Skip to main content

Garegnani on Long Run Effective Demand

The famous Italian report, or parts of it, written in the early 1960s, which preceded the English papers published in the Cambridge Journal of Economics (CJE) in the late 1970s (here and here; subscription required), has been translated and published by the Review of Political Economy (ROPE) and is available here.

Some excerpts that are particularly relevant given recent debates on growth within heterodox schools. Garegnani says:
"it follows that the effect of increases in real wages on the absorption of unemployment will depend in large measure on how they affect final demand. 
It is necessary then to distinguish between the two components of final demand: consumption and exports."
 On the effects of real wage changes on consumption he argues that:
"As regards consumption, increases in real wages lead to a rise in consumption and hence, provided the economy has accumulation capacity that is not fully utilized, to an expansion of the productive system and to an increase in employment. Given the level of productivity in the economy, the increase in real wages will in fact cause a redistribution of income in favour of a class that consumes a major portion of its income, and with that an increase in the first component of final demand... 
a steady and continuous rise in real wages along with the consequent steady and continuous increase in consumption can serve to instil in entrepreneurs a confidence in the continuous expansion of the market for their products, inducing them to undertake investments and increases in employment and output that will in turn help to raise final demand."
Then the question is what is the effect of real wage changes on exports:
"But how far can this increase in consumption due to the rise in real wages continue before its effect on final demand is offset by a reduction in the other element of final demand, net exports? ...  
The discussion of the effects of a change in real wages on exports is much more complicated than the discussion of how real wages affect consumption. Exports do not in fact depend in a straightforward way on the movement of wages in the same way that consumption does. Variations in net exports depend upon the money prices of goods, and unless additional assumptions are introduced, no necessary connection exists between the movement of real wages and the behaviour of prices. If real wages were to rise via a fall in prices with constant money wages, the situation with regard to exports would be improved. If real wages were to increase via an increase in money wages with prices remaining constant, the exports situation would be neither improved nor harmed. If however the increase in real wages were to lead to increases in the level of prices, exports would be harmed in a regime of fixed exchange rates."
And that is before bringing the question of productivity into the analysis.

From a more historical point of view, the significance of this report is that it was written right after the publication of Sraffa's Production of Commodities by Means of Commodities, and of Garegnani's own doctoral dissertation, published as Il Capitale nelle teorie della distribuzione. This should make clear that part of the Sraffian project was the revival of the classical theory of distribution, concomitantly with the extension of the Keynesian Principle of Effective Demand to the long run.


Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…