The world according to Garegnani

 

    I have not thought of this until I had lunch with Anwar Shaikh today. I have personally known Anwar for at least ten years. But only today it struck me that I was meeting a hero of my early intellectual life, although the difference in age between Anwar and me is not that great. But he was my hero while I was a nobody.

    In the early 1980s, thanks to my mentor Branko Horvat, we had a very good group of neo-Ricardian economists in Belgrade who used to meet about once a month, present papers and discuss them. It was a pan-Yugoslav group with meetings alternating between Belgrade, Zagreb and Ljubljana. It was carefully organized, with presentations, assigned discussants, and commentators. Everything was very friendly, collegial and non-competitive. We would discuss and disagree and then go to a nice restaurant.  The literature we studied was entirely Marxist and Staffian. We read many neo-Ricardian/neo-Marxist writers but among all of them, for some reason (perhaps because of clarity of his writing), I liked Anwar Shaikh the most. This is what I recalled today.

    The smartest member of our small group of neo-Ricardians eventually killed himself. I remember getting together with him for dinners tete-a-tete that would last for hours. Then we would move to his very comfortable and large apartment in downtown Belgrade where he would tell me at length how Garegnani’s equation (6) in his 1972 paper was wrong; how mathematically it did not make sense. He would get a piece of paper, and write down the correct derivation. He was not a fake. He knew mathematics extremely well, but could not write quickly and easily. It would take him months and even years to write a couple of pages; discussing a single draft of his paper, we must have spent five or six dinners, drank ten bottles of wine, and  met at one or two months intervals, where each time I would learn that he had advanced by one paragraph in his earth-shattering Sraffian paper. I think that eventually, perhaps ten years later, a couple of his papers were published. But they give just a pale reflection of the brilliance of the man.

    Neo-Ricardians in Serbia existed in the world that had no relationship with  anything around them. They discussed capitalist relations of production, while we had socialist. They focused on the π/w relationship while profit was an unmentionable category. They spoke of wage bargaining while the state decided on salaries. So theirs was the world of equations, differential calculus, and logical rules that could as well have been the world of astronomy as the world of a social science.

    One May 1 (that is, accidentally, on the holiday day), I had a lunch with several friends, and after the lunch ended, I went out in search of a taxi to go back home. It was raining. I ran into one of my socialist, and this case neo-Keynesian, professors. She was also in search of a taxi. In those days, in Belgrade, there were two taxi companies: a private one, and a state one. We found a private taxi company car. But she refused to get into it. She wanted to be driven by a state-owned company and a worker who was neither a petty-bourgeois nor a hired laborer. The problem was that we could not find one such. Finally, one state-owned taxi appeared but the driver was unwilling to stop and take us (most likely he was driving home to rest). My professor however hit the roof of his car with her umbrella and the taxi stopped.

    So the two of us shared the ride, and I insisted that I should pay. She not only refused but pronounced the sentence that I have said a few times since: “I will never let my student pay for me”.  

    During the ride she told me that she was just completing the book that formally proved the superiority of the socialist mode of production and the forthcoming end of capitalism. I thought it was strange that we had to beat the socialist taxi driver with an umbrella to drive us home but said nothing.

    Like neoclassical economists in the West who lived in a made-up world of their own, we lived in ours. With correct equations and beating taxi drivers to pick us up.  

Abundance, capitalism and climate change

 

In classical Marxism, communism is defined as a society of material abundance. It is a society where goods flow in abundance (“after the productive forces have…increased…all the springs of co-operative wealth flow more abundantly”, Marx, Critique of the Gotha Program). It is also a society that, having overcome the division of labor, allows for full self-realization and flowering of individual abilities:

He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so [under capitalism] if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner… without ever becoming hunter, fisherman, herdsman or critic.” (The German Ideology)

When we define abundance in communist society it is important to keep in mind that it is material abundance, viz., abundance of physical goods and some services. This cannot be a abundance in everything. We can each have as many cars as we wish but the number of desirable parking places near the good restaurant, where we get a free dinner,  or near a good theater will always be limited.

