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).

Table 1 illustrates the baseline scenario, as in Kalecki's equation (1): payroll cut is nil and capitalists consume 50% of profits, investing the remainder 50%. The baseline wage share of Y of this hypothetical economy is 50% (= 100*W/Y).

Table 2 illustrates my own re-distribution example (readers can think of it as the "cut-and-spend" scenario): D ($100) is cut from W and paid together with P to capitalists (for short: capitalists, having the power to do so, re-distribute income in their favor). They now consume/invest (this is the and spend bit) more than they did in Table 1. GNP and employment do not change. Consumption is also re-distributed. Note carefully: compared to the baseline scenario, wage share of GNP fell to 40% without the economy being in recession.

Capitalists -- in the aggregate -- seem capable of handling their business. The only limit to their power to re-distribute incomes from their workers to themselves is given by the workers' patience and/or physical endurance: a "large" D may well cause a backlash, "small" ones may not.

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Before proceeding, I invite readers to consider these kind comments -- by Robert King -- posted on November 25, 2015 at 1:43 PM in reply to my previous post. Having written this before receiving his feedback, I decided to re-write some parts of it to address his objections. Otherwise, the post is essentially the same.

Let me first acknowledge this: Mr. King is absolutely right in writing "You partly assume your conclusion to start: revenues are fixed at Y."  I agree with him on that and I want to emphasise this fact for all readers.

However, unlike him, I don't see any problem in that. Conclusions must follow from their premises/assumptions and it's a bad argument one where conclusions fail to do that. If my argument at least supports my conclusion, I could feel satisfied.

I can't see a problem in assuming Y fixed -- as I certainly did -- either. For one, the Levy team did not state anything to the contrary. For another, the derivation of Kalecki's equation also assumes a fixed Y. Therefore, I see little reason to worry about this.

In addition, Mr. King himself offers some premises/assumptions from which the Levy team results (namely "Therefore, cutting payrolls will not directly increase corporate profits") follows. Personally, I do not hold that against him and, if anything, thank him for that. For one, it would have saved me some guesswork (luckily, I seem to have guessed more or less correctly).

At this stage, readers might be asking themselves: If all depends on assumptions, what's the point of this? Is this just a game?

Far from it. The more closely the assumptions relate to reality, the greater our confidence (albeit not our certainty) that the conclusions also relate to reality. This, as hinted in the previous post, is the purpose of this last part: to assess the plausibility, verisimilitude of the premises and conclusions.

What follows has been edited, to address Mr. King's other observations, not explicitly addressed here, but otherwise remains pretty much as I had prepared.

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[*]

It took some guesswork to illustrate the Levy publication's results. Table 3 is my best shot (judging by Mr. King's comment, apparently my guess was more or less accurate).

Why the guesswork? Wages can fall in two different but not mutually exclusive ways: by (i) reducing employment or by (ii) cutting down hourly wages (or a combination). Looking at flows of funds exclusively -- as the Levy team seems to do -- these procedures are indistinguishable and perhaps that's why they don't specify what they had in mind. However, these different causes have different implications for the "real economy". To match their result, I chose the first option: to reduce employment (a good guess, seemingly). It's worth to make this clear: This is not a necessary assumption, but is the one they seem to have assumed, thus I reflect it in Table 3 (in Table 2, I assumed an hourly wage cut, as per the previous post).

In Table 3 capitalists cut their payroll by D = $100 (as in Table 2).

In Table 2, capitalists used those savings to fund an increase in dividends: payroll cuts logically precede the increase in dividends; the former are the cause, the latter, the effect (in other words, dividends without a corresponding cash availability mean little). In other words: capitalists re-distribute the income in their favour.

In Table 3, they didn't. They cut payroll but -- apparently -- that's all they did.

In terms of the circular flow diagrams, this is how I visualise the situation:

So, what happened to the D dollars capitalists saved? Well, whatever they did with the $100 thus saved, capitalists didn't spend them (as they did in Table 2 with much better results).

Compared to the previous "cut-and-spend" scenario, from Table 2, readers can think of this newer Table 3 scenario as the "cut-and-do-nothing" scenario.

