R: Raising aggregate demand without raising foreign debt

["Ricottilli Massimo (DISES)" <massimo.ricottilli@xxxxxxxxxxxxxxxxxxxx>]

-----Messaggio originale-----
Da: Ricottilli Massimo (DISES)
A: 'Leigh Harkness '
Cc: 'pkt@xxxxxxxxxxxxxxxx'
Inviato: 28/02/02 11.16
Oggetto: R: Raising aggregate demand without raising foreign debt

 Dear Leigh,
             I do not know what a perfect post-keynesian would say but
it seems to me that the Australian newspaper's reader is wrong on two
accounts. First, assume for simplicity's sake that the trade balance
were in equilibrium but at a low level of employment and activity level.
Now, if a structural fall in Australian prices were to occur (other
things remaining equal), the nominal exchange rate would remain constant
but the real exchange rate would increase (depreciate) provided that the
level of activity and employment could rise: this happens not only if
exports increase but also as aggregate demand as a whole were to rise so
as to generate a higher level of imports to match the higher level of
imports brought about  by larger exports. The trade balance remain zero.
Normally keynesians would salute this event as a degree of freedom for
pro-active demand management.
Second, can prices structurally go down if the labour market were
deregulated?  This would come to pass only if very, but very,
neo-classical assumptions about static perfect competition on all
markets were the rule. If one takes the rather more sober view that
oligopoly prevails, lower nominal wage costs would quite likely
translate into a higher degree of monopoly , in  Kaleckian terms, or
simply in a higher mark-up, leaving nominal prices at the same level.
Thus, real wages would be lower, the real exchange rate would remain
constant and no benefits from trade would accrue to effective demand.
The latter, on the contrary, could very possibly fall on account of
falling consumption due to lower real wages.
I believe that economic rationalism would seek no poor short-cuts but
would seek ways to increase productivity levels, a topic which opens
very interesting questions on technical progress and what causes it.
Massimo Ricottilli


-----Messaggio originale-----
Da: Leigh Harkness
A: pkt@xxxxxxxxxxxxxxxx
Inviato: 27/02/02 8.17
Oggetto: Raising aggregate demand without raising foreign debt

The following is from a letter published in an Australian newspaper :

"Des ___ calls for even more economic rationalism to reduce
unemployment.   Heaven forbid.

 His logic is that if the labour market were deregulated, wage costs
would be reduced, Australian products would become cheaper relative to
imports, we would buy more domestic products and so raise employment.

 But would the floating exchange rate system allow Australia to shift
demand from imports to domestic products, or raise exports?  Of course
not.

 If there were a reduction in demand for foreign funds (because of
reduced imports) or an increase in the supply of foreign funds (from
increased exports), the foreign exchange market would raise the value of
the Australian dollar.  That would reduce the price of imports, reduce
export revenues and raise the price of exports on foreign markets.

 Any success at reducing the relative price of Australian products on
the domestic market would be undone by the foreign exchange market.
Therefore, further labour market de-regulation would continue to fail to
provide full employment.

 Australia needs to raise its aggregate demand to provide full
employment, but without causing excess demand that would raise foreign
debt.

 Economic rationalism cannot solve this apparent dilemma."



Economic rationalism, or Neo-classical economics, may not be able to
solve this problem but what solution does Post-Keynisian Economics
offer?

Any suggestions?



Leigh Harkness