Connell Fanning

Ireland: Industrial Co-operatives

In Ireland, enterprises are regarded as co-operatives if they are registered under the Industrial and Provident Societies Acts 1893–1978. To register, an organisation must satisfy the Registrar of Friendly Societies as to membership size, objectives of the society and acceptability of its rules. The acts, influenced as they are by the laissez-faire attitude of the legislature at that time, leave wide scope as to what may or may not be included in the constitution of ‘rules’ of the society. There are no compulsory clauses which must be inserted in the rules.

The Rate of Interest

The traditional theory of interest, as Keynes understood it (CW, VII: Chapter 14, with Appendix; also CW, XIV: 101–4), was an essential part of a body of economic theory which he regarded as dealing with the ‘real-exchange economy’ (CW, XIII: 409). The task which he sought to undertake, therefore, was to develop an explanation of the phenomenon of interest in the monetary economic system. In doing so he saw himself as filling one of the three major gaps, as he described them, in traditional economic theory (CW, VII: 31). His theory of the determination of the rate of interest and his explanation of the role of the rate of interest in the economic system completes his analysis of the ‘system’s determinants’ on the demand-side. The other two determinants, it will be recalled, are the propensity to consume and the schedule of the marginal efficiency of capital (CW, VII: 183–4).

The Supply-Side

The supply-side is as important as the demand-side in the general theory of employment. As in the general theory of value or price the two sides are as important as the two blades of a scissors (Marshall, 1920: 348). Yet Keynes says very little about his supply-side. The reason seems to be that he considers what he calls the aggregate supply function to involve ‘few considerations which are not already familiar’ (CW, VII: 89). ‘The form’, he says, ‘may be unfamiliar but the underlying factors are not new’ (CW, VII: 89). It may be taken, then, that Keynes did not see himself as making any fundamental additions to economic theory in his discussion of the supply-side even though he develops it in terms of the resources which firms employ and the expectations they form in a way which, in retrospect, seems to make a significant addition to the theory of the firm as it was in his own time.

Keynes’s Way of Theorizing: The Marshall Connection

The General Theory amply demonstrates that Keynes took his ideas about economics in general and about economic theory in particular seriously and followed them conscientiously. Hence, if that book is to be understood, it is essential that his conception of the nature and purpose of economics be appreciated. Although he did not write a systematic account of his views in this connection a reasonably clear picture of his thinking may be gleaned from various passages scattered throughout his writings and his correspondence.

Wages, Prices and Money

Keynes regarded the received treatment of money-wages and of the quantity of money as being particularly unsatisfactory. As he saw it, the presuppositions of the existing theory were irredeemably flawed as far as the effects of changes in money-wages and in the quantity of money were concerned. For that reason he elaborated on the general principles of his own analysis with a view to formulating an explanation of the part wages and the quantity of money play in determining the employment of the available resources which would be consistent with his own method of analysis.

The Demand-Side I: Consumption

Keynes formulated the theory of the supply of output as a whole in terms of employment. The next step is to discover what governs the demand for output as a whole. As we saw in the previous chapter, he based his theory of the supply of output as a whole on the received theory of the firm. There was no received theory on the demand-side on which he could base a corresponding theory of the demand for output as a whole. Consequently, he had to develop a completely new theory for that purpose. He did so by reference to the demand for output for consumption purposes and to the demand for output for investment purposes. By reckoning consumption and investment in wage-units the employment implied on the demand-side is taken into account. Thereby, the demand for output as a whole is put on the same footing as its supply and the two sides can be analyzed with a view to the discovery of the conditions in which they would be in equilibrium.

The Demand-Side II: Investment

Investment is the second source of demand for current output. For the most part, Keynes’s predecessors and contemporaries did not see any need to explain what determines the demand for goods for investment purposes as a whole. They took it that, savings, whether in physical terms or in monetary terms, were invested and that the rate of interest provided the mechanism which ensured that investment and savings would be equal to each other. Keynes’s insight that the question as to what determines the employment of the available resources had to be addressed, his model of the monetary-entrepreneur economy and his conception of the phenomenon of interest ruled out the possibility that the rate of interest would do any such thing. Accordingly, he had to work out a theory of the demand for output for investment purposes. He did so in a way that complemented his theory of the demand for output for consumption purposes.

Foundations: Units, Expectations, Income

In the course of writing The General Theory, Keynes found that ‘three perplexities’ impeded his progress. He could not ‘express [himself] conveniently’ until he had found ‘some solution for them’ (CW, VII: 37). The three perplexities were ‘the choice of units of quantity appropriate to the problems of the economic system as a whole; … the part played by expectation in economic analysis; … and … the definition of income’ (CW, VII: 37).

