ABSTRACT

The main thrust of this book has been a comparison on a theoretical plane of the Keynesian, monetarist and Kaleckian approaches to macro-economics. The argument in the previous chapter was that the Kaleckian approach is more in tune with empirical evidence than the Keynesian and monetarist approaches, particularly over central issues such as the nature of unemployment and the causes of inflation. Indeed it can be argued that many features of the Kaleckian approach, such as cost-based pricing, differential savings out of wages and profits, the accelerator component of investment, are well-established parts of many macro-econometric models of the economy. 1 , 2 This highlights a curious contrast between the theoretical macro-economic models (such as those discussed in Chapter 3 and more sophisticated ones in the same mould), which underlie much policy discussion and the macro-econometric models which are designed mainly for forecasting and policy simulation purposes. The equations entered into macro-econometric models are often chosen on the basis of statistical criteria from a selection of possible equations, and there may not be a coherence between the various equations entering the overall model. For example, some equations in the model may rely on one type of economic behaviour whilst others may be drawn from another type. On other occasions a list of possible variables which have been postulated as influencing the variable of interest is drawn up, even though a variety of theories is drawn up. Econometric estimation is then undertaken to determine which variables on the list are indeed empirically relevant. 3 We have sought to provide an analysis which accords with significant aspects of the real world in its assumptions, which provides predictions which are consistent with the evidence, and at the same time provides a coherent and internally consistent approach to macroeconomics. The central notion is that the modern capitalist economy is oligopolistic and that macro-economic theory must take this 173fact on board. Thus an industry is typically dominated by a few firms, and at the economy level a significant proportion of decisions on investment, pricing, etc. is in the hands of relatively few firms and within those firms decisions are in the hands of a small number of individuals. 4 Further, the pursuit of profits is a major objective of firms, which feeds into explanations of pricing behaviour, investment and savings as well as the relations between firms and government. The labour market is characterised by collective bargaining and attempts by workers to defend and increase their real wages. The pursuit of profits by firms and of real wages by workers is the central conflict in the economy. This central conflict can be ‘resolved’ by levels of output and unemployment which lead to the profit and real wage demands being compatible. 5