A Multi-Sector Version of The Post-Keynesian Growth Model

1
A Multi-Sector Version of the Post-Keynesian Growth Model

Ricardo Azevedo Araujo and Joanlio Rodolpho Teixeira
(University of Braslia, Brazil)

Abstract: In this paper we intend to develop a disaggregated version of the post-
Keynesian approach of economic growth by showing that it can be treated as a
particular case of the Pasinettian model of structural change and economic growth. By
using the device of vertical integration it is possible to carry out the analysis initiated by
Kaldor (1956) and Robinson (1956, 1962) and followed by Dutt (1984), Rowthorn
(1982) and Bhaduri and Marglin (1990) in a multi-sectoral model where demand and
productivity grows at particular rates for each sector. From our approach it is possible to
determine the rate of savings that keep the economy in full employment.
Keywords: Post-Keynesian growth model, structural change, multi-sector models

1. Introduction
It is not easy to define what is the Post-Keynesian growth model since there are a
number of models in this tradition with different assumptions, focuses and results
1
. A
common feature of the models in this tradition is that the functional distribution of
income plays an important role in the determination of macroeconomic variables and
growth rates and an inversion of the direction of causality between savings and
investment as assumed by the Neoclassical economics. Here investment is shown to
determine savings and not the reverse. In the present paper we use the term Post-
Keynesian growth model to designate the model that has its roots in the seminal works of
Kaldor (1956) and Robinson (1956, 1962). Both authors have built a model that contemplates
both the supply and demand sides to determine the growth rate of a closed economy.
Although these precursory models have properties that still are present in the
contemporary version of the Post-Keynesian growth model they are built on the notion
of full employment and full capacity utilization. In order to take into consideration the
possibility of disequilibrium. Dutt (1984) and Rowthorn (1982), by working
independently, have built what is known as the second generation of the Post-Keynesian
growth model by endogenizing the rate of capacity utilization in the lines of Steindl
(1952). One of the main contributions of this second generation is the existence of a
stagnationist regime in which an increase in the profit share implies a reduction in the
capacity utilization. The key assumption behind this result is that the growth rate of
investment is a function not only of the profit rate, as in Kaldor-Robinson but also of the
rate of capacity utilization.
Bhaduri and Marglin (1990) have challenged this view by considering that the
growth rate of investment is a function of the rate of capacity utilization and of the
profit share. According to them the rate of profit has already been implicitly considered
in the equation of the growth rate of investment through the rate capacity utilization and
due to the following macroeconomic relation r = .u, where r is the profit rate, is the

1
The models of Thirlwall (1979), Pasinetti (1981, 1993) and Harrod (1933) may be classified as Post-
Keynesian models of economic growth. They share the common characteristic of giving demand an
important role in the determination of the growth rates.
Artigo aceito para apresentao no III Encontro da Associao Keynesiana Brasileira
De 11 a 13 de agosto de 2010
2

profit share and u is the rate of capacity utilization. Hence by introducing the profit
share in the place of the rate of profit in the growth rate of investment it avoids to
consider twice the effects of the profit rate on the growth rate of investment. One of the
properties of this third generation model, as become known this version as they
proposed is the possibility of a non- stagnationist regime.
Although the Post-Keynesian growth model is remarkable for its ingenuity it
may face some difficulties to explain the contemporary growth experiences since it
contemplates only an aggregate economy. It is worth to remember that one of the major
criticisms by Post-Keynesians to the Neoclassical model is that it is aggregated in one
sector and it is not possible to perform an analysis of structural change in this set up. It
is implicit in such analysis a well-known and strict definition of balanced growth:
growth of a non-inflationary, full-capacity utilisation with all sectors growing at the
same rate. It is somewhat a Von Neumann type of steady growth.
According to Ocampo (2005, p. 8) this view precludes any analysis of the
relationship between growth and inequality. He considers that: [t]he contrast between
the balloon and structural dynamics views of economic growth can be understood in
terms of the interpretation of one of the regularities identified in the growth literature:
the tendency of per capita GDP growth to be accompanied by regular changes in the
sectoral composition of output in the patterns of international specialization. According
to the balloon view, these structural changes are simply a by-product of the growth in
per capita GDP. In the alternative reading, success in structural change is the key to
economic development.
In this paper we intend to extend the Post-Keynesian analysis to a multi-sector
models by treating it as a particular case of Pasinetti (1981, 1993). By following this
approach we intend to bring new insights to the issue of economic growth from an
heterodox viewpoint. This article is structured as follows. In the next section we provide
a systematic presentation of the generations of the Post-Keynesians growth models. In
section 3 we treat these versions as particular cases of the Pasinettian model of
structural change by using the device of vertical integration. In section 4 we show that
the properties of natural growing system as defined by Pasinetti allows us to established
the savings propensities that generate full employment. In section 5 we conclude.