One could even argue that the abundance of material goods cannot be absolute. For example, if cars are abundant and one can have as many as he or she wishes, they can indulge in anti-social behavior by destroying a car each day.  Thus eventually, society must step in and impose a limit on the number of cars. It can be countered, however, that this is not a likely behavior because a socially destructive behavior is generally indulged in order to show power and wealth. One could expect this kind of behavior to be minimized in communist societies because wanton destruction of goods that are accessible to all does not convey status. A useful comparator may be the wastefulness with the things that are relatively cheap today like water or electricity are used. Neither of them is, for most households in rich countries, very expensive. There is thus no particular status one gets by being ostentatiously wasteful with them. The same might apply for most goods under communism: since they are accessible to all, intentional wastefulness is not signaling power.  

This summary of the standard Marxist view faces one significant problem. The definition of abundance implies full satisfaction of all needs. However, Marx very clearly defines needs as a social category, something that evolves with the development of society. What it means is what we perceive as a need today is a function of what currently exists in the world and consequently what is the current level of development. In Roman times nobody felt the need for a smart phone, nor a frustration if they did not have it. Likewise, we do not experience  the need to spend a weekend on Mars simply because such a good is unavailable.

If needs are a historical category, then new needs arise with technological progress. If new needs are constantly born, the abundance that was presumed in the opening paragraphs cannot be achieved because sufficient material means to satisfy these new needs will always be deficient. When the first laptop was invented, no matter how efficient the production, society could not create billions of laptops almost instantly. Some people’s needs for a new laptop had to go unsatisfied. The access to new goods must always be unequal, and this inequality will produce frustration and imply absence of abundance.  

To summarize: Our needs increase in step with technological progress but the technological progress cannot at all points in time satisfy the needs of everybody. Abundance defined as full satisfaction of all material needs cannot be achieved in technologically advancing  societies.

When can all needs be covered by societal production? Only in a society which does not experience technological progress and where no new needs can arise. In such a society it is possible to imagine an almost unlimited production of things which already exist. That society can be related to today's society by realizing that in the rich part of the world most of our current material needs, defined in terms of goods that already exist, can be fully satisfied. Given the productive capacity of rich countries, everyone could have a decent home, refrigerator,  laptop, dishwasher, car etc.

To reach a society of abundance requires that we accept absence of technological change or economic stationarity. The question then becomes  whether capitalist society can ever be stationary. Schumpeter thought that imagining capitalism as a stationary society is a contradiction in terms. Capitalism can exist only if profits, on average, are positive. No capitalist or entrepreneur would invest if they cannot expect a net return, no more than a worker would work for a zero wage. If profits are positive they will be used for investment; investments will generate growth, and that very growth will create new products, which in turn will create new needs and make the society of abundance impossible.

This then means that the stationary society that is compatible with full satisfaction of all human needs cannot be capitalist. Capitalism, by definition, means limitless change and limitless progress. With the society of limitless change and limitless progress we cannot have abundance.

Degrowth advocates therefore might have a valid point when they argue for an end to capitalism if they believe that climate change can be stopped only if society is stationary. Stationary society, end of capitalism, and abundance are logically consistent.  

 

P.S. The last point is an implication based (I hope correctly) on Kohei Saito’s arguments. I had a privilege to participate in a panel with Kohei and my interpretation is based on that discussion. I have not yet read his just published (in English) book “Slowdown: The Degrowth Manifesto”.

 

Why not Keynes? Keynes’ uneasy relationship with income distribution

 

I was asked several times, and most recently only a couple days ago, why in Visions of Inequality I do not discuss Keynes. He doesn't have a chapter like the other six authors and when I mention Keynes it is only in passing and simply in relationship to the marginal propensity to consume. My answer is twofold. First,  I think that Keynes was not interested in income distribution. And, more importantly, at one point where he clearly could have, or even should have, brought income distribution into discussion he declined to do so and decided to ignore it.

