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Technical Change, Effective Demand, and Employment
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Seminar Paper No. 10
Oct 2001
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Sergio Cesaratto (info),
Antonella Stirati (info), and
Franklin Serrano (info)
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"...it seems to me that we should not make use of the concept of
autonomous investment at all," Duesenberry (1956, p.141)
1. Introduction
The relation between innovation and employment is of particular interest
today. For instance, the recent rate of job creation in most European
countries has been rather poor and unemployment has reached in the last
fifteen years or so levels unknown in the preceding post-war period. Could
technological change be the cause of these high unemployment levels? This is
a traditional thesis recently recovered by popular authors (Rifkin, 1995), but
also echoed, with more sophisticated arguments, by mainstream economists to
justify the dismantling of post-war II labour and social institutions,
allegedly to cope with structural change. The position of mainstream
economists seems reinforced by the case of the US in which, according to their
opinion, the association of a more "flexible" labour market and
strong technical change is behind the better employment performance.
The purpose of this paper is to present a critical examination of the
theoretical relationship between technical change and aggregate employment.
This relationship is treated in different and, sometimes, in opposite ways by
different theories of distribution and accumulation. The analytical strength
of some of these positions is assessed here. According to Neoclassical
economists technical change is always beneficial to labour employment,
provided that factor markets can work freely and competitively. This view is
the most influential nowadays, but it is not free of serious theoretical and
empirical shortcomings. This approach is contrasted to the renewed strength
that the work of Sraffa and the results of the capital theory controversy have
given to the old Ricardian view of innovations as harmful to labour
employment . Next, we ask ourselves whether 'compensation mechanisms' to
technological unemployment could be envisaged on the effective demand side.
What may be called the neo-Schumpeterian approach suggests a positive
association between technical change and effective demand. In this case a
compensation effect would be due to the positive effects of innovations on
autonomous investment. This view is discussed and criticised by using a simple
supermultiplier model in which effective demand is the determinant of economic
growth. Our general conclusion is that there are no basis to believe that
there will be sufficient automatic compensation effects either of the
Neoclassical or neo-Schumpeterian types. Fast technical change and full
employment are only consistent either by circumstances that somehow affect
effective demand - such as exports or speculative bubbles that affect
consumption patterns -- or, more preferably and systematically, through
the adoption of expansionary macroeconomic policies.
2. Technical change and unemployment in neoclassical theory and in
Ricardo
2.1. The Marginalist or 'mainstream' view
According to the marginalist approach market economies, if left free to
operate, i.e. if prices are flexible and there are no obstacles to
competition, always tend to the full employment of labour, and do so also when
technical change reduces the labour inputs required to produce a given
output.
Such tendency to full employment is brought about by the substitutability
between factors of production, which in turn relies on two mechanisms. The
first, direct substitution, is the change in the proportion in which
the factors of production are used in the production process. According to the
theory, the additional employment of one unit of a productive factor (say,
labour), given the amount of the other factors, has decreasing returns (the
marginal product of labour is decreasing). Accordingly, if for example, there
is a shift in labour supply caused by immigration, or some other demographic
phenomena, and the price of labour falls as the additional labourers compete
for employment, entrepreneurs will find it more profitable to use techniques
that involve a higher proportion of labour in combination with the other fully
employed factors, up to the point at which the marginal product of labour
equals the new full employment wage level. If there are no constraints
preventing the required fall in wages this process will lead towards the full
utilisation of the additional labour supply, albeit at a lower real wage, and
to a growth of national output.
The second, indirect substitution mechanism works through changes in
consumers' optimal choice of their consumption baskets as the relative prices
of factors and goods change. Again, let us suppose an increase in labour
supply and fall in the real wage. According to the theory, this brings about a
fall in the relative prices of the goods that are produced with
labour-intensive techniques (i.e. techniques entailing a higher proportion of
labour to the other inputs). This fall tends to alter consumers' demand in
such a way that the (now supposedly cheaper) labour intensive commodities will
be demanded and produced in a higher proportion than they were before, thereby
increasing the demand for labour in the economy. Thus, even if there is no
factor substitution in production (i.e. the 'production function' has fixed
coefficients), the economy will tend to full employment.
In this analytical framework innovation has in one respect the same effect as
an increase in the quantity of production factors, say labour and capital: as
these tend to be always fully employed, such an increase will necessarily
result in an increase in the level of production and income 'as soon as the
liberated resources can be effectively transferred to new uses' (Hicks, 1932,
p.121).
As well known, according to the seminal Hicksian analysis, an innovation is
most likely to raise the full-employment marginal productivity of all
'factors', labour and 'capital'. An innovation is said 'labour saving' if the
full employment marginal productivity of labour increases proportionally less
than that of the other factor, suggesting that the innovation has made labour
relatively less scarce. Only in the case of 'very labour-saving' innovations
will the full employment marginal productivity of labour and the equilibrium
real wage fall. In this case, if the downward adjustment of the real wage is
not immediate the innovation may initially create some unemployment. The
competition among workers, however, will induce the fall in the real wage and
the inception of the two mechanisms illustrated above. Thus, according to the
traditional neoclassical framework technical change may cause temporary
unemployment if technical change is very labour saving and the adjustment
to the new lower equilibrium wage is not immediate. Note, however, that Hicks
regarded very labour saving innovations as an extreme case that would seldom
occur (or rarely occur so pervasively to outweigh the positive effects on the
equilibrium wage rate deriving from other types of innovations).
If the technical innovation occurs in a single industry and the elasticity of
demand for the product of this industry is not high enough to allow the same
employment level in that industry, part of the labour force will have to move
to other industries and this may create frictional unemployment.
However, while contemporary mainstream theory retains the mechanisms described
above, and envisages an underlying tendency of market economies to full
employment, in applied analyses it is generally maintained that not only
temporary, but also persistent unemployment may result from innovations.