2. The Post-Keynesian Model of Economic Growth
A common characteristic of the Post-Keynesian growth models PKGM
hereafter is that they assume the existence of independent investment function a
heritage from Keynes and saving functions that depends on income distribution a
Kaldorian approach. The saving propensities, for instance, are particular to each group
may it be workers or capitalists. Unlike the Neoclassical model, the PKGM considers
investment and not savings or technological progress
2
the variable that drives the
growth process. The rationale is that investment is determined not by savings but for the
availability of credit in the financial market as well as the animal spirits. Once
investment is made the effective demand determines the output which in turns
determines savings.

2
Note that a great deal of technological progress is embodied in capital goods. Hence investment plays an
important role in the growth process even by assuming that technological progress is the engine of
economic growth.

3

The Post-Keynesian growth model has passed by main three principle phases
that are labelled generations. The main assumptions that are behind this model may be
recalled as follows: the economy is closed and produces only one good that is both a
consumption and a capital good. The technology is of fixed coefficients and constant
returns to scale is assumed. There is no government and the monetary side is ignored.
All firms are equal.
2.1. First Generation Model
The model of first generation is due to Kaldor (1956) and Robinson (1956,
1962). There are some differences between the approaches developed by these authors
but the core of the model may be described as follows. It is assumed that workers do not
save and that the economy operates at full capacity or at a constant level of capacity
utilization. The growth rate of investment, g
I
, is given by:
r g g
o I
o + = (1)
where measures the influence of the investment to the interest rate, r, and g
o
stands for
the growth rate of autonomous investment. By using the formulae u r t = , where is the
profit share and u measures the capacity utilization expression (1) may be rewritten as:
u g g
o I
ot + = (1)
The growth rate of savings, g
S
, is given by the Cambridge equation:
sr g
S
= (2)
Where s is the saving propensity, with 1 0 s s s . By equalizing (1) to (2) we
conclude after some algebraic manipulation that the rate of profit is:
o
=
s
g
r
o
* (3)
A necessary condition for obtaining positive profits is o > s , which states that
savings are more sensitive to income than investment. By replacing this result into
expression (1) or (2) we conclude that the balanced growth rate is given by:
o
=
s
sg
g
o
* (4)
From expressions (3) we obtain an inverse relationship between the rate of profit
and the rate of accumulation of capital:
0
*
<
=
c
c
o s
g
s
r
o
(3)
From expression (4) we also obtain an inverse relationship between the growth
rate and the saving rate:
0
) (
*
2
<
=
c
c
o
o
s
g
s
g
o
(4)
4

Expressions (3) and (4) show that higher savings propensities implies both
lower growth rates and smaller profitability. These two results show that being the
economy at its production possibility frontier there is a trade-off between wages and
profits.
2.2. Second Generation: the Neo-Kaleckian Model [Dutt (1984) and Rowthorn
(1982)]
Now the capacity utilization is an endogenous variable that can be different from
the full capacity utilization. This gives rise to the main difference in relation to the first
generation model: the variable that measures the capacity utilization enters the equation
of growth rate of investment meaning that the higher the capacity utilization the higher
the growth rate of investment [Steindl (1952)] according to the expression below:
u u g u r g g
o o I
| ot | o + + = + + = (5)
Where measures the sensibility of the growth rate of investment to the capacity
utilization and captures the accelerator effect: high utilization induces firms to expand
capacity more rapidly in order to keep up with anticipated demand. The growth rate of
savings is also given by the Cambrige Equation where workers do not save.
sr g
S
= (6)
By equalizing (6) to (7) we conclude after some algebraic manipulation that the
rate of capacity utilization is given by:
| o t
=
) (
*
s
g
u
o
(7)
By replacing expression (7) into relation u r t = we conclude that the profit rate
is given by:
| o t
t