It is all tacitly assumed throughout The General Theory that the functional income distribution (labor share In total output) is unchanged. Keynes believed, or pretended to believe, in the so-called Bowley’s law, a relative fixity of labor and capital shares, found to have existed in Britain over the first two decades of the 20^th century. The fact that “the law” applied to only one country and held for a short period of time did not seem to have bothered Keynes. This in turn meant that Keynes believed that interpersonal income inequality was also fixed. If both functional and interpersonal inequalities are fixed, there is no need to discuss income distribution, and Keynes indeed does not discuss it at all.

The second reason is more interesting and to some extent more dramatic. It illustrates what I believe was Keynes’s politically-induced unwillingness to bring income distribution into The General Theory.  

It is well known that the lack of effective demand, the main topic of the book, arises from the fact that consumption and private investments are not necessarily equal to the aggregate supply. As Keynes writes, total consumption increases only as a fraction of the increase in aggregate output. That means that the shortfall between the two (aggregate supply on one hand, and aggregate consumption on the other) has to be filled in by private investments. It is only in a special case that the desired private investments will be exactly equal to that gap. But when investments fall short of it, government spending has to be brought in to increase the effective demand and to balance supply and demand (at a given level of employment). 

Even a very cursory look at the fundamental equation which is A  (aggregate supply) = C + I + G shows that if C (aggregate consumption) is a function of income distribution an obvious way to rebalance supply and demand is to “improve” income distribution, that is to transfer purchasing power from the rich to the poor. If $1 is transferred from a rich person who normally consumes only 50 cents, to a poor person who would consume 95 cents, aggregate consumption will increase. One  can then fine-tune it until it closes the gap between the aggregate supply and the effective/aggregate demand. There is no need to introduce government spending, G.

The question is then, why was such an obvious path out of insufficient demand not taken by Keynes?  He had in front of him two possibilities: one was to increase government spending; the second was to redistribute income towards the poor. The latter is an easier solution and entirely within the logic of the model itself, including within the logic of a new concept of “propensity to consume” which Keynes has introduced. But if income distribution is assumed unchanged or unchangeable, or if one does not want to touch income distribution for political reasons, then the only way out is the one taken by Keynes: increased government spending.

It is remarkable that in the entire General Theory income distribution plays absolutely no role at all. When Keynes discusses the forces that affect aggregate propensity to consume he lists no fewer than fourteen: six of them “objective”, eight  “subjective”. Just to give an idea what are the forces that affect consumption, here is a list: among the objective factors: (i) change in wage units (i.e., change in real income), (b)  change in the difference between net income and income, (c) windfall changes in capital values, (d) change in the rate of discount, (e) change in fiscal policy, (f) change in the expected relation between present and future level of income; as for the psychological causes, they are (a) to build a reserve against unforeseen contingencies, (b) to provide for an anticipated future relation between income and  the needs of an individual and his family different from which  exists at the present, (c) to enjoy interest and appreciation, (d) to enjoy a gradually increasing expenditures, (e) to enjoy the sense of independence, (f) to enjoy a masse de maneuvre to carry out speculative or business projects, (g) to bequeath a fortune, (h) to satisfy pure miserliness. It is rather curious that among this plethora of causes, there was no place for income distribution.

That Keynes was aware that income distribution can affect propensity to consume is shown, very briefly and discreetly, in a couple of references in Chapter 22 (“Note on Trade Cycles”; importantly, the chapter is not in the main part of the book, but in “Short Notes Suggested by the General Theory”, rather sundry reflections stimulated by Keynes’ writing of the main  text), where Keynes writes: “I should readily concede that the wisest course is to advance on both fronts [increasing investments and consumption] at once. Whilst aiming at a socially controlled rate of investment with a view to a progressive decline in the marginal efficiency of capital, I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume. There is room, therefore, for both policies to operate together; — to promote investment and, at the same time, to promote consumption” (p. 325). Since this section opens with a clear discussion of “schools of thought” which “maintain that chronic tendency of contemporary societies to underemployment is to be traced to under-consumption;…that is to say…to a distribution of wealth which results in a propensity to consume which is unduly low (p. 324), it is clear that the increase in consumption that Keynes has in mind here comes from changed distribution of wealth or income. However, here too, he believes that working on increasing investments and, if needed, government spending, is more immediate and better (since investments result in augmentation of productive capacity) than altering distribution to increase consumption. This is the furthest that Keynes has come in the entire book to acknowledging a role for income distribution.