Consistently with the general approach outlined above this is attributed to
market imperfection and price rigidities, and particularly of institutional
factors, such as the existence of unions, unemployment benefits, costly firing
procedures and the like. These rigidities would tend to prevent the required
adjustments both in the level and in the relative values of real wages and the
necessary mobility of the labour force between industries and occupations with
the consequence of preventing the working of the substitution mechanisms just
described, and of rendering rather persistent the unemployment resulting from
innovation and structural change. Thus, while it is maintained that innovation
and structural change will not cause long run unemployment if markets work
freely and competitively, in the actual situation of contemporary industrial
countries, and particularly in Europe, high and persistent unemployment is
often said to be associated to technical and structural change, as a
consequence of the existence of 'rigidities' in these economies which prevent
the required adjustments.
To enquiry further in what ways technical change may cause persistent
unemployment in the mainstream framework of analysis we must turn to the
conventional explanation of persistent unemployment based on the concepts of
the natural unemployment rate and of the NAIRU -- non accelerating
inflation unemployment rate. While an entirely clear-cut distinction between
the two concepts cannot be drawn, the first is usually regarded as associated
mainly with frictional (mismatch) and voluntary search unemployment, while the
second is generally used to indicate an equilibrium unemployment which
includes, besides the above two components, involuntary unemployment resulting
from various market or information imperfections leading to equilibrium wages
higher than full employment wages (particularly resulting from efficiency
wages, union bargaining, and hiring and firing costs).
The fact that in any economic system 'shocks' - i.e. structural changes,
including technical innovations - are continuously occurring, is regarded as
at the root of the two major components of the natural unemployment
rate:
- Mismatch between labour supply and demand:
'shocks' will tend to determine a difference between the characteristics
(skills, education etc.) of the labour supply and those required by the
employers.
- Voluntary search unemployment: the 'shocks' also alter
equilibrium relative prices and wages. Since economic agents incur costs and
take time to acquire information about them, for each occupation there will
not be a single wage offered by firms, but a distribution of wages. This, it
is argued, renders rational for workers to spend some time collecting
information and searching for the best opportunities while remaining
unemployed (Phelps et al., 1970). This type of unemployment, other
things constant, would be increased by an intensification of the
'shocks' - hence by an intensification of technical change - because this
would increase the wage dispersion around any given mean and this in turn
increases, according to the model, the reservation wage and the duration of
search on the part of the 'optimising' unemployed.
In addition, according to the literature concerning the NAIRU, equilibrium can
be associated to involuntary unemployment due to:
- obstacles to free competition and market imperfections.
Technical change may also raise the natural unemployment rate that results
from these factors, particularly as they are analysed in 'Insiders-outsiders'
models. These have pointed to the ability of employed workers (the 'insiders')
and their unions to fix wages at a level higher than that compatible with full
employment. This ability is said to derive from the bargaining advantage due
to the existence of hiring and firing costs, which are to an extent determined
by institutional factors (for example, the existence of costly firing
procedures). The insiders' objective (according to this view) is to obtain the
maximum wage compatible with preserving their employment. Hence, the marginal
product of labour at the given employment level fixes a maximum to the real
wage. If an initial 'shock', which may be caused by a very labour saving
innovation, diminishes employment in some firms, the remaining 'insiders' in
these firms will tend to fix the wage at the new higher level compatible with
the lower employment. Even if the innovation is not very labour saving
but there are, as assumed in some insider-outsider models, asymmetries in the
response to 'shocks', unemployment can result. This will occur if in the firms
where the innovations shifts to the right the labour demand schedule there
will only occur a rise in the wage level at a constant employment level, while
in the firms where the innovation has a negative impact (for example because
they have not innovated and lost market shares) there will not be any change
in wages while employment will fall. Once it has so diminished, the mechanism
of wage determination in these models prevents competitive pressure towards
wage adjustment from the unemployed outsiders (Lindbeck and Snower, 1986;
1988).
To sum up, according to the mainstream interpretation, innovation and
structural change (or their intensification) may -- other things
constant -- increase the 'natural' or equilibrium unemployment determined
by mismatch, 'search', and market imperfections. Consistently with this
analytical background, it is suggested that attention should be focussed on
flexibility and individual incentives to adjust rapidly to a changing
environment in order to create an institutional framework favourable to
mobility.
2.2. Technological unemployment in Ricardo
At the beginning of the last century, David Ricardo initially maintained the
opinion, similar to that illustrated above, that the 'application of machinery
to any branch of production' is 'a general good, accompanied only with that
portion of inconvenience which in most cases attends the removal of capital
and labour from one employment to another' (1951, p.386). This opinion is
based on the idea that an equal amount of labour employed with the
newly invented machinery will give rise to a greater real income, beneficial
to all social classes. But subsequently Ricardo came to the different
conclusion that 'the discovery and use of machinery' can be 'injurious to the
labouring class' (1951, p.390). To follow the reasoning behind this last
proposition consider the following relations:
(I-A)X = Y
Where A is the matrix of the production inputs for unit of output; X is the
vector of the social product; Y is the given vector of output
net of the circulating capital used up in production. The labour requirement,
hence the employment level associated to the given Y, will be given
by:
L = l X = l (I-A)-1 Y
Where l is the vector of labour requirements per unit of output.
According to Ricardo the introduction of machinery would reduce terms in l and
A, hence cause a fall in the employment level. Observe that in Ricardo we do
not find the idea that wage flexibility can lead to 'factor substitution' and
full employment, the mechanism later envisaged by neoclassical economists, and
this in turn is at the root of the assumption of a given vector of
output.
The interest and the force of the 'Ricardian case' has been renewed by the
recovery of the Classical approach by Sraffa, who highlighted the distinctive
analytical structure of the classical approach. It is the absence of
substitution mechanisms that explains the possibility of persistent
unemployment in the Ricardian framework (for a formal demonstration of this
proposition see Montani, 1985). Failure to perceive this crucial difference
has often led to misinterpretations of the 'Ricardian effect' as a
'transitory' or 'short run' phenomenon occurring in the transition towards a
new, full employment equilibrium and to associate it to particular assumptions
concerning the nature of technical progress (Wicksell, 1981 [1924],
Schumpeter, 1954; Katsoulacos, 1986).