=
) (
*
s
g
r
o
(8)
and the balanced growth rate is given by:
| o t
t

=
) (
*
s
g s
g
o
(9)
Taking the derivative of expression (8) in relation to we conclude that:
| |
0
) (
*
2
<

=
c
c
| o t
|
t
s
g r
o
(10)
This result shows that a redistribution of income towards wages may result in a higher
rate of capacity utilization as shown by Blecker (1989) and became known in the
literature as the stagnationist view
2.3. Third Generation: Bhaduri and Marglin (1990)
5

The investment function now consists of an autonomous part, and reacts
positively to profits and capacity utilization, being the profit share used as a measure of
profitability
u g g
o I
| ot + + = (11)
According to Bhaduri and Marglin (1990, p. 380) the influence of existing
capacity on investment cannot be captured satisfactorily by simply introducing a term
for capacity utilization. The investment function should also consider profit share and
capacity utilization as independent and separate variables in the lines suggested by
expression (11). The growth rate of savings is given by the Cambridge Equation.
Following the same procedure of the previous subsections, it is possible then to
establish the rate of capacity utilization, the profit rate and the growth rate of the
economy as follows:
| t
ot
+
=
s
g
u
o
* (12)
| t
ot t
+
=
s
g
r
o
) (
* (13)
| t
ot t
+
=
s
g s
g
o
) (
* (14)
The main difference in the results of the Bhaduri-Marglin (1990) and the neo-
Kaleckian approach of the previous subsection is that now the derivative of the profit
rate in relation to the profit share may be positive or negative as follows by the
differentiation of expression (12) in relation to .
0
* *
> <
=
c
c
or
s
u r
| t
| ot
t
(15)
An increase in the profit share will decrease capacity utilization but its effects on
the growth rate of capital stock is ambiguous. There may be a positive capacity effect
and a negative profit share effect on investment. Thus two regimes are possible
depending on the relative magnitudes of capacity utilization and profit share effects in
the investment function. If the profit effect is stronger than the capacity effect growth is
profit led. Otherwise we have a wage led regime.

3. A Multi-Sector Version of the Post-Keynesian Model of Economic Growth
The Pasinettis model of structural change and economic dynamics is carried
out, not in terms of input-output relations, as has become usual in multi-sector models,
but rather in terms of vertically integrated sectors. This device is used to focus on final
commodities rather than on industries. In this case, it is possible to associate each
commodity to its final inputs - a flow of working services and a stock of capital goods -
thus eliminating all intermediate inputs. From this point of view, such framework may
be adopted to approach the Post-Keynesian growth model although the latter does not
6

consider the distinction of capital and consumption goods: only one commodity is
produced. Hence the starting point of the present analysis is to consider that the Post-
Keynesian structure is a vertically integrated model in which this device was used to its
limit. It is possible to state that the Post-Keynesian growth model is vertically integrated
because it has the same characteristics of what Sraffa (1960, appendix A) has called
sub-systems, i.e, it is self-reproducible, it uses no intermediate goods to produce only
one kind of commodity. Therefore, it represents an economy in which sectors are
vertically integrated
3
.
In order to consider a multi-sectoral version of the Post-Keynesian growth model
let us consider that X
i
denotes the domestic physical quantity produced of consumption
good i and X
n
represents the quantity of labour in all internal production activities; per
capita demand of consumption goods is represented by a set of consumption
coefficients:
in
a . The former refers to domestic and the latter to foreign demand. In the
same vein,
n k
i
a
,
stand for the investment coefficients of capital goods k
i
. The production
coefficients of consumption and capital goods are respectively
ni
a and
i
nk
a . The family
sector is denoted by n. The physical system may be written as follows:

