By Alice Even
Illustration by Keo Morakod Ung
In “The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers”, G. C. Harcourt explores the assumptions and beliefs that shape Post-Keynesian economics, supported by the works of the various Economists who contributed to this school of thought. In the introduction to the book, he explains that Post-Keynesian economics is unorthodox, yet most of its “pioneers” in fact started in the mainstream, then gradually moved towards Post-Keynesian economics (other than Michal Kalecki, who was never in the mainstream). Post-Keynesian economics, like several schools of thought, does not have detailed rules, it is quite vague yet has some fundamentals which are described and explained in the book by Harcourt. The fundamental idea that we will explore in this article is how Post-Keynesian economics views the distribution of income within economies.
We start with a crucial assumption. That “wage-earners” (workers and employees) do not save additional income as much as “profit-receivers” (the owners of firms and capital). To understand this assumption, one can intuitively think about the specific case of food: if a household could barely afford the food they require to survive, if they received an unexpected £100, on top of their wages, they would buy more food, as they would prefer to have more food now instead of saving the money. On the other hand, if a household purchases a 3-course meal for every single meal, they would be less likely to use the extra £100 for more food than they currently eat, and instead choose to save that for the future.
You might have noticed that there are only two economic actors, which is a staple of this school of thought. According to Professor Wendy Carlin, there is an opposing view to that of Post-Keynesian economics, which they criticize often, that there is one economic actor: the “representative agent”. In this case, there is only one individual, who owns the factor of production and profits, such as a yeoman farmer: they own the land, they are the labour (they farm), and therefore they earn. Given the strong emphasis Post-Keynesian economists put on the difference between the wage-earners and profit-receivers, their criticism against the idea of only having one agent meant to represent both is fathomable.
Now that the lower savings by wage-earners is assumed, one can start to consider the effect of an increase in income. If wage-earners were to earn a bit more in wages, they would spend it. In other words, their Marginal Propensity to Consume (MPC) is high. All this means is that any additional income would likely be spent (consumed) back into the economy. On the other hand, the MPC of profit-receivers, the owners of firms, is lower. They would save some of the money. If they earned any additional income it likely would not be respent into the economy. In this case, it could easily be argued that if one wants to increase economic activity, they should give additional income to the wage-earners, as the savings by profit-receivers would not increase economic activity.
Hence, Nicky Kaldor believed that the surplus of production should be more veered towards the wage-earners than it was in the 1950s. From Ricardo’s time, the wage-earners would earn “subsistence income” (the minimum possible income for an individual to survive), and the rest of the money made through the production of which the wage-earners were working on would go towards the profit-receivers. However, following the technological advancements in the subsequent centuries, real wages increased, which improved living standards (wage-earners could afford more than the bare minimum required to keep them alive).
Kaldor then thought it was possible that instead the profit-receivers would first earn a certain amount of money from the revenue of the production, then the wage-earners would earn the rest. This would increase wages for the wage-earners. The amount that the profit-receivers earned could not be too low, however, so that capitalism could be sustained, as too low of a reward would remove any incentive for people to take the financial risk to start a business, for example. The profit-receivers also could not get all of the income and leave nothing for the wage-earners; this would remove incentives for them to work, hence they would refuse to work. A long-term equilibrium could then be found.
This equilibrium would in fact be where Savings, as a portion of full-employment national income, would be equivalent to Investment, as a portion of full-employment national income. If Savings became larger than Investment, it would mean the spending by the firms would decrease relative to the investment, which would lower economic activity, decreasing overall (aggregate) demand, leading to excess supply of the good or service. On the other hand, if Investment became larger than Savings, it would lead to excess demand.
Those that have studied economics previously might see a connection to what is known as the “Keynesian multiplier”. When an investment is made into the economy, the Aggregate Demand increases by more than the tangible amount spent on the investment. As previously stated, when someone (either a wage-earner or a profit-receiver) gains a bit of additional income, they might spend it. When they spend it on purchasing a good or service, the person who gains that money (the seller) can now spend that money on another good or service. This trickle effect would increase economic activity by much more than the additional higher income. This idea forms the basis of the Keynesian multiplier. When a company chooses to invest in its capital, such as human capital for example, the employees earn more money, and they might choose to spend it on the goods and services sold by the firm. Post-Keynesian economists believe investment is the choice that firms make, and their savings are a consequence of the choice they made. The relationship between profits and investment, as the Marginal Propensity to Save of wage-earners approaches 0 (ie, they spend all that they earn), is the share of profits as a portion of full-employment national income approaches the portion of investment as a share of full-employment national income divided by the marginal propensity to save of the firm. In symbols,
where sw is the Marginal Propensity to Save of wage-earners, Π is the profits, Yf is the full-employment national income, I is the investment by the firm, and sπ is the Marginal Propensity to Save of firms (if they earn an additional income, what fraction of that additional income would they save). In conclusion, if firms invest money, this will feed into their profits later.
In conclusion, according to the book by Harcourt, Post-Keynesian economists believe that the distribution of profits and earnings between wage-earners and profit-receivers are what determines the increase of economic activity caused by an increase in investment by a firm. They believe demand is an extremely influential factor in the economy.
For further reading on this topic please see “The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers” by G. C. Harcourt.
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