Sraffa not only suggested that the neoclassical substitution mechanisms were
absent in the classical approach, but he also demonstrated that they are
logically flawed. This inspired in the 1960s the controversy on the
neoclassical notion of 'capital' (for an overview see Harcourt, 1972; for more
recent discussions see Eatwell et al., 1990; Kurz, Salvadori, 1995, Ch. 14,
Garegnani,2000 and Schefold, 2000).
Put simply, this controversy pointed to the peculiar nature of 'capital',
which is not an 'original' factor measurable in some conventional unit, as is
the case for labour or land, but it is a produced commodity measurable only in
'value'. This has important consequences for the reliability of the two
neoclassical substitution mechanisms described above.
The first substitution mechanism -- direct substitution in
production -- predicts that when, for example, the wage rate falls,
methods of production using more labour relative to the other inputs will
become more profitable and the demand for labour will rise. Sraffa (1960) and
other contributors to the capital controversy of the 60s have shown that this
is not the general case, and that when there are a multiplicity of techniques
and 'heterogeneous' capital goods (that is many kinds of capital goods), the
so-called 're-switching of techniques' makes the neoclassical prediction
unreliable. This is because as distribution varies the relative prices of the
produced capital goods used directly and indirectly in the production of any
commodity will change. Thus it may happen that a technique -- using
directly and indirectly a certain amount of labour per unit of net
output -- is the most profitable (least costly) for low levels of the
real wage rate as well as for high levels of it, while a different technique
is the most profitable at 'intermediate' levels of the wage rate (Sraffa,
1960; Garegnani, 1970). Hence a monotonic inverse relation between the real
wage and labour demand cannot be demonstrated.
The second mechanism, indirect substitution through changes in
consumption patterns, requires a) that as, for example, the wage rate
declines, the relative price of the labour-intensive goods falls; b) that this
is followed by a larger consumption of the relatively cheapest goods. Now the
first step is put in doubt again by the conclusions of the Capital theory
controversy. It has been shown (Sraffa, 1960) that as the wage rate varies
from maximum to zero, the price of any commodity A may alternately fall and
rise relative to the price of another commodity B, so that no a priori
expectations as to the direction of the change, based on the 'factor
intensity' in the production of the two commodities, is justified.
To those trained in neoclassical economics, the 'Ricardian approach' may at
first sight appear as too primitive and missing important aspects of
consumers' and entrepreneurs' behaviour. We have shown, however, that
neoclassical substitution mechanisms require assumptions concerning the
direction of the substitution taking place when relative prices and
distribution change, which are undermined by theoretical results.
The modern non-conventional theory confirms Ricardo's opinion that there are
no necessary compensation effects to technological unemployment. But is
then, according to the non-conventional view, technological unemployment an
irreversible result? To answer this question we must turn to the demand side.
While the role of compensation effects on the demand side is ruled out in
principle by neoclassical theory (since in this view substitution mechanisms
always lead the system towards the level and composition of output that
ensures the maximum possible utilisation of all the existing resources), the
Ricardian approach is not necessarily associated to the acceptance of
Say's Law, and once this is rejected, the analysis is open to the
investigation of the compensation effects and policy prescriptions on the
demand side.
3. Technical change, investment and Effective Demand
The idea that technical change affects the demand for of gross investment in
the long run is taken for granted by most of the economists of otherwise
different persuasions. The association between innovation and gross investment
has traditionally been considered one of Schumpeter's main lessons. Mainstream
economists have seen this view as consistent with neoclassical theory. This
claim is not without foundations, as we will briefly argue. By contrast, some
modern heterodox followers of Schumpeter have advanced the idea of a
complementarity between Schumpeter's explanation of investment and Keynes'
theory of Effective Demand. We shall examine critically this second
claim.
3.1. Technical progress and investment : neoclassical and Schumpeterian
views
According to the marginalist principles, technical change normally shifts the
marginal productivity of capital schedule to the right. In flow terms, the
gross investment function, derived from the demand of capital schedule, also
shifts to the right. In general the long period real interest (profit) rate
will rise. How much depends on the behaviour of the full employment saving
supply schedule, whose slope and position hinges on, respectively, the
elasticity of full employment saving with respect to the interest rate and to
income. Observe that the positive effect of technical progress on gross
investment must not be interpreted as a relaxation of the marginalist view
that sees full employment saving as the determinant of aggregate investment.
In this approach the technical conditions of production along with the
physical quantities of the other production factors which are being employed
determine the demand for investment (capital), and technical change can
increase the demand for investment. However, the actual level of
investment (capital) depends on the position and slope of the supply of (full
employment) savings.
Schumpeter did not challenge this view. His focus was on the effects of
innovations on the composition of investment, but not on the
determination of their level and rate of growth, that was left
to the traditional theory. For instance, Schumpeter argued that: 'the carrying
into effects of an innovation involves, not primarily and increase in the
existing factors of production, but the shifting of existing factors from old
to new uses" (Schumpeter, 1939, p.111; 1934, p.67-8). The role of the credit
system in a non-planned economy is precisely that of permitting this shifting
of resources from the old to the new firms (1939, pp.111-112; 1934, p.69).
Absent in Schumpeter is therefore the idea of the independence of the
level of investment from the full employment saving supply. As a
result, his view of the association between technical change and investment
can be seen as complementary, stressing the qualitative aspects of
investment, rather than alternative to the marginalist one. Indeed,
Schumpeter's contribution, although relegated to the margin, has never been
rejected by mainstream economists, and the process of 'creative destruction'
can be identified as the process of structural change dealt with in item 2.1
above.