0
0
0
1
1
1
1
,
=
=
=

=
=
n
i
ki nki
n
i
i ni n
n n ki ki
n in i
X a X a X
X a X
X a X
(16)
A sufficient condition to ensure non-trivial solutions
4
of the system for physical
quantities is:
1
,
1
1
= +
=
nki n ki
n
i
ni in
a a a a (17)
This is also a condition for full employment of the labour force. The solution of
the system for physical quantities may be expressed as:

=
=
n n ki ki
n in i
X a X
X a X
,
(18)
Considering that p
i
is the price of commodity i (i = 1,2,...,n-1), and w is the wage
rate (uniform), the monetary system may be written as:

3
Araujo and Teixeira (2002) has adopted this idea to show that the Feldmans bi-sectoral model of
economic growth may also be considered a vertically integrated model in each this technique was adopted
to produce a two-sector model.

In fact the concept of vertical integration has been widely used in
macroeconomics. As pointed out by Lavoie (1995), the concept of vertical integration, although
extensively but implicitly used in macroeconomic analysis, has always been difficult to seize intuitively.
4
As pointed out by Pasinetti (1981, p. 33), fulfilment of (1) is a sufficient condition for the system for
physical quantities to have non-trivial solutions. However, non-fulfilment does not imply any meaningful
solution. The particular form of the coefficient matrix (all its entries are zeros, except those in the last
row, those in the last column, and along with the main diagonal) means that the solution of the system can
be derived directly, without substitution, from the first 2n1 equations. Therefore, relative quantities are
determined independently of condition (2).
7

= +
=
=
=
0 ) (
0
0
,
1
1
ki n ki i in
n
i
i ki in
nki ki
ki i ni i
p a p a r p a w
w a p
p r w a p
(19)
The set of solution for prices may be expressed as:

=
+ =
w a p
w a r a p
nki ki
nki i ni i
) (
(20)
In general, if the rates of profit, r
i
(i=1,...,n-1), are positive and the capital intensity is
different from one production process to another, relative prices of consumption goods will
depend both on labour inputs and on the rate of profit. In this case a pure labour theory of value
is no longer valid since the price of commodity i depends not only on quantities of direct and
indirect labour but also on the rate of profit. In order to develop a theory in terms of pure labour,
Ricardo (1817) and Marx (1887) assumed a uniform organic composition of capital in a static
framework. In order to avoid this simplification let us assume, as Pasinetti (1981) did,
that the price of consumption goods are given by a mark-up rule according to:
w a p
ni i i
) 1 ( t + = (21)
A possible departing point to establish a bridge between the two approaches is to
check the validity of relationship u r t = in a sectoral environment. Note from the first
expression of system (19) that:
i k i i ni i i
K p r wX a p X
i
= (22)
Where the right hand side is nothing but the profit, that is
i k i
K p r
i
= [ . Then we above
expression may be rewritten as:
w X a p X
i ni i i i
= [ (23)
By replacing the mark-up expression in to the expression above we obtain:
i ni i ni ni i i ni i i i
wX a w a w a X w a p X t t = + = = [ ] ) 1 [( ) ( (24)
The profit share in sector i ,
i
t , is given by:
i
i
i ni i
i ni i
i i
i
i
wX a
wX a
X p t
t
t
t
t
+
=
+
=
[
=
1 ) 1 (
(25)
Besides rPK = [ which implies, by using (25) and (24) that:

i i
i ni i
i ni i
i i
i ni i
i i
i
i
u
K wa
X wa
K p
X wa
K p
r t
t
t t
=
+
= =
[
=
) 1 (
(26)
8

Assuming that
i
i
i
K
X
u = the relationship u r t = remains valid for a multi-
sectoral economy but now it has to take into account that
i
t is the sectoral profit share
and
i
u is the sectoral rate of capacity utilization. The following table sums up the
results obtained for a multi-sector economy:

