Economic Theory

A Critique of Neoclassical Macroeconomics by John Weeks (auth.)

By John Weeks (auth.)

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Extra info for A Critique of Neoclassical Macroeconomics

Sample text

Indeed, money income is just another name for value added. The relationship, value added equals wages plus profits, remains a definition when measured in real terms, by whatever method of deflation. On the other hand, y = rk + wl also holds by definition as a production relationship, since an 'assumption' (constant returns to scale) is one aspect of defining a function. There is an important difference between the two senses in which equality holds. In the first case, y = rk + wl is a definition which carries with it no implications for the behaviour of the economy.

The latter division, however, is only semantic, 32 The Neoclassical Macro Model two words for expenditure upon the same commodity or product. To the extent that these two words imply any theoretical difference, 'consumption' refers to expenditure which results in immediate use of the single commodity for personal (household) gratification, while 'investment' involves buying the same commodity but carrying it forward into another period. Since not consuming something in the current period means by definition to save it, investment and saving are exactly the same act in the model.

If all production can be summarised by this single function, then for every value of y all commodities must be produced in the same proportions. It is for this reason that the term 'composite commodity' is frequently used in the context of the aggregate production function. But a constant composition of production is inconsistent with the demand side. On the demand side of the model we have two types of expenditure, for consumption commodities and investment commodities. In general, shifts in the parameters of the model will result in changes in the ratio of these expenditures.

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