3.2. A marriage between Schumpeter and Keynes?
Other economists working in the Schumpeterian tradition, for instance Chris
Freeman and his SPRU associates (Freeman et al., 1982), or the scholars in the
'long waves' tradition (e.g. Kleinknecht, 1992, p.9), have seen the
possibility of a marriage between Keynes and Schumpeter. This would lie in the
idea that the level of investment (not only its composition) is
determined by innovations. In this perspective, a compensation effect to the
technological unemployment generated by innovations on the production side can
be envisaged on the (effective) demand side. For instance Freeman
argues:
Whereas in neo-classical theory the emphasis is on factor price flexibility
and in keynesian theory on aggregate demand, with Schumpeter it is on
autonomous investment, embodying new technical innovation that is the
basis of economic development and new employment. In such framework economic
growth must be viewed primarily as a process of reallocation of resources
between industries and firms. That process necessarily leads to structural
changes and disequilibrium if only because of the uneven rate of technical
change between different industries and countries. Economic growth is not
merely accompanied by fast growing new industries and the expansion of
such industries; it primarily depends on that expansion. The new firms
and new industries are an essential source of the new employment, which
compensates for the loss of jobs in declining industries and firms. It is a
process of 'creative destruction' in which the process of job creation
outstrips that of job destruction as a result of profound structural
adjustment and not as a smooth incremental process' (Freeman, 1995, p.52,
first italics added).
We shall discuss this claim exploring the extent in which we can expect
compensation effects of technical change on the various components of
Effective Demand in the context of an approach to Long Period Effective Demand
in the tradition of Keynes, Kalecki and Sraffa.
3.3. The long-period theory of Effective Demand
In the General Theory Keynes showed that within the limit of the full
utilisation of the existing capital stock a larger amount of investment does
not require a prior reduction in consumption. On the opposite, the higher
level of output and income generated by the fuller utilisation of capacity
would generate an amount of saving equal to the investment decisions. The
'Neoclassical synthesis' circumscribed this criticism to short-period
situations of low business and financial confidence arguing that in those
circumstances active fiscal and monetary policies were required to reach full
employment. This was the conventional wisdom shared by the national and
international institutions until, in the late sixties, the Monetarist
revolution begun to re-establish the pre-Keynesian doctrines as the prevailing
view. Although the 'new classical economics' has subsequently receded, the
currently prevailing conventional wisdom still fundamentally reflects
pre-Keynesian views. Some non-orthodox economists have tried the opposite road
of extending Keynes' analysis to the long period. In this approach in the long
run (when the productive capacity can vary considerably) even more than in the
short, investment is independent from and determines saving through increases
in output . Thus the level of aggregate output is determined by the level of
effective demand, defined as the aggregate expenditures forthcoming at the
normal prices of production (e.g. Garegnani, 1962; Garegnani and Palumbo,
1998).
Given this aggregate output and the technology, the level of employment will
also depend on the level of effective demand. Innovations will usually reduce
the total labour requirements per unit of aggregate output and thus reduce the
employment associated with any level of output. However, high growth rates of
output could, in principle, compensate the decreasing labour requirements.
This is shown by the well-known identity-equation e = y - p, where the symbols
indicates, in order, the growth rates of (the logs of) employment, of output
and of productivity. Does innovation compensate technological unemployment by
positively affecting the level and rate of growth of effective demand? The
answer of the Neo-Schumpeterian economists tends to be positive. To discuss
this claim, we shall sketch a simple model of accumulation to examine the
persistent effects of innovation on the level and rate of growth of effective
demand in the process of accumulation. Of course, even when some positive
effect in this direction can be found, this will not necessarily be enough to
compensate productivity growth. This will be discussed in the final part of
this section.
3.4. The components of effective demand
In the same way as in its short-period versions, from the point of view of the
theory of long-period effective demand the components of effective demand must
be split in two groups, induced and autonomous, according to whether they
depend on the level of the real income generated by the firms' decision to
produce. Using this criterion we must first separate induced consumption
expenditures from all other expenditures. Induced consumption expenditures are
that part of the wage bill that is spent by the workers on consumption goods.
This is the only category of induced expenditures according to the above
classification since in the aggregate the only income that is actually
generated (and paid) by the firms' decisions to produce are the contractual or
'earned' incomes, i.e., wages and salaries. Profits and other incomes that are
part of the surplus are 'residual' in the sense that they depend not only on
the production but also on the sale of the product. Thus, from the point of
view of the income generating process and the multiplier mechanism all other
expenditures are autonomous. This classification is not sufficient, however,
when we want to make an analysis of the trend of accumulation in which the
capacity effects of investment expenditures are fully taken into account.
Therefore we must now distinguish between the expenditures that do and those
that do not have capacity generating effects. Thus we shall define as gross
investment all purchases of produced means of production that can have
capacity-generating effects in the sense that they can affect the potential
supply of gross output of the economy.
That gives us three types of expenditures: induced consumption, gross
investment and other 'unproductive' autonomous expenditures, or autonomous
expenditures for short.
These autonomous components of aggregate demand, by definition do not
create productive capacity, nor depend on 'earned incomes'. Autonomous
expenditure thus comprises all the sources of potential discretionary or
autonomous injections of purchasing power in the economy. They
include:
- Total government spending, whose level is autonomously
decided by Government;
- Total exports whose level depends, ceteris paribus,
on foreign demand (that is exports are financed by exogenous purchasing
power).
- Autonomous consumption, financed by consumers'
credit and accumulated wealth (Steindl, 1982). Most of the expenditure by
households on owner-occupied housing , usually classified as "residential
investment" should be included here.
- Autonomous business expenditures, including R & D and
managerial expenses, that also do not lead to capacity creation. Here we
include the important and relatively unexplored component of the autonomous
business expenditure is the 'superfluous' business expenditure in, say,
company cars, executive jets etc. Most of these latter expenditures are made
by firms' owners and managers and are clearly a type of 'luxury' or
'unproductive' consumption that usually for tax reasons (or to hide the
appropriation of the surplus by the managers from the stockholders) are
disguised as 'production costs'. This type of discretionary unproductive
expenditure clearly is not financed by the wage bill and thus should be
classified as part of the autonomous components of aggregate demand (Cowling,
1981).
