Re: demand management

[Rakesh Bhandari <rakeshb@xxxxxxxxxxxx>]

Title: RE: demand management

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.

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 even  if final sales are suffering, 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.)

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 (I think that I am the first to point out) 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