Sraffa and the Reconstruction of Economic Theory: Volume Two

This chapter explores some basic questions about the effects on the economic system of financing public expenditure by issuing debt. It develops within a theoretical framework differing from that which is currently predominant both in pure theory and in applications to specific problems such as those addressed here. In particular, the approach in this chapter rests on two basic and closely related premises.

The purpose of this chapter is to draw attention to a weakness, so far unnoticed, of the neoclassical argument in support of Say’s Law—that is, of the thesis that investment is determined by savings,¹ and that therefore aggregate demand poses no obstacle to selling at cost- covering prices the aggregate supply of goods whatever the forces determining the latter. The neoclassical argument, relying upon an assumed negative interest elasticity of investment derived from the demand-for-capital function, neglects the problems with the marginalist or neoclassical conception of capital: as pointed out by the late Pierangelo Garegnani (1983, 1990), the discovery of reverse capital deepening undermines the foundations of Say’s Law, because it undermines the belief in a negative interest elasticity of the demand for (value) capital, but then also the belief in a negative interest elasticity of aggregate investment; Garegnani concluded that the ‘neoclassical synthesis’ criticism of Keynes could not be accepted, and that aggregate demand had to be considered the determinant of employment and growth not only in the short period but also in the long run. In Petri (2004, ch. 7) I reinforced Garegnani’s contention by showing that the attempts, after Keynes, to derive a negative interest elasticity of investment without relying on the traditional neoclassical conception of capital are all indefensible.²

This chapter discusses the meaning of the output trends examined in the analysis of growth and their relation to actual levels of output and income. These issues are seldom explicitly examined in the literature, where the relation between actual and theoretical magnitudes assumed in the theory of prices appears to be automatically extended to the magnitudes addressed by theories of growth. In field of economic growth, however, the distinction between actual and theoretical magnitudes overlaps with the distinction between cyclical and trend positions of the economy. This gives rise to crucial misunderstandings, at least from the standpoint adopted here.

Potential output is generally understood as the desirable level of output, i.e., the highest which may be attained in any given situation without putting inflationary pressures upon the economy.

The central purpose of this chapter is to construct an analytical framework for explaining growth in concrete terms by reference to history consistent with the view that economic growth is fundamentally determined by the growth in aggregate demand.¹ As based on the Keynesian principle of effective demand, a demand-led theory of growth supposes that the level of aggregate output is determined in the long run by aggregate demand in which saving endogenously adjusts to autonomous demand through changes in income and output associated with the adjustment of productive capacity to aggregate demand. In this approach it is the growth in demand which determines the growth in output and the rate of capital accumulation in which it is supposed there is no technological constraint on output adjusting to demand growth. Key factors in explaining growth, notably, technical progress, are therefore conceived to contribute to economic growth through their effect on the growth in demand. From this standpoint, growth is a complex process, entailing structural change of the economic system, such that it can only be plausibly explained in concrete terms by reference to social, politico-institutional and technological factors. All these factors are seen to have an historical dimension in explaining growth.

The Keynesian principle of effective demand states that the equilibrium level of output in a given period is a multiple of the expected autonomous demand (Kalecki, 1971; Keynes, 1936). Can we extrapolate this principle to a long-run dynamic analysis and conclude that the rate of growth of output will eventually depend on the expected rate of growth of autonomous demand? A positive answer would be a significant step towards a long-period theory of output which, according to Eatwell and Milgate, provides the most solid ground for demand-led growth (Milgate, 1982; Eatwell, 1983; Eatwell and Milgate, 1983; Eatwell, 2012).

The present work analyses the pattern of economic growth prevailing in Brazil from 1970 to 2005. The analytical framework for this investigation is based on the classical supermultiplier demand-led growth model combined with the hypothesis that the balance of payments was the main potential (and often the most effective) constraint for the expansion of the Brazilian economy during the period in focus. We adopt a demand- led growth accounting methodology to analyse the Brazilian economy, based on a multi-source database compiled for this investigation.

In the first decade of the twenty-first century we can observe some elements of continuity and others of change in the international economic order. In terms of continuity, what is perhaps most striking is the resilience of the ‘floating dollar standard’, which was neither a cause of the major world crisis of 2008, nor was negatively affected by it.¹ In terms of change, there is the new tendency towards a greater relative autonomy of the (relatively fast) rates of growth of GDP of many developing economies from the (low) growth rates of the advanced capitalist countries, A second (and intimately connected) change is the increasing absolute (dollar) and relative prices for internationally traded ‘commodities’ (food and raw materials in general).

The spread of industries in several peripheral countries after the Second World War and the great divergence that has opened up between them since the 1980s has sparked widespread debate on economic development. Interpretations based on neoclassical and on institutional economics¹ are the major fields of historical explanations. Despite their wide differences on the determinants of economic growth, they share a common perspective on three basic aspects: first, the supposition that strategies of development are built on a set of government policies and on institutions that model private behaviours (of course, they disagree on which policies and institutions promote economic development); second, a ‘methodological nationalism’² in which individual countries’ performances are essentially explained by domestic factors. The third is a corollary of the two above perceptions and says that the state as a major initiator of positive change (in resource allocation, as in the heterodox reasoning, or in the creation of market institutions, as in orthodox thought) is responsible for the success or failure of growth strategies. For the mainstream school, the wrong policies of populist states play the dominant role, for the heterodox, they are those of liberal or neo-liberal states. For both, a meritocratic state is central to successful development strategies (to avoid rent-seeking cases according to neoclassical authors, to discipline large firms according to the institutionalists).³

In dealing with the European crisis and the frequent accusation of German ‘mercantilist behaviour’ (Cesaratto, 2011, 2012b, 2013; Cesaratto and Stirati, 2011), it seemed natural to look for analytical approaches to international economic relations (IER) that went beyond naive pro-European rhetoric and mainstream economic beliefs in the harmonic virtues of international laissez-faire. Some Sraffian contributions to the demolition of these beliefs will be recalled below. The pre-laissez-faire, mercantilist tradition was another natural candidate for attention. Mercantilism, the world of non-harmony, may be envisaged as an underground tradition, which a group of northern European economists called ‘the other canon’ (www.othercanon.org), parallel to the laissez-faire tradition. Kalecki’s view of net exports as a way of realising profits also buttresses a conflict view of IER. A cynical view also springs from political realism, a major tradition in political science. An intellectual father of political realism was Thomas Hobbes, contemporary of many British mercantilists. In this tradition, a social contract is enforceable at domestic level by attributing authority to the Prince, but not at international level where sovereign states do not submissively recognise any higher authority. Mercantilism and political realism converge in international political economy (IPE), a field that arose in the early 1970s as an attempt to bridge the gap between the disciplines of international economics and international relations (Strange, 1970).

Let me advance a possible explanation of the current stagnation and of the preceding crisis and crash. The 2007 crash, generally thought to be of financial origin, is imputed to speculation without regulation and/or to the inevitable eventual failure of otherwise self-fulfilling expectations: surely, there must be more to it, and an ample literature has accordingly developed. In this chapter I shall merely offer hypotheses, unaccompanied by statistical proof. Logic mistakes are likely, but my purpose is to stimulate research by others. In the following argument I will discuss events in the USA and the UK, and to a lesser extent continental Europe (perhaps Japan) - the argument is restricted to something that looks like a closed economy; and, in effect, if a China was not there, I don’t know what part of the following could stand.