While, as we have seen, from the point of view of the income generating
process and the multiplier all investment expenditures are necessarily also
'autonomous' or independent variables. This, of course, needs not be the case
when we extend the analysis to the process of accumulation and fully take into
account the feedback between the capacity and demand generating effects of
investment. In this context it is better to consider all gross investment to
be induced since these capacity creating expenditures depend fundamentally on
the expectation about the evolution of the normal levels of effective demand
over the life of the equipment and hence are subject to an accelerator or
capital stock adjustment mechanism in the analysis of accumulation.
The following table summarises the proposed taxonomy:
|
|
Capacity creating |
Non capacity creating |
| Autonomous |
Government spending, Exports, Autonomous
consumption, Business expenditure |
|
|
Induced |
Gross Investment |
Induced consumption |
3.5. The output and capacity supermultipliers
In order to classify and assess the various possible effects of technical
change on Effective Demand, we have found useful to use a model of
accumulation based on the supermultiplier (Kaldor, 1971; Serrano, 1995,
1996; Bortis, 1997) in which the evolution of the productive capacity of the
economy follows the level and growth of the various autonomous components of
aggregate demand via both multiplier and accelerator effects.
The notation we use is quite standard. Y is the current level of effective
demand and output. Autonomous consumption (Ca), Government
expenditure (G), autonomous business expenditure (B) and exports (X) are the
autonomous components of effective demand. Induced (gross) investment is
represented by Ii . Moreover, d is the replacement coefficient;
the expected average rate of growth of normal effective demand over the life
of investment that is being currently installed is denoted by ge
and v is the capital output coefficient. Again in standard notation M stands
for imports , m and t for the marginal propensity to import and to tax
respectively. The five equations that follow are a simple extension of the
standard Keynesian model for the determination of the (gross) domestic
product. The main difference is in equation [3]: the (gross) level of induced
investment is a function, respectively, of ge , d and v.
Y=C + Ii+ B + G+X-M [1]
C = Ca +c(1-t)Y [2]
Ii = v(d + ge)Y [3]
M=mY [4]
Let us put together all the autonomous components of final demand that do not
create capacity and denote them as Z :
[5] Z=Ca+B+G+X
and group the determinants of the aggregate marginal propensity to save s
as:
[6] s= m+(1-c(1-t))
From these equations we solve for the level of long period effective demand
and output as:
[7] Y= (Z ) / (s -- v(d+ge))
We shall call the reciprocate of denominator of [7] (after Hicks, 1950, as
the output supermultiplier. The above equation shows the level of effective
demand as a function of the autonomous components of aggregate demand,
considering investment not as an autonomous component but also as being
induced by the expected trend of effective demand.
Note that the level of output described by the level of effective demand given
by our output supermultiplier equation [7] (with a given ge) does
not necessarily entail the normal utilisation of already existing productive
capacity.
That however does not mean, of course, that over time a continuous tendency of
capacity to adjust itself to the trend of effective demand is not a work. Such
adjustment will be happening over time as the capacity effects of the
propensity to invest at given ge materialise and as the expected
rate of growth ge itself is gradually revised in the light of
actually realised growth performance.
Indeed, in the process of accumulation (defined as the process in which long
period positions such as [7] undergo changes), as the distance between actual
and realised growth rates of effective demand narrows and the size and growth
rate of capacity output adjusts itself to the trend of effective demand,
leading to a tendency for the actual degree of capacity utilisation to go
towards its normal or planned degree.
As a result, in the process of accumulation the productive capacity of the
economy gravitates towards a fully adjusted supermultiplier in which the
capacity follows the trend of effective demand and the degree of capacity
utilisation is equal to the planned one. It is easy to see that in this
process the growth rate of productive capacity will be tending to grow at the
rate at which autonomous expenditures are growing , since it will not be
possible with induced investment , to sustain growth (with given parameters s,
v and d) without the expansion of autonomous expenditures.
Thus assuming that in the process of accumulation ge is made
endogenous and is gradually revised as a flexible accelerator process
(Chenery, 1950) , as long as the response of ge to actually
observed growth rates g is slow both the expected and actual rates of growth
of the economy will have an endogenous tendency to converge to the rate of
growth of autonomous expenditures.
That means that the productive capacity of the economy (which we will denote
as Y*) will have a moving centre of gravitation expressed by a supermultiplier
equation in which the growth rate that appears in the propensity to invest is
given by the growth rate of autonomous expenditures (which we denote by z) .
This "secular" capacity supermultiplier or "fully adjusted" supermultiplier
can be described by :
[8] Y*= (Z) / (s --v(d+z))
Equation [8] describes the centre of gravitation
of the process of accumulation set by the pace of the autonomous components of
effective demand. Changes that affect one or more of the various elements of
equation [8] can have a persistent effect on the trend of the productive
capacity of the economy. Taking advantage of this result, let us look at the
effects of technical change on the long period rate of accumulation through
the lenses of these two supermultipliers (equations [7] and [8]).
3.7. The effects of technical change on long period Effective
Demand
3.7.1. Autonomous or unjustified investment?
As seen above in the quotation by Freeman, there is a well-established view
that argues that technical change directly affects effective demand through
its effect on the levels of autonomous investment. Indeed it is common
practice since Kalecki's earlier trade cycle models and Hicks's own
supermultiplier to include in the same model both an induced and an autonomous
component of investment and to explain the latter by reference to technical
change (e.g. Gandolfo, 1996, ch.6). Behind this practice there is the idea
that somehow this autonomous investment component does not create any new net
capacity and thus can be simply added to the induced investment
component.
This practice although still quite common has been long ago effectively by
Kaldor (1951) and Duesenberry (1957). The main point is that when the
innovators who are making the autonomous investments steal market shares from
the non innovators it is very hard to see why the non innovators will not
react to their reduced market shares and degree of capacity utilisation by
contracting their own induced investment expenditures. Indeed in models in
which autonomous and induced (gross) investments are simply added there the
implicit assumption that non innovators keep trying to provide productive
capacity for the whole market even as their market share clearly and
systematically does not justify that.
Thus it seems reasonable to think that the accelerator or capital stock
adjustment process will tend to compensate, by reducing induced investment,
the expansionary effects of autonomous decisions to invest by
innovators.
