Edward J. Nell

Theories of Growth and Theories of Value

A number of recent treatments of growth, otherwise widely divergent in approach, have found themselves confronted by certain common problems.1 For example, a series of questions has arisen with respect to the concept of capital: how should it be measured? Does it consist of one ‘capital good’ or of many goods? Should materials and depreciation be included as part of the capital upon which returns are calculated? Should the wage bill likewise be included? Secondly, some closely related questions concerning distribution have emerged, for the concept of capital adopted in a model determines to a considerable extent both what the model will say about the relation of the return to capital to the wages of labor and how this relation will be affected by growth. Consideration of relative shares leads naturally to a third question concerned with the relation between the amounts of the various factors advanced and the output produced. If this relationship, the ‘production function,’ is to be of any use in the study of technical changes during growth, it must be disaggregated to exhibit the structure of production as a set of relationships between technologically specific inputs and outputs. But in this case ‘capital’ will be composed of different specific goods in different industries, with the result that the notion of a ‘marginal physical product of capital’ must be discarded as meaningless.

On Realizing Profits in Money

A basic if neglected step in monetary theory is to show that a given amount of money will enable all transactions to take place in money. But if the money advanced is no more than current costs, how are profits to be realized in money? The answer requires tracing the pattern of circulation, which, in turn depends on the structure of production and distribution. The sectors have different patterns of interdependence, so imply different sequences of transactions. Borrowing is costly, so the amount of money must be minimized. These issues have been brought into focus in the interesting article of J-F Renaud.

Transformational Growth and the Long-period Method

The long-period method rests on gravitation which, in turn, implies that the real price-quantity system adjusts in a stable manner. The process of gravitation rests on prices that are flexible in both directions, and on the willingness of investors to shift capital in response to changes in market prices. Neither are empirically present or plausible in modern conditions, though both may have characterised capitalism in its earlier stages, based on craft technology. But later capitalism—operating mass production—exhibits inflexible relative prices coupled with volatile quantities. For the Classical equations to serve as the basis for the analysis of cycles and growth in modern conditions an interpretation must be found which does not beg the question of stability. Such an approach is sketched.

The Simple Theory of Effective Demand

Keynes set out to show that orthodox economic theory was flawed. To that end he accepted its postulates and general approach as the starting point for his argument. In particular he accepted marginal productivity theory as an account of the demand for labor, even though his own work in the Treatise had already suggested a different theory of distribution. Accepting marginal productivity theory committed Keynes to more than is generally realized, and marks a decisive difference between this model and Kalecki’s. It opened the way to the IS-LM interpretation and to the ‘neo-Classical synthesis.’ Kalecki’s approach, by contrast, fits well with mark-up pricing and a realistic notion of market behavior, in both small and large scale industries.

Demand, Pricing and Investment

Economists dissatisfied with the conventional theory of the firm have recently begun to examine the connections between a corporation’s pricing and investment decisions. Prices are seen as linked to potential output, rather than to current output, as in conventional theory. Perfectly competitive firms take prices as given and choose the optimal output, while in imperfect markets firms take the demand curve as given and choose the optimal combination of price and current output. In both cases productive capacity and the cost structure are taken as given. This may be reasonable for a small family firm, which at the outset makes a once-for-all choice of its optimal size, thereafter adjusting its current activity to changing conditions. But modern industrial corporations do not choose an optimal size; they invest regularly and grow. The conventional picture is not so much wrong as out of place — it is as though someone had painted a scene from the Middle West and tried to pass it off as a portrait of the Rockies. There are similarities, to be sure. The sky is blue and the grass is green, in both cases, and the sky lies above the land. Granted, but prairies are not mountains; it is not even ‘as if’ they were mountains. Corporate firms grow, and their pricing policies must be understood in relation to their growth if we are to accurately picture how the modern economy works.1

Rational Econometric Man

This challenging and original book takes a fresh, innovative look at econometrics, and re-examines the scientific standing of structural econometrics as developed by the founders (Frisch and Tinbergen) and extended by Haavelmo and the Cowles modellers (particularly Klein) during the period 1930–1960.

Transformational Growth in the 1990s: Government, Finance and High-tech

Our aim is to understand how the process of transformational growth during the 1990s shaped the boom and bust of the New Economy. From the debate on new technologies and productivity growth, we move on to consider the questions raised by technological developments of the 1990s. Our focus is on the three-way relationship between the development of information and communications technologies, structural change and economic growth, as the key determinants of the cycle of expansion. This brings to the fore the effects of private investment driven by high-technology but we also need to consider the role played by finance and macro policy, and, in particular, the government budget.

Reswitching, Wicksell Effects, and the Neoclassical Production Function

The Cambridge debate over capital theory has raised doubts about the validity of the neo-Classical theory of distribution (see G.C. Harcourt). As this theory is widely assumed in empirical work, and often drawn upon in the analysis of policy, a demonstration that it is seriously flawed would require extensive rethinking of many areas of mainstream economics. Accordingly, two principal lines of defense have been advanced. The first, an oblique defense, accepts the critique, but asserts that only a simplifying ‘parable’ has been damaged. The main corpus of neo-Classicism, general equilibrium theory, remains unscatched. The second is a counterattack, and contends that a well-ordered neo-Classical production function can be constructed after all (see Gallaway and Shukla, 1974, and refutations by Garegnani and by Sato, 1976).

Growth, Distribution, and Inflation

As is well known, the warranted rate of capital accumulation is unstable. This rate is defined by the equality of aggregate demand, I/s (where 1/s is the multiplier), to aggregate supply, K/v (where 1/v is the productivity of the capital stock), and v is assumed constant, so that fixed coefficients prevail. Also there is either no, or Harrod-neutral, technical progress. Relative prices are assumed practically fixed, changing only slowly, with changes in the rate of profit. There is a given, initial money wage.

Does the Rate of Interest Determine the Rate of Profit

Does the rate of interest on money, as fixed by the Central Banking Authorities, determine the rate of profit? There is a suggestion to this effect in Sraffa (1960, p. 33) and Pivetti (1985) has interpreted this to mean that the ‘normal’ rate of profit, as opposed to the actual rate, will be governed by the effects of the rate of interest on the ratio of money prices to money wages: a fall (rise) in the rate of interest will lower (raise) costs, so will lead to lower (higher) prices, but there will be no similar effect on money wages. So a fall (rise) in the rate of interest will bring a rise (fall) in the real wage; thus the rate of profit will move in the same direction as, and by a magnitude proportional to the change in the rate of interest. In short, ‘lasting changes in interest rates must be followed by corresponding changes in normal profit rates’ (Pivetti, 1985, p. 81). Similar arguments have been advanced by Panico (1985) who finds the root of the idea in Keynes’ Chapter 17, by Vianello, (1985) and by Schefold, (1985), who limits the claim by arguing that the mechanism works only under historical conditions of slow accumulation.