Keynesian Equilibria as Centers of Gravitation?

Abstract

ABSTRACTStarting from some of Geoff Harcourt’s contributions, this article deals with the problem of macroeconomic equilibria as centers of gravitation from a Keynesian perspective. It is argued that the Keynesian notion of short-period underemployment equilibrium (or rest state) represents a sustainable analytical notion of center of gravitation in so far as a static state is assumed. If the economy grows over time, dealing with the problem of centers of gravitation requires a long-period perspective, which, however, cannot be reduced to the use of equilibrium growth models. A more general approach to the dynamics of market economies is a better way to support Keynes’s idea that the economy tends to fluctuate around positions characterized by the unemployment of resources.KEYWORDS: Centers of gravitationshort- and long-period analysismodels of growthJEL CLASSIFICATION: E10E12O40P10 AcknowledgementsI would like to thank M. Boianovsky, B. Ingrao, F. Ruggeri for their helpful comments and suggestions. Any possible mistake is, of course, my sole responsibility. I would also like to use this opportunity to acknowledge and thank the reviewers who reviewed this article and aided in its publication.Disclosure StatementNo potential conflict of interest was reported by the author.Notes1 Some of these papers have been re-published in Harcourt (Citation1992): ‘The legacy of Keynes: Theoretical methods and unfinished businesses’ (Citation1987); ‘Marshall, Sraffa and Keynes: Incompatible bedfellows?’ (Citation1981); ‘Marshall’s Principles as seen at Cambridge through the eyes of Gerald Shove, Dennis Robertson and Joan Robinson’ (Citation1991). This article focuses on the first two.2 Harcourt (Citation1992 [Citation1981], pp. 254–258) devotes considerable attention to Sraffa, his critique of Marshall, and the way in which Sraffa’s normal values can be interpreted. Harcourt (Citation2018) returns to the problem of centers of gravitation by concentrating on Sraffa and different interpretations of his theory.3 Keynes’s ‘indecisiveness’ resides in the fact that ‘he had all but despaired of finding a determinate unit of time into which all various interrelated processes and decisions he was analysing could be fitted so he decided never to push any particular piece of analysis very far past its starting point, preferring to get only the central message across’ (Harcourt Citation1992 [Citation1981], pp. 259–260).4 For Keynes (Citation1973 [Citation1936], p. 249), ‘it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed, it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.’5 ‘Keynes … adopted Marshall’s methods for his own purposes, the determination of output and employment as a whole, the theory of effective demand, once he had convinced himself that Say’s law did not hold so that a general glut was a theoretical possibility, just as it was obviously a practical possibility in the world around him at the time’ (Harcourt Citation1992 [Citation1987], p. 240).6 In the book’s Acknowledgements, Kahn devotes several pages to clarifying the notion of the short period as distinct from the long period.7 Among Post Keynesians and Kaleckians, several reject the idea of a normal and constant degree of capacity utilization. For a summary of the debate on this issue, see, e.g., Lavoie (Citation2014, pp. 387-410) and also Patriarca and Sardoni (Citation2014). The debate on capacity utilization is mainly concerned with the long period. Here, without entering into this debate, we retain the hypothesis of a constant u∗, which we regard as a safe assumption in a short-period framework.8 If b=1, the adjustment is completed in one period.9 Wrong short-term expectations also cause a deviation in the degree of capacity utilization from u∗ and it would be reasonable to think that u≠u∗ should affect investment; here, however, this possibility is excluded by the restrictive hypothesis that investment remains unvaried.10 This would be the logic to follow for the analysis of cases in which there is an initial worsening of expectations.11 For simplicity, we assume that all equilibrium levels of the output are below the full employment level, say Yfe∗.12 Referring to Keynesian short-period analysis, Domar (Citation1957 [Citation1946], p. 73) argues: Because investment in the Keynesian system is merely an instrument for generating income, the system does not take into account the extremely essential, elementary, and well-known fact that investment also increases productive capacity. This dual character of the investment process makes the approach to the equilibrium rate of growth from the investment (capital) point of view more promising: if investment both increases productive capacity and generates income, it provides us with both sides of the equation the solution of which may yield the required rate of growth. 13 Keynesian, post-Keynesian, and Kaleckian economists have been particularly interested in the problem of growth path stability; for a review of this literature, see, e.g., Lavoie (Citation2014, pp. 377–410). For a discussion of the stability of neo-classical growth models, see, e.g., Aghion and Howitt (Citation2009, pp. 21–46).14 As Asimakopulos (Citation1991, p. 145) observes, Keynes had no problem conceiving of a growth path like those determined by equilibrium growth models, but he contested the capacity of such models to be a realistic depiction of modern capitalist economies.15 The normative character of Domar’s model of growth is revealed by the fact that it does not contain any investment function describing firms’ behavior. Also, Harrod’s growth model — which is often associated with Domar’s, though erroneously — can be interpreted in normative terms: ‘the “natural” growth rate is determined by population increase and technological progress, and specifies what saving ratio is required in consequence of that. It is up to the authorities to ensure that this amount of saving is made’ (Citation1973, p. 28). On the models of Domar and Harrod and their normative nature, see also Hein (Citation2014, pp. 23–49).16 Kalecki was another economist whose work was highly appreciated by Harcourt (see, e.g., Harcourt Citation2006).17 See Hein (Citation2014) and Lavoie (Citation2014, pp. 347–455) for surveys of this literature.18 Kalecki (Citation1971) contains a collection of his works on cycles and growth.19 ‘The contemporary theory of growth of capitalist economies tends to consider this problem in terms of a moving equilibrium, which is frequently not checked for stability’ (Kalecki Citation1971 [Citation1968], p. 165).20 They include the autonomous component of capitalists’ consumption, technical change, coefficients of the equation of investment decisions, profits and their ratio to income.21 Kalecki thought that full employment cannot be a stable equilibrium solution for capitalist economies. Social and political factors prevent the economy from maintaining full employment for a long time (see Kalecki, M. Citation1971 [1943]).22 Hicks (Citation1982 [Citation1976]) also strongly argued in favor of the abandonment of the equilibrium method and the adoption of a notion of irreversible historical time.23 On Harcourt’s views of Joan Robinson’s economics, see, e.g., Harcourt (Citation1995), Harcourt (Citation2001), and Harcourt and Kerr (Citation2009).24 Harcourt and Riach (Citation1997) edited two volumes containing the contributions of many economists who have speculated on how Keynes would have written a hypothetical second edition of The General Theory to cope with the ‘unfinished business’ of the first.