Since there is also the problem that in practice most gross investment
includes technical innovations to some degree anyway and given that it is
quite difficult to think that investors (whether "innovators" or not) are
indifferent as to the capacity effects of their investment expenditures it
seems better not to use the concept of autonomous investment at all.
That does not mean that a wave of innovative investment may not affect the
level of effective demand of the economy or that all induced investment must
be seen as "justified" by the level or growth of demand. "Unjustified"
investment happens all the time, whether because of technical change or
"animal spirits" or more generally because of the very nature of competition
in a capitalist economy (one of Kalecki's famous aphorisms says that "the
capitalists do many things as a class, but they do not invest as a
class").
However, the best way to analyse those expenditures in a long period context
is to consider a wave of innovative investment, which will possibly be
"unjustified" in the aggregate, as an exogenous increase in the aggregate
estimate of ge, the expected trend growth rate of demand, while
keeping all gross investment as induced so that we do not forget that the
capital stock adjustment will be always operating. Thus, completing the
quotation put on the top of this paper: "it seems to me that we should not
make use of the concept of autonomous investment at all. We should regard
exogenous events, such as innovations, as factors which influence the response
of investment to the level of income and the size and character of the stock
of capital" (Duesenberry, 1956, p.141)
If we do this we see in the output supermultiplier equation [7] above that a
wave of "schumpeterian" innovative investment will have, by generating a once
and for all increase in ge, a level affect on the level of output
since it does increase the aggregate marginal propensity to spend.
However, this does not mean that a single increase in ge can lead
to a permanently higher rate of growth since, without an increase in the
autonomous expenditures proper (Z), that would require that ge
implausibly keeps increasing continuously period after period. Thus a wave of
innovations will probably have a level but not a growth rate effect on the
output supermultiplier. The long period levels of output of the economy will
first grow faster and then settle down back to the growth rate of autonomous
expenditure but with a permanently bigger aggregate marginal propensity to
spend (a larger output supermultiplier, see equation [8]).
When we extend the analysis to the secular process of accumulation and use the
capacity supermultiplier we can see that this initial "autonomous" increase in
ge will gradually tend to be reverted as ge is gradually
revised in the light of the actual realised degree of capacity utilisation and
the effects of the excess capacity generated are felt.
Thus the capacity supermultiplier shows that the capacity effects of any
"unjustified" ge are not lasting and thus the initial wave of
investment will not tend to have a persistent capacity effect. Not only it
will not have a persistent growth rate effect on capacity for the same
reasons stated above but furthermore it not even have a persistent level
effect on trend capacity (as opposed to long period output) because the
capital stock adjustment process is continuously revising any given
ge and making it tend towards z, the growth rate of autonomous
expenditures that do not create capacity.
Thus it is very unlikely that an acceleration of technical change can have by
its direct effects on investment a persistent effect on the growth rate of
the levels of output and capacity in the process of accumulation. In
particular it is very hard to see how can a persistently higher trend growth
rate of effective demand can be sustained through that direct route via
"autonomous" investment decisions.
It can be objected that in any particular moment the competition between
rival technologies may lead in some sector of the economy to an "unjustified"
level of investment, that is investment that gives place to capacity that will
not be used. In an unplanned economy, wrong/unjustified investment may be
taken, on average over time, as a specific share of gross investment. The best
way of taking into account this persistent amount of unjustified investment is
to consider it as a persistent circumstance that rises the normal average
capital output coefficient v. In the specific (and strong) hypothesis that
technical change is in any moment unexpectedly affecting some sector of the
economy, it is possible to maintain that the aggregate level of investment is
persistently increased above the level justified by the pattern of Effective
Demand. This effect, if sufficiently persistent, will result in a level
effect (since it increases the capital coefficient k) and not in a growth rate
effect.
Another way through which intensification of technological competition may
directly increase effective demand is if it leads to increases in autonomous
business expenditure in research and development. Note however that R&D is
not innovation but expenditures made to search for innovations and thus
increases in R&D may be the direct effect on increased competition but
they are not direct effects of technical change per se (for they are one of
its causes). In the most industrialised countries, firms spend significant
amounts on private R&D expenditure that, according to our classification,
is an autonomous component of Effective Demand. An increase in the rate of
growth of R&D expenditures will increase the levels and rate of growth of
autonomous expenditures (Z and z) and thus have a growth rate effect on the
long period output supermultiplier (equation 7) and both a growth rate and
level effect on the capacity supermultiplier (equation 8).
3.7.2. Effects of technical change on the capital-output and depreciation
coefficients
Technical change will have persistent effects on gross induced investment
according to the effects of technical change on the capital-output and
replacement coefficients. Changes in these coefficients will affect the
marginal propensity to invest in both the output and the capacity
supermultipliers. By thus changing the value of the supermultiplier(s) changes
in the replacement coefficient or the capital-output ratio will cause level
effects both on long period output and the trend of productive
capacity.
Faster technical change may cause an increase in the replacement coefficient
d. This may be due to the faster economic obsolescence of plants that may
follow both product and process innovations. The competitive process can lead
within the sectors subject to technical change to the early
replacement of capital goods, also causing a higher level of gross
investment. This would be a level effect on the marginal propensity to
invest. As said, this early scrapping can also take place between
industries through the establishment of new industrial sectors (characterised
by new products) accompanied by the decline of old sectors (Garegnani, 1962,
p.96).
However, even conceding technical change to be so persistent as to determine a
systematic accelerated economic obsolescence of capital goods, some other
circumstances, mentioned in the literature, may delay or reduce the effects
on gross investment.
It has been pointed out that the expected shortening in the economic life of
capital goods can lead to capital-saving innovations (Caminati, 1986),
in which case the higher gross investment determined by the early replacement
is compensated by the lower value of the new capital goods. In this case
although d has increased , the capital-output ratio v has decreased and the
net effect on the marginal propensity to invest is ambiguous.
