Thursday, November 26, 2015

The Paradoxical Kalecki (and part iii)

(From part ii)

The tables below may help in this discussion.

In principle, capitalists hold the frying pan by the handle: they decide (i) the payroll cut magnitude (D) and (ii), from what they get, capitalists decide how much to consume and invest (without loss of generality, in the examples following they consume as much as they invest).

Tuesday, November 24, 2015

The Paradoxical Kalecki (part ii)

(From part i)

For convenience, let's repeat the argument presented last, adding some emphasis:
"Answering the question 'Where do profits come from?' requires a macroeconomic perspective. Profits are produced by specific macroeconomic flows of funds. Unfortunately, the macro perspective necessary to investigate these flows can be elusive because of a logical trap: the tendency to assume wrongly that circumstances that apply to the familiar case of the single firm also apply to the entire business sector.
"To illustrate the problem of applying a microeconomic perspective to a macro situation, consider the following. As every entrepreneur knows, employee costs are a major influence on a firm's profits. Cutting payroll expenses means a more robust bottom line. Accordingly, it is commonly believed that when firms throughout the economy hold down wages, they improve aggregate profits. However, for the whole business sector, cutting employee compensation reduces revenue as well as expenses. Less worker pay means less personal income and, therefore, less personal spending on the goods and services sold by businesses. Therefore, cutting payrolls will not directly increase corporate profits".

Saturday, November 21, 2015

The Paradoxical Kalecki (part i)

(Motivated by a side discussion at Peter Cooper's)

Following Keynes and the paradox of thrift he popularised, Keynesian economists have developed a taste for paradoxes. In most cases I'm sure there is something to those paradoxes; in a few cases, they may be meaningless, but otherwise harmless.

In one case, however, this reliance on paradoxes seems detrimental. Paradoxically it involves misinterpreting Polish economist MichaƂ Kalecki's price equation:

(1)          P = Cp + I.