 All but universal omission of income distribution was quickly noted. In a 1937 article in The Review of Economics and Statistics, Hans Staehle shows how German wage distribution has changed in the period 1928-1934, and how it has affected consumption. He registers his disbelief that Keynes could have overlooked such an obviously potent force that affects aggregate propensity to consume and in turn effective demand. He writes:

it is obvious that any modification in the distribution of incomes entails a modification…so that the marginal propensity curve of the market can be derived from the individual curves…only on the assumption that the size-distribution of incomes is constant. Keynes has entirely overlooked this implication. He takes it that the derivative of the market function [of aggregate consumption] will have the same characteristics as that of any individual curve…Among the factors capable of shifting the market curve, he does not list changes in the size-distribution of incomes, but only mentions changes in the income distribution as between entrepreneurs and rentiers [and this very modestly and in passing]. But even this Keynes does not consider to be an important factor. The only other reference to the income-distribution in connection with the propensity to consume is in the chapter on the trade cycle, where the "redistribution" of incomes is spoken of as a measure by which the propensity to consume may be stimulated; but what type of "redistribution" Keynes here has in mind is not clear; at any rate, there is no proof that he meant a modification of incomes according to size (p. 138).

  The decision not to use “improvement” in income distribution to solve lack of aggregate demand could have been, I think, politically motivated. By weighing the political acceptability or political risks of the two solutions, Keynes probably decided to go with greater G as politically and ideologically more acceptable. Neither approach was politically easy, of course. Most of the economics profession and business interests at the time (e.g. US Chamber of Commerce in the late 1930s) were opposed to increased government spending. It involved higher taxes or printing fiat money and surely greater involvement of government in the economy.  But Keynes might have thought that arguing in favor of redistribution could have been even less politically popular among the ruling classes, and for the academic acceptance of his theories even worse, bringing him too close for comfort to Hobson and Sismondi and similar “schools of thought”.

I think there is little doubt that Keynes, under the best and the most favorable interpretation, had no interest in income distribution because he believed that—at least analytically—it can be taken as fixed in its functional and interpersonal aspects. A less charitable interpretation of what he did is to argue  that he was worried that his theories may be conflated with those  of  “underconsumptionists” from the “underworld of economics” (Keynes’ term), who tended to favor change in income distribution as a solution for the lack of effective demand. Keynes did not want to “be” like them and he therefore ignored income distribution throughout.

  

PS. In the very opening chapter of The Economic Consequences of the Peace, Keynes mentions income distribution, but in an unusual way, to argue that high inequality before the World War I was not socially destabilizing so long as the rich were seen not to engage in ostentatious consumption, but to use their excess money for investments—which, of course, create jobs. “…the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit understanding that they consumed very little of it in practice” (p. 20). They were just simple vessels through which the surplus of purchasing power flowed to get transformed into investments. This was, according to Keynes, a part of the social compact that existed prior to the War and ensured social peace: “I seek only to point out  that the principle of accumulation based on inequality was a vital part of the pre-war order of Society and of progress as we then understood it” (p. 21). He was not sure that it would endure after the War.

 

J. M. Keynes. The general theory of employment, interest and money, Harcourt, Brace and the World, 1964.

J. M. Keynes, The economic consequence of the Peace, Penguin Books, 1971.

Hans Staehle, “Short-Period Variations in the Distribution of Income”, Review of Economics and Statistics,  Vol. 19, No. 3 (Aug., 1937), pp. 133-143