It has also been argued that the expectation of further technical change may
induce the postponement of the replacement until technology has settled
(Caminati(1986), Rosenberg, 1982). This decision depends of course on the
balance between, on the one hand, the losses that the firm may incur by the
delayed introduction of the new machinery in terms of smaller market shares
and of being held back in the learning process of new techniques; and, on the
other hand, by the expected losses due the its short anticipated economic
life. More in general, firms will have the convenience to substitute their
plants according to the original depreciation plans, and the possibility of
doing so depends on the competitive structure of the industry (Domar, 1948).
In this latter case faster technical change does not systematically increase d
and thus it has no clear effect of increasing gross investment.
Turning now to the capital-output ratio v, we know it will change according
to the overall "bias" of technical change. Thus, if innovations are on balance
capital-saving (in Harrod's sense) v will be reduced and technical progress
will imply lower levels of gross investment and a decrease in the
aggregate marginal propensity to spend .
Of course if technical change is Harrod-neutral v will remain unaffected . On
the other hand if technical change has a capital-using bias v will increase
and with it the levels of gross investment and the marginal propensity to
invest.
Note however that in this latter case, while technical change clearly has a
positive effect on gross investment, we cannot be sure it will have an
expansionary effect on aggregate demand as whole. For as we know from the
classical analysis of switching of techniques (and the Okishio theorem, see
Steedman, 1977, ch.9), a capital-using system (i.e. one with a lower maximum
rate of profits) will only be cost minimising if it saves enough labour so
that the normal rate of profits does not fall. That means that such techniques
will only be adopted if wages lag behind the increase in output per worker.
But this associated change in the distribution of income is bound to have a
depressive effect on the economy's marginal propensity to consume.
We conclude that when technical change is capital-using and thus the marginal
propensity to invest increases, we cannot be sure because of the negative
effect of the associated change in distribution on the marginal propensity to
consume that the economy's aggregate marginal propensity to spend and the
supermultiplier will increase or decrease (v will increase but s also
will).
3.7.3. Technical Change and Consumption patterns
Innovations are traditionally classified in product and process innovations
according to whether they create new products or change production processes.
This is clearly not an entirely satisfactory classification since for instance
a new machine is both a new product and changes production processes. Moreover
even in what regards consumer goods and services process innovations often
are what creates or at least renders possible many product innovations as "The
fall of production prices that follows process innovations, if substantial,
may have the same effects of major product innovations insofar as it makes
possible mass consumption of previously inaccessible products and services"
(Garegnani, 1962, p.98).
In any case we can still analyse particular innovations in what regards their
impacts on production process and on the demand for new or at least
differentiated products.
In general the process aspect of innovations has an impact on the economy's
marginal propensity to consume through their effect on the rate of profits and
the share of wages. If the long period impact of innovations is to leave the
normal rate of profits and the share of wages unchanged then there will be no
impact on the marginal propensity to consume. On the other hand if technical
change leads to a higher normal rate of profits and a lower wage share then
the marginal propensity to consume will decrease (s will increase) and with it
the long period level output and the productive capacity via the
supermultipliers of equations [7] and [8] above.
To the extent that innovations generate new or differentiated products they
may actually increase or at least prevent the decrease of the aggregate
marginal propensity to consume. Indeed new products are very important to
counteract the tendency towards saving when individual incomes rise. This
product aspect of innovations is important to sustain a high marginal
propensity to consume out of wage income.
In a closed economy the most direct route by which the product aspect of
innovations has a decidedly positive impact on the growth of aggregate demand
is through the effects of the continuous introduction of new products on the
growth of autonomous consumption.
In fact the continuous introduction of new and differentiated products may
help to explain the stylised fact of the rough long run constancy of the
average propensity to consume in advanced capitalist economies. The average
propensity to consume depends both on autonomous consumption and the marginal
propensity to consume. Even if the latter is constant (or decreasing) , this
could easily be compensated by the continuous growth (or acceleration) of
autonomous consumption so to leave the average unchanged.
By continuously creating new needs and by making consumer durables quickly
obsolete, product innovations may foster autonomous consumption both of the
working classes (the more, the more income distribution and consumers credit
are favourable to mass consumption) and of the wealthier classes (that can
also use their financial wealth to have access to new products). Note however
that in order that these new products have a positive impact on the growth of
effective demand it is necessary that these innovations do not simply replace
older products of the same value and that the economy's credit and financial
system allows the liquidity for the accumulated wealth and/or the new
purchasing power necessary for the expansion of autonomous consumption. A
stream of product innovations may thus increase the rate of growth of
autonomous consumption and, consequently, that of autonomous demand z and have
the effect of increasing the rate of growth of long period output and the
longer run trend of productive capacity.
The expansion of effective demand due to product innovations justifies gross
investment that gives place to additional capacity. This gross investment,
however, although associated to technical progress cannot be considered
"autonomous" since it is induced and justified by the expected growth of
effective demand. In other words, the investment associated to product
innovations cannot be taken as exogenously determined, but are better treated
as induced by the growth of effective Demand stimulated by those
product innovations.
In conclusion, the innovation related investment has to find a justification
on the effective demand side, either by displacing competing capacity which is
early scrapped, or by increasing effective demand through product innovations.
Since innovative investment is linked to the expectations that the
market will absorb the product at least at its normal price, then this
investment has to be considered as induced.
Moreover, we can see then that the effects of technical change on consumption
expenditures is very complex and can change according to different
circumstances. The positive impact on effective demand of the product aspect
of innovations has to be balanced against their process aspect and increasing
returns that generally accompany the mass diffusion of new products. On the
one hand, the fall of production prices that results from mass production
allows the mass consumption of previously inaccessible products and services.
On the other hand, by displacing workers in production, mass production may
weaken workers' bargaining power shifting distribution away from wage-income,
something that depresses the aggregate marginal propensity to consume (cf.
Arestis, Howells, 1995). As a result, the potential positive effects of the
product aspect of innovations on Effective Demand has to be considered in view
of a host of additional circumstances, in particular income distribution, the
availability of cheap consumer credit and institutions that give liquidity to
the accumulated wealth.
