Re: demand management (a bit modified)

[Rakesh Bhandari <rakeshb@xxxxxxxxxxxx>]

Mat, thanks as always for your response.

> Hi Rakesh -
>
> I think Professor Bhaduri is right and so do many PKians.  For example,
> as my colleague Randy Wray points out, Minsky advocated 'high
> consumption' ('high investment' is unsustainable for Domar reasons,
> etc.).


I am not sure where to locate the unsustainability given what Marx's
reproduction show as summarized by Shaikh:
"What Marx's examples show is that if capitalists did undertake the
appropriate amount of investment, they would indeed be able to  sell
their products and make the anticipated profits. If this  success
spurs them to reinvest once again in anticipation of yet more
profits, they would be rewarded once again, and so on. All the while
consumption would expand due to the growing employment of workers and
the growing wealth of the capitalists. but the expansion of
consumption would be a consequence, not a cause. "

It's not clear to me why with competitive pressures and the reward of
a greater mass of profits firms would fail to create through trial
and error appropriate autonomous demand  through use of, say,
overdraft facilities at a bank. Joan Robinson seems to have thought
that Marx was a prisoner to Say's Law for having made this
assumption. But high investment does seem to be sustainable as long
as  the mass of profits rises along the way.

And high consumption may be unsustainable for profitability reasons.
"The disillusion comes because doubts suddenly arise concerning the
reliability of the prospective yield, perhaps because the current
yield shows signs of falling off" (GT,
p.317)

(Let's leave aside the Hayekian arguments that the consumption path
may not be necessary since even with final sales growing slowly if
not declining absolutely, profit-hungry firms could indeed be induced
to scrap old technologies and  invest in those processes that lower
costs faster than prices are falling. Moreover, for those investment
projects that are meant to meet a long term trend even a drop in
immediate consumption can be favorable as firms may decide that it is
advantageous to build on the trend and thus take advantage of lower
depression prices in materials, wages and possibly interest rates.)

But to get back to the question of investment, let me restate
Bhaduri's argument using some simple game theory from Balakrishnan:

"Since Keynes had provided a story of the determination of national
income, his main point may be made in terms of a game involving the
investment decisions to be made by firms. A firm invests in
anticipation of an expanding market. This growth is determined by the
investment made by the other firms in the economy. Our firm must
literally make a guess at the scenario to be, for it faces
irreducible uncertainty. If one firm invests while the others do not,
it will not even recover its capital expenditure. If all firms but
one invest, the withholding firm loses out on a profit opportunity.
In this game, each firm must perforce guess the likely behaviour of
its peer group. Now, apart from the two situations described, there
are two more to be considered. In the first, all firms invest. This,
of course, is 'win-win', and of no interest whatsoever. On the other
hand, no firm invests. This is disastrous for the economy! It is in
having alerted the world to this possibility that 'The General Theory
of Employment, Interest and Money' attains its significance. "

Reformist Keynesians (Bhaduri's social democrats) simply thought that
it was obvious that the best way to encourage investment is to
brighten the prospects of final consumption through government job
creation and income redistribution. Investment would follow
consumption, so that the autonomous increase in final consumption
would bring the economy to a higher employment equilibrium. Social
democracy would be good for not only the working class, especially
the most vulnerable minority parts thereof, but also the
entrepreneurial class as well. Since businesses make what they
spend--they are their own source of demand--a higher level of
investment would increase the profits for the class a whole. Though
the working class may have to impose social democracy upon the
reluctant business class, the result would be a cooperative
capitalism.
	However, if the retreat of investment was not in fact
preceded by a crisis of final demand--in Marxian terms this would
imply that Department I or the means of production industries would
face a sales crisis before Department II or the means of consumption
industries--the best way to raise effective demand of which private
investment is the most important component may be to increase the
risk that the firms that withhold from accumulation will lose profit
opportunities and thereby be without the increase in financial
resources that is needed to stay in the competitive game. Once
Keynesian is understood in terms of the game theoretic scenario
above, one can easily justify  the transition from social democratic
to private or profit-led demand management. That is, in trying to
increase the opportunity cost of not investing and accumulating, the
state will attempt to whet the appetite for profit or unleash (as
Keynes referred to it) "animal spirits" through regressive taxes and
anti-labor legislation. After the failure of social democratic demand
side management and full employment Keynesianism in the 1970s, the
stage was set for the eventual transition in the function of the
state from a welfare instrument to a naked class instrument:

Isn't this where we are now? And isn't this result of the objective
failures of social democratic demand management?


Yours, Rakesh