity of R&D time researchers Exercise: what is balance growth? gA=constant

29. Other EGT's Externalities from capital stock 'learning by doing' Schumpeterian growth

30. Optimal R&D? Remember: ideas  externalities market solution will not be optimal. Why? Researcher looks at his own benefit, not the one to society (ignores knowledge spill- overs). ‚stepping on toes‘ consumer surplus (imperfect competition!)

31. Solow and EGT exogenous vs. endogenous growth  economy grows in equi (in EGT) perfect vs imperfect competition convergence vs. divergence driving forces are the same: technology and preferences How useful is this discription of tech progress?

32. Stationary state perfect competition convergence of countries Endogenous growth imperfect competition divergence possible

33. What is neo-classical econ? Methodlogical individualism (profit and utility max) ? Market clearing? Assertion that markets lead to optimal results ("invisible hand") ?

34. Growth, distribution and employment: An ountline

35. Post-Keynesian Growth Principle of effective demand in LR income distribution conventional, not rational behavior "historical time" investment as driving force non-clearing labor market in the LR

36. Investment Investement (I) - accumulation (I/K) investment = long term commitment (fundamental) uncertainty about the future conventions to deal with uncertainty conventions -- institutions expected profits! -> I=I(R) "animal spirits" (exog. Inv.)

37. Short run Invexog Savs R >s W Distrexog Exercise1: solve for Y* I=I 0 S= s W W+ s R R= s W (1-  )Y+ s R  Y Discuss the multiplier

38. Robinsonian growth Assumes full capacity utilization accumulation depends on profits  demand determines distr! (Kaldor) Exercise 2 accu: I/K=g I (r)= g 0 +g 1 r savings: S/K= g S (r)=sr

39. Kaleckian growth Variable capacity utilization why? Imperfect competition exogenous income distribution why? Mark-up pricing (imperf. comp) power relations between capital and labor endogenizing distribution?

40. Exercise 3 Note: r=  z=(R/Y)(Y/K) Distr  =  0 Accug I =g 0 +g 1  +g 2 z Savg S =s  z What is equilibrium growth? What does demand-led growth mean?

41. PK growth: comparison

42. PK growth Key variables: accumulation and distribution Robinson vs. Kaleckian model: fixed vs. flexible capacity utilization flex cap.util. -- exog. distribution How long is the long run?

43. Neo-classical vs. PK Main driving forces: technology (substitution) preferences rational individuals full employment Main driving forces: investment (animal spirits) distributional conflict classes non-clearing labor market

44. Theory of régulation Developed in 70s and 80s combining economic and institutional analysis régulation = self-regulation of a system the system is a system of institutions... that shapes the behaviour of actors

45. Institutions Institutions, not markets, provide stability institutions are outcome of political struggles and compromise institutions shape behaviour

46. Crises and régulation 2 types of crises: small (business cycles) and big (structural) structural crises = crises of mode of regualtion (+accu regime); similar to long waves examples for structural crises: 1930s, 1970s

47. Mode of regulation Composed of the following "institutional forms": wage and labor nexus (wages, work org.) monetary regime (what is money?) competitive relations forms of state interventions international regime

48. Regime of accumulation Describes macroeconomic system income distribution and demand formation sectoral balance macro ec. development has to be complementary and is determined by institutional setting

49. Exercise Try to make an overview table and describe: 3 periods: pre-30s; 1945-70s; 1980-now 5 structural forms

50. Competitive vs. Monopolist R. Decentralized wage contracts  cyclical wages small competing firms gold standard British hegemony minimal state Collective bargaining  stable wages large corporations that set prices 'credit money' US hegemony, Bretton Woods Keynesian welfare state

51. Patter of business cycle Strong cycles inflation and deflation cyclical wages Modest cycles creeping inflation steadily rising real wages

52. "Fordism" Ford: high wages  high demand workers become an important source of demand (mass consumption: cars...) high demand  high investment  high productivity growth  : Competitive regulation + intensive accumulation (productivity growth): mass production + mass consumption

53. Theory of rég. and growth institutions! Complementarity within institutional forms and between MoR and RoA distribution, demand, investment, productivity growth close to, but not married to, post-Keynesian approaches

54. GROWTH Neoclassical: preferences (time preference) + technology Kaleckian: demand (autonomous investment) + income distribution Regulationists: institutional structure (complementarities between institutions)

55. DISTRIBUTION Marx: class struggle, tendency of the rate of profit to fall due to mechanization Neo-classical: technology (MPL) and preferences NAIRU: bargaining outcome Kalecki: exogenous (bargaining, market power) Robinson/Kaldor: accumulution (saving out of profits has to finance accu)

56. EMPLOYMENT Neo-classical: full employment (tech&pref) Keynes: SR: demand NAIRU: u* such that inflation is stable; bargaining positions (labor market inflexibility) post-Keynesians: no LR equilibrium unemployment

57. Kaldorian growth Cumulative causation: no stable equilibrium, but once off the equilibrium forces pull economy further away independent demand (Keynesian) endogenous (induced) tech progress  Interaction of demand regime and productivity regime

58. Induced tech. progress Economies of scale learning by doing division of labor

59. Neo-Kalodorian model Demand growth: y = y 0 + y 1.x Productivity growth: x = x 0 + x 1.y Interpretation of y 1 and x 1 Emphasis of role of exports for pdy growth (in manufacturing)

60. Class, 11.12.02 Summary & comparison open questions for exam (review of models) (if time:) neo-Kaldorian growth model feedback