3.7.4. Exports and the propensity to import
Let us finally consider the magnitudes associated to the foreign trade
performance of a single country. Theory and the historical experience suggest
that technological advantages are a main determinant of the growth of
exports. The single most important expansionist effect of technical
change for a particular economy is the increase in the growth of exports that
it can bring. The faster growth of exports leads to a higher growth rate of
autonomous demand z and thus to a faster growth of long period output and
capacity through the supermultipliers.
Other factors, in particular the foreign exchange rate policy, can of course
affect the establishment of a virtuous circle between export performance and
productivity growth (Kaldor, 1971). Technological advantages reduce also
import penetration, which has a level effect by increasing the economy's
domestic marginal propensity to spend (reductions in m decreases s).
Note however that these open economy effects cannot of course operate for all
countries simultaneously . It is of course not possible for the world economy
to grow through increasing its share of world exports and reducing its import
share. The expansion of world trade inevitably depends on the expansion of
domestic effective demand at many countries simultaneously.
3.8. Effective demand as a "compensation" mechanism
The analytical contribution of the preceding paragraphs has been the orderly
classification the possible effects of innovations on Effective Demand by
using a supermultiplier model summarised by equations [7] and [8].
What can we conclude about the Neo-Schumpeterian thesis of compensation
effects on the effective demand to the Ricardian technological
unemployment?
As we have seen many aspects of technological change affect positively the
long period level of effective demand. However many other aspects affect
aggregate effective demand negatively or not at all. Moreover the
supermultiplier analysis makes it clear that even when the effects of
innovation on effective demand are positive they often constitute only level
effects that are not capable of sustaining a higher trend growth rate of
effective demand. It is also clear that the expansionary macroeconomic effects
of technical change often depend crucially on the macroeconomic economic
policy regime in terms of fiscal, credit, exchange rate and income policies
and thus there is nothing "automatic" about them , since under different
policies they may simply not happen.
The Neo-Schumpeterian compensation thesis requires that a higher growth of
output per worker should in the long run automatically (and not as policy
choice) lead to a compensating increase in trend growth rate of effective
demand.
As we have seen not only it is not clear that faster technical change will
automatically increase the trend growth rate (in the closed economy) but even
in cases in which it did there is absolutely no reason or mechanism to
ensure that this increase in the growth rate should be enough to match the
growth of output per worker.
Therefore not only the neoclassical compensation story via factor substitution
but the Neo-Schumpeterian compensation thesis through effective demand must
be also be rejected.
3.9 Expansionary Macroeconomic Policies and endogenous technical
change
The thesis that there must be some strong automatic compensating forces is
usually supported by reference to the fact historically in some regions and
some periods of very fast technical change have been periods of relatively
fast growth both of the economy and employment.
In particular countries and periods this often can easily be explained by
export-led growth as these countries with fast technical progress quickly
increase their shares in the world market . But what about the "golden age"
period of fast growth in most of the developed countries from the end of WWII
to the early seventies, which has been a period of fast growth in output per
worker and at the same time of a high rate of job creation?
In our point of view the explanation of this latter experience requires that
we take into account two factors. First, that these years were characterised
by a very expansionary international macroeconomic regime in which
expansionary policies in the USA (particularly in what regards government
spending) and the special position of the dollar as the international currency
allowed export led growth in many developed countries Also the most recent
Clintonian period of US expansion, characterised both by employment and
productivity growth, seems to have been fostered by the effects on autonomous
and induced consumption of a financial bubble favoured by an easy access to
bank liquidity (Sergio will provide quotations New Left Review dec
2000).
Second, that due to increasing returns, learning by doing effects, etc. there
is a strong endogenous element in the growth of output per worker.
Indeed, a number of scholars have questioned the traditional causal
relationship from innovation to economic growth, arguing that the spur of
innovations are the rates of growth of aggregate income. For instance,
economic growth induces a greater division of labour, facilitates the
penetration of new products, and stimulates innovative activities by
accelerating the recovery of their costs before innovations are
imitated.
What the historical experience seems to be showing is that fast growth of
aggregate demand allows inventions to turn into innovations and thus make
output per worker grow faster. It seems that fast technical change is only
compatible with fast growth of output and low levels of unemployment when and
if it comes together and is in fact a result of an expansionary macroeconomic
environment. There seems to be no automatic mechanism at work.
4. Conclusions
The essential theoretical feature of this paper lies in taking what could be
called an Effective Demand approach to the study the long run impact of
technical change on employment. Having shown how Effective Demand determines
the rate of growth of the economy, it follows that the rate of growth of
employment will depend on the difference between the growth of aggregate
demand and the rate of growth of labour productivity. Using a supermultiplier
model of long period Effective Demand, we have examined the various channels
whereby innovations may positively affect Effective Demand. A first result is
that the impact of innovations cannot be considered in a vacuum, that is
without taking into account considerations that include the kind of technical
change, income distribution, the availability of consumers' credit, the
reaction of firms to the pace of technical change, and the reverse causation
from income growth to technical change. Secondly, even allowing that the
prevalent circumstances are favourable to a positive impact of innovations on
aggregate demand, this is not enough to conclude that the pattern of Effective
Demand will be high enough to compensate labour productivity growth. The main
conclusion that stems from our analysis is that technical change is not a
sufficient explanation of long run economic growth, let alone a sufficient
force to keep the economy on a full employment path. Hence, technical change
can be the cause of persistent unemployment quite independently of the
existence of the various kinds of market imperfections and rigidities stressed
by neoclassical theorists.
Having said that, however, we do not think it is appropriate to attribute the
current high levels of unemployment in most European countries to technical
and structural change. By definition the increase in unemployment is the
result of the growth of productivity being greater than the growth of output.
But the former has also been slow in the eighties and early nineties in
comparison with the earlier part of the post II world war period so that the
high unemployment level appears to be the result of the slow output growth, in
turn the outcome of slow growth of long period Effective Demand which is the
result of the progressive abandonment of the expansionary macroeconomic
policies in most developed countries since the mid-seventies (Stirati et al,
1999). 
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