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.