A post‐Keynesian model of output, employment and monetary demand

Abstract

This paper presents a simple model based on three broad Post‐Keynesian hypotheses: (1) the economic process develops over time; (2) money is endogenous; and (3) producers are price setters. To make the analysis easier we also assume (4) that firms are vertically integrated. Producers assess the expected demand and ask banks for credit in order to start production; banks create credit at the request of producers to finance the wage bill; workers buy goods sold by firms; firms must repay banks the amount borrowed plus interest and earn a target rate of profit. Since firms have created only as much purchasing power as they have advanced to workers in the form of the wage fund, equilibrium requires that there is an amount of autonomous monetary demand equal to profits and interest. Furthermore, in order to make the value of supply equal to the value of effective demand, firms will employ the number of workers necessary to create the purchasing power which, when added to the anticipated autonomous demand, enables all costs to be covered and the planned rate of profits to be attained.

Notes

Correspondence Address: Rosaria Rita Canale, Dipartimento di Scienze Economiche e Sociali, Facoltà di Economia, Università di Napoli, ‘Federico II’, Via Cinthia 45, 80126 Naples, Italy. E‐mail: [email protected]

The endogeneity of money is generally accepted in the Post‐Keynesian literature. Its ramifications have been developed at length by adherents of the Circuitist approach, whose hypotheses are incorporated in our model; see Deleplace & Nell (1996), Graziani (1994) and Lavoie (1992).

That is why the issuing institution cannot directly control the monetary base, but can just alter the discount rate (Kaldor, 1982). For more recent versions of this point of view see Arestis (1992), Lavoie (1992) and Moore (1988).

This planned rate of profit is a historically determined value, which depends on the outcome of the distributive conflict and on production relationships (Robinson, 1977; Kaldor, 1985).

The presence of a propensity to consume less than one (0<c<1) would reduce the level of equilibrium employment, given the expected autonomous demand, the wage, the rate of profit and the rate of interest. Equation (9) would become N ₀={1/ w[(1+r)(1+γ)—c]}A.

‘What equilibrium requires is not equality of the actual earnings, but equality of the mathematical expectation of earnings … for similar units in different uses’ ( Shove, 1930, p. 95).