Dynamic Economic Systems

A Post Keynesian Approach

John M. Blatt

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781315496276
• Edition: 1
• Topic: Art
• Subtopic: Artist Monographs

The bicentenary of The Wealth of Nations has passed, and so has the centenary of the neoclassical revolution in economics. Yet the present state of dynamic economic theory leaves very much to be desired and appears to show little sign of significant improvement in the near future. Structured into 5 main topics, the main purpose of 'Dynamic Economics Systems 'is to present arguments for this contention and to start developing the tools which are needed to make progress in understanding truly dynamic economic systems. First published in 2000.

Book II

Theories of Balanced Exponential Growth

Once we go away from entirely static systems, the simplest dynamic system is one undergoing balanced growth; that is, all quantities increase uniformly with time, by the same growth factor each period, and all prices stay constant. Not surprisingly, just such systems have been studied extensively.

Chapter 3 is introductory, a straightforward extension of the work of chapter 2 to a balanced growth system. To make such an extension, we must assume something about the entire production possibility set, not merely state actual production levels in any on e period. Chapter 3 assumes an input-output production set of Leontief type, i.e., fixed factor proportions, no joint production. Regarding consumption, we assume “perfect thrift, ” i.e., none but absolutely necessary consumption. Much of chapter 3 is well-known material and can be read quickly by advanced students. The mathematical appendix contains a summary of the relevant theorems.

Chapter 4 extends this to the van Neumann technology, which permits joint production, alternative processes for producing the same output, and (discrete) input substitution. This also is largely well-known material, though the last two results of the KMT theory (results K5 and K6) have disastrous implications for the “optimality” implications of the theory: If there is any real choice at all, then the solution with maximum growth is not the one with the lowest rate of return; and the solution with the lowest rate of return does not give maximum growth. This fact, which is a direct consequence of the theory, is sometimes glossed over.

We strike really new material in chapter 5, where we first introduce discretionary consumption; i.e., there is now a choice between consumption and investment for further growth. In chapter 5, we assume that this choice is made so as to lead to an exact steady state. The result is a theoretical counterpart to the well-known open Leontief model familiar to applied economists. The “theoretical” aspect is that we distinguish clearly between quantities and values (i.e., prices are deduced, not taken from market observation) and we assume the competitive condition that rates of return are the same in all industries. The surprising result is that such a system may fail to have any sensible solution whatever.

Chapter 6 introduces growth along with consumption. Here again there are new results. With Leontief technology, it turns out that the competitive conditions for a state of steady balanced growth are not sufficient to pick out a particular rate of growth, though they do pick out a particular rate of return. The growth rate can vary from instant collapse of the economy to a maximum equal to the rate of return, depending upon the degree of “frugality” of the capitalists. Furthermore, under certain circumstances, no sensible state of balanced growth exists at all.

Finally, in chapter 7, we show that a Leontief system without consumption is perfectly unstable; any deviation from the correct proportions between commodity outputs, for any reason what-ever, results in ever increasing departures from balance, with eventual disaster (some commodities must have negative amounts of output). We also show that input substitution, when treated correctly and restrained to reasonable elasticities of substitution, does not alter this result. Section 7D relates these new results to the literature on long-term stability.

CHAPTER 3

Balanced growth with Leontief technology

A. Leontief technology

We are now ready to embark on the study of dynamic economic systems, in which production levels, and possibly prices, change with time from one production period (“year”) to the next. We have seen in section 2C that a simple statement of actual quantities produced, and actual inputs necessary to produce that output, is no longer adequate to derive conclusions. We need to know alternatives, i.e., what outputs are obtainable from any (reasonable) choice of inputs.

Obviously, we need some restrictive assumptions to limit the range of possibilities to something we can handle. In this chapter we shall make a number of assumptions concerning the production possibility set, more restrictive than is either reasonable or necessary, so as to obtain simple and easily understood results with a minimum of mathematics. The more realistic, but also much more complicated “van Neumann technology,” is left for chapter 4. For now, we restrict ourselves to “Leontief technology” —the name is taken from the input-output system of Leontief (1951, 1953), which is related but not identical— a technology which we shall now define.

The first restrictive assumption is constant returns to scale. If all input quantities are, say, tripled, then the output also triples. Naturally, this assumption is not exact; but neither is it at all far from reality. In classical capitalistic economies, with many small independent producers in each industry, expansion of output in an industry is achieved mainly by new producers entering thi...