Kaldor-Robinson Neo-Kaleckian Bhaduri-Marglin
Sectoral Growth
rate of investment
i i
i
o
i
I
r g g o + =
i i i i
i
o
i
I
u r g g | o + + =
i i i i
i
o
i
I
u g g | t o + + =
Sectoral Growth
rate of savings
i i
i
S
r s g =
i i
i
S
r s g =
i i
i
S
r s g =
Rate of capacity
utilization
u
i
* = 1
i i i i
i
o
i
s
g
u
| o t
=
) (
*

i i i
i i
i
o
i
s
g
u
| t
t o
+
=
*

Profit Rate
i i
i
o
i
s
g
r
o
=
*

i i i i
i
o i
i
s
g
r
| o t
t

=
) (
*

i i i
i i
i
o i
i
s
g
r
| t
t o t
+
=
) (
*

Growth rate
i i
i
o i
i
s
g s
g
o
=
*

i i i i
i
o i i
i
s
g s
g
| o t
t

=
) (
*

i i i
i i
i
o i i
i
s
g s
g
| t
t o t
+
=
) (
*

The Pasinettian approach provides us with the concept of natural rate of profit,
that is a rate of profit that must be adopted in order to endow each sector with the capital
goods required to allow each sector to at least fulfil the demand requirements of that
sector. This rate is given by:

i i
n r u + =
*
(27)
Where n is the growth rate of population and
i
u is the growth rate of demand. As pointed
out by Araujo and Teixeira (2003) the proportionality between the rate of profit to the
sectoral rate of growth emerges as a natural requirement to endow the economic system
with the necessary productive capacity to fulfil the expansion of demand. Therefore, a
growing economy does imply a natural rate of profit
5
, which is given by the following
expression (see Pasinetti, 1981, p. 131)
Now we can compare the Pasinettian solution with the solutions of the previous
generations of approaches already presented in the previous section. It is important to bear in
mind that the Pasinettian model has a strong normative taste, that is, it shows the requirements
for an economic system to be in equilibrium but it does not say that this equilibrium will
prevail. Note that the equilibrium in each sector requires that u
i
= 1. Besides the capital
accumulation condition requires that:

5
The concept of natural rate of profit, introduced by Adam Smith, was reinterpreted by Pasinetti (1981,
1988). Whereas Adam Smith (1776) argues that due to the competition amongst capitalists the
ordinary rate of profit is in the long run uniform across sectors, Pasinetti (1981, p. 130) postulates that
there are as many natural rates of profit as there are rates of expansion of demand (and production) of the
various consumption goods.
9

ni i nk
a n a
i
) ( u + = (28)
Now it is possible to determine the savings rates that ensure that the capital
accumulation condition is satisfied. In each of this models this is given by:
Kaldor-Robinson Neo-Kaleckian Bhaduri-Marglin
Saving rates
i
i
i
o
i
n
g
s o
u
+
+
=
i
i
i
o
i
i
i
n
g
s o
u t
|
+
+
+ =
i
i i
i
o
i
i
i
n
g
s
u
t o
t
|
+
+
+ =

Note that the saving rate in the Kaldor-Robinson model has to given by:
i
i
i
o
i
n
g
s o
u
+
+
= (29)
This is a requirement since the model assumes full employment and full capacity
utilization. Hence in order to keep the system in its equilibrium position it is necessary
that the saving rate practiced by capitalists must necessarily be the one given by
expression (29). In the Neo-Kaleckian and the Bhaduri-Marglin version the savings
rates given in the table above are just a normative criterion since these models do not
require full equilibrium.

4. Concluding Remarks
The key distinction between the orthodox view and the Post-Keynesian growth
models is the importance given on the supply and demand determination of economic
growth. While the later focuses on demand the former stresses the supply side as
determinant of the process of economic growth. But what is known as the Post-
Keynesian growth model in fact is subject to the same criticism as the Neo-classical
model since these models are aggregated in one sector. In the present paper we have
built a disaggregated version of the Post-Keynesian growth model by considering it as a
particular case of the Pasinettis model of structural change and economic growth. This
is a step further in order to build an unified Post-Keynesian theory of economic growth.

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