Is this "cut-and-do-nothing" scenario a logical possibility? Of course it is. Does it make any sense in real life? I suggest none whatsoever. I'll, however, leave readers to judge.

At any event, in comparison to Table 1, wages fell (to $400) and profits remain unchanged (as the Levy team would have it); additionally, GNP fell to $900. Because employment fell, physical output fell too: the economy is in recession. Not only that, the wage share of GNP fell, as well: now is 44.4%. Note carefully: both the wage share of GNP fell and the economy is in recession. In this, too, the scenario in Table 3 differs from the scenario in Table 2 [*]

(To the extent the scenario above reflects the Levy team conclusion, my guesses seemed to hit the mark. However, at the risk of being repetitive: the outcome reflected in Table 3 is not necessary; for one, it was avoided in Table 2).

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But if the outcome of Table 3 is not necessary, something additional must have been added to arrive at it.

The astute reader may have guessed my own guess: the recession in Table 3 was caused by capitalists' Animal Spirits, not by the payroll cut.

What the Table 3 scenario shows is the paradox of thrift, in disguise, inadvertently superimposed over the payroll cut. It's an unstated assumption. Unless I'm badly mistaken, to conclude that "cutting payrolls will not directly increase corporate profits" -- as the Levy team did -- it takes assuming that capitalists' Animal Spirits will choose a recession and add an unnecessary leakage in the macroeconomic flow of funds. That's where the unspent and "missing" D in possession of capitalists went.

Let's pause and think for a moment. Why would capitalists, after getting a windfall of D, forget everything about it? Let's further remember the first post: doesn't equation (1) say that workers' demand is irrelevant for profits? It doesn't matter that workers' aggregate demand may fall: capitalist's profits are safe. It would take for capitalists to be irrational to believe otherwise.

But what if capitalists sometimes are irrational, as the Keynesian Animal Spirits allows?

Capitalists' self-defeating bouts of irrationality are only the least interesting half of it. The other, more interesting half has clear empirical implications. To justify the Levy team's conclusion capitalists need to act not only in a self-defeating manner, but consistently so, each and every single time, otherwise sometimes "cutting payroll will increase corporate profits". It's not enough being irrational once, but they must be so always: every single time capitalists manage to re-distribute wages in their favour, a recession must ensue.

It is in this light that this chart becomes relevant:

(source)

As the chart indicates, the wage share of Y does fall during recessions (the narrow vertical grey stripes). This is consistent with the Table 3 "cut-and-do-nothing" scenario and presumably with the Levy team conclusion: those stripes show both a recession and a fall in the wages share. (Incidentally, it may be consistent with other hypotheses, too, but the fact remains, it is consistent with their hypothesis). But it also falls outside of recessions (the much broader white areas). Their scenario is inconsistent with the falls in wage share during the much longer normal times: the wages share falls almost without interruption.

In that sense, and taking into account that the American economy is a lot more complex than my circular flow diagrams, the "cut-and-spend" hypothesis seems to fare reasonably.

But I'll leave readers to be the judges of that.

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Everything may be a matter of assumptions: mine versus theirs. But their assumptions do not seem analytically or empirically defensible. Frankly, they seem extremely implausible. Therefore, I am afraid I remain critical of their conclusion.

Again -- as is my policy -- I'll invite readers to judge.

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Is this an argument against Kalecki? I don't think so. If anything, my problem is with the proliferation of Keynesian "paradoxes". I find that style of argumentation problematic: is there a reliable method to distinguish a real paradox, from a questionable argument covered by the "paradox" label?

Neither is this an argument against the Levy team's methodology, in general. My problem is with one of their conclusions, only.

I had planned to add some general comments about the need to consider things beyond flows of funds. Things like re-distribution, real flows of goods and services and factors of production. But I'll leave that for a future opportunity. This post is too long as it is.

To close, I'll remind readers something modern economists often forget:

"To determine the laws which regulate this distribution, is the principal problem in Political Economy." (David Ricardo)

[*] This ignores, for simplicity's sake, the effect of the multiplier on Y: Y' - Y = - m.D (where the multiplier m is a positive real number greater than 1)