Introduction: The Keynesian Evolution

In The General Theory of Employment, Interest and Money (1936) Keynes set out to answer the question: what determines the employment of the available resources in the monetary- entrepreneur economy? Even to ask that question is to imply that the resources available at any particular time could be employed at different levels. If they could, the output of the economic system as a whole would not be fixed. Other things being equal, the level of output as a whole would correspond with the level at which resources were employed. Hence the question is synonymous with the question: what determines output as a whole? The answer to this question is what, as Keynes said, The General Theory purports to be (CW, VII: xxvi).1 The question is a valid one because (i) we know from experience that the extent to which resources are employed varies from time to time; (ii) the assumptions required to support a theory that resources are normally employed fully or that general unemployment is merely a temporary aberration are not plausible, as is argued below. It is not, however, until the question is addressed in a methodical way that its validity can be fully appreciated. Up to Keynes’s time the ‘pure theory’ relating to the question had ‘seldom been examined in great detail’ (CW, VII: 4). The issue was by no means totally ‘overlooked’, but ‘the fundamental theory underlying it [had] been deemed so simple and obvious that it [had] received, at the most, a bare mention’ (CW, VII: 4–5, footnote omitted).

Aggregate Supply, Aggregate Demand and Income Distribution in Ireland: A Macrosectoral Analysis.

from the sh0rt-term, or cyclical, fluctuations of the economy and to concentrate !nitially on the long-term structure. The rationale for this is the assumption that the pressures for following Neo-classical competitive-like behaviour may be greater !n the long term. The linked-peaks method is used to define capacity output for any particular sector of the economy and the secular trend is used for employment. Using the normal definition of the capital stock, a CES production function is estimated, indirectly via the marginal condition on labour. The marginal condition for capital yields Jorgenson-like investment equations. Actual output is then related to capacity output Via a behavioural equation determining capacity utilisation as a function of short-term factors. The following points can be isolated for comment: (i) An empirical definition of long-run or capacity output is introduced in order to estimate the underlying CES value-added technology. Here, the linked-peaks definition is used as a proxy for the essentially unobservable long-run variable. (ii) Technical change is introduced explicitly into the production function, but is restricted to the neutral disembodied form. (iii) The criterion of profit maximisation is invoked to derive factor demand equations. However, the factor demand equations are formulated in a hybrid form and not in the reduced form specification used in Appendix 3.1. Hence, Behrman’s investment equations are Similar: in form to the original Jorgenson equations (Jorgenson, 1963), and as such are subject to the various criticisms that have been made Of this approach (Brechling, 1975, pp. 20-22). (iv) Although the long-run output and the factor demand equations are formulated in a fairly tightly specified Neo-classical framework, the determination of actual output (and, by implication, capacity utilisation) is tackled in an ad hoc fashion where various shortrun market conditions, profitability and weather come into play. (v) Capacity utilisation feeds back into investment determination as one factor influencing the long-run investment decision. Supply Modelling in Response to Energy Price Impacts In order to analyse the problems of the turbulent 1970s, it is fair to say that a major re-evaluation of approaches to model building has been taking place. Some of the issues being re-examined are surveyed in the paper by Masson et al (1980). There seems to be a general view developing that formal econometric techniques may not be the best way to discriminate between alternative SUPPLY, DEMAND AND INCOME DISTRIBUTION IN IRELAND 79 theories which are often empirically difficult to distinguish. This has led to a desire to impose more theoretical structure on models, particularly on their medium-term properties, and to use the model results in the light of the particular set of maintained hypotheses chosen. A recent p aper by Helliwell and McRae (1981) stems from this re-evaluation and incorporates many of the newer approaches to model building. It gives a special role to energy as an additional factor input. In its initial form it is very aggregate (about 50 variables in total), an approach adopted in order to permit models of similar structure to be estimated and compared for other countries, without running into too many data difficulties. The Helliwell and McRae approach contains the following characteristics: (i) A sequence of nested production functions is used to combine a capital-energy (KE) factor bundle (CES) with labour (CD). (ii) The capital-energy bundle is modelled using a simple putty-clay vintage approach, i.e., the energy intensity of capital is freely adjustable ex-ante but fixed ex-post. (iii) To simplfy estimation, factor demand equations and factor share data are used to obtain values of the production function parameters. (iv) The actual consumption of energy relative to the amount required to fully utilise the vintage KE bundle is used as a measure of capacity utilisation. (v) Inventory changes and imports are used to reconcile unanticipated divergences between potential and actual output. (vi) Factor-based measures of potential output and operating costs are used in conjunction with final sales and desired inventories to derive the short-term production decision. (vii) The role of imports in aggregate supply is explained; and (viii) A hierarchical series of interrelated factor demand equations, based on the nested production functions and a derived measure of the expected level cf profitable future production, are calculated. The resulting overall framework provides a tightly integrated system which can be used to study policy decisions and evaluate alternative policies, and provides a standard or benchmark for evaluating the structure and organisation of other models. The factor input and technology modelling approaches being developed at present impose heavy demands on data and mathematical sophistication, but are made necessary by the complexity of the issues facing economic policy-inakers today. As yet there is no consensus as to the most appropriate or fruitful line of development in studying the Irish economy, nor are suitable national accounting data available for such 80 THE ECONOMIC AND SOCIAL RESEARCH INSTITUTE applications. However, the two examples cited in this section seem particularly suggestive for applications to Irish problems in the general area of supply (HeUiweU and McRae)and, in particular, agricultural supply (Behrman). In Chapters 4 and 5 we turn to the problem of setting out and attempting to operationalise these techniques.