Interdisciplinary Doctoral Dissertation Proposal Microfoundations of Effective Demand

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Interdisciplinary Doctoral Dissertation
ProposalMicrofoundations of Effective Demand

• Tae-Hee Jo
• University of MissouriKansas City
• Feb. 23, 2006

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Objectives

• The eventual end is to construct a proper
  microfoundations of effective demand.
• To do so it is necessary to investigate the
  strategic pricing and investment behavior of
  business enterprise.
• The principle of effective demand and the theory
  of business enterprise will be integrated and
  developed in order to have a systemic view of the
  overall economic activity.

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Research Questions

• What is the microfoundations in heterodox
  economic theory?
• Are existing theories of effective demand
  realistic, consistent, and comprehensive?
• What has been left out when economists approach
  to effective demand from an aggregate (macro)
  point of view? Is the micro-macro synthesis
  possible and relevant? Is the short-period vs.
  long-period dichotomy necessary and relevant?
• To what extent would the microfoundations of
  effective demand be better way of looking at the
  real world?
• How to define business enterprise in the context
  of contemporary corporate capitalism? Are
  theories of business enterprise historically and
  empirically grounded? Are they relevant for
  explaining contemporary corporate capitalism?
• How to articulate the roles of business
  enterprise in dealing with effective demand?
• Why are the pricing and investment mechanisms of
  business enterprise important in the principle of
  effective demand?

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Research Scope

• Theoretical Scope
• Theories of effective demand Keynes and Post
  Keynesian (Sraffian Kaleckian) theory.
• Theory of investment pricing and investment.
  Behavioral, institutional, evolutionary
  viewpoint.
• Empirical Scope
• Modern form of corporations in the manufacturing
  sector of the advanced capitalist economy (the
  U.S). In particular monopoly or oligopolistic
  industry in which big corporations have enough
  power to govern a specific industry by means of
  pricing, investment, and employment.

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Microfoundations 1

• Neo-Classical Microfoundations
• Economists see the real world as if the world
  could be separated into individual and aggregate.
  Reductionism or methodological individualism at
  the aggregate level. Homogeneous agents or the
  representative agent.
• Macrofoundations
• The most relevant question in economics is the
  evolution of the social structure as a whole, or
  overall macroeconomic structure constraining the
  microeconomic behaviors (Crotty, Smithin)
• Micro-Meso-Macro
• Irreducibility. The evolution of society is the
  matter of a change in meso-relations (rules and
  ideas)

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Microfoundations 2

• What matters most is what we face in our everyday
  life. Social environment, organizations,
  collective behaviors, structures and mechanisms
  are to be translated into micro terms which make
  hypothetical and conceptual macro-reality clear
  and obvious.
• There exist macro-things irreducible to
  micro-realities. Such macro-structures
  encompassing over time and space constrain
  individual decisions and conducts, and vice
  versa.
• For the purpose of establishing a substantive
  theory of a social phenomenon we ought to have a
  systemic view a micro-macro consistent, a
  micro-macro interacting and connecting view
  (Collins 1988).
• A proper microfoundations apart from
  methodological individualism and collectivism a
  realist microfoundations.
• micro-macro distinction ought to be made in terms
  of its qualitative characteristicsemergent
  properties generated by social interactions.

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Effective Demand - Keynes

• Definition aggregate expenditure decisions
  determine overall income, output, and employment
  given technology, consumers tastes and habits
  (regardless of the degree of competition).
  Therefore effective demand drives the economy.
• Components government expenditure and business
  enterprise investment.
• In Keyness system Procedural rationality,
  fundamental uncertainty, historical time,
  expectation, and money in the aggregate monetary
  production economy. This tradition continues in
  Post Keynesian economics.

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Effective demand - Criticisms

• Only macro, No micro This criticism centers on
  the GT. Prior to 1936, Keynes evidently had
  micro-ideas imperfect competition and industrial
  policy as well as macro policy
• This fact brings up two points. First, we need to
  distinguish Keyness GT and Keyness economics in
  general. GT was designed to attack (neo)Classical
  economics.
• Second, most PKs are following the way paved by
  GT. But Keyness works are to be understood in a
  comprehensive way including Keynes's micro
  theories.
• Sraffian long-period Approach designed to find
  systemic and persistent forces operating
  underlying the economic phenomenon. While
  transitory psychological factors (expectations
  and uncertainty) and short-lived social phenomena
  are marginalized, the hypothetical long-period
  position as a center of gravitation is
  emphasized.
• Keyness principle of effective demand is brought
  into the long-period position as a determination
  mechanism of normal output without considering
  monetary and expectational factors that are
  fundamental to Keyness system.
• The convergence (tendency) toward the long-period
  position from the short-period positions This is
  hardly supported by empirical evidences.

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Effective demand - alternative

• Kaleckis theory of effective demand
• Class-oriented micro social relations (degree of
  monopoly)
• Capitalists investment and consumption decisions
  generate profits, and hence, output and
  employment.
• Distinction and interdependence between
  individual behaviors and aggregate operations of
  the system in the dynamic context
• Eichners theory of megacorp
• the dominant role of big business enterprise
  which strategically determines price in order to
  finance the level of investment necessary to
  maximize its long-run growth, and drives the
  overall market economy.
• Thus Keyness principle of effective demand still
  holds and investment is the key to link between
  micro and macro analysis.

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Philosophical foundations, Methodology, and
Interdisciplinarity

• Realism and Emergentism, evolutionary and
  institutionalist approach.
• Synthesis of micro-macro analysis and the
  rejection of short- and long-period dichotomy.
• Theoretical historical empirical.
• Interdisciplinarity Sociological and
  psychological literature will be reviewed
  regarding the micro-macro distinction, social
  psychology, organizational and behavioral
  theories.

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Outline

• Introduction
• Theories of Effective Demand Criticisms and
  Extension
• A Realist Theory of Business Enterprise
• Microfoundations of Effective Demand
• Conclusion