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Kirill Borissov Leontief model: Classical vs. Neoclassical viewpoints

Kirill Borissov Leontief model: Classical vs. Neoclassical viewpoints. Leontief model. A = , L =( l 1 ,…, l n ) Prices of production P *=( p 1 *,…, p n *). Given a nominal wage rate w and a profit rate r , P * is a solution to P =(1+ r ) PA + wL. that is

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Kirill Borissov Leontief model: Classical vs. Neoclassical viewpoints

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  1. Kirill BorissovLeontief model:Classical vs. Neoclassicalviewpoints

  2. Leontief model. A= , L=(l1,…,ln) Prices of productionP*=(p1*,…,pn*). Given a nominal wage rate w and a profit rate r, P* is a solution to P=(1+r)PA+wL. that is P*=w(I–(1+r)A)–1L =w(I+(1+r)A+(1+r)2A2+…)L.

  3. 1c) Classicals (neo-Ricardians, Sraffians): There is a trade-off between the rate of profit rate and the real wage rate since for all i=1,2,…,n, w/pi* is a decreasing function of r (Sraffian indeterminacy) • 1n) Neoclassicals: There is equilibrium of supply and demand (in particular, in the labor market) and no trade-off between the rate of profit rate and the real wage rate.

  4. 2c) Classicals: • Equal rates of profit • 2n) Neoclassicals: • Profits = 0. r is interpreted as interest rate, which can be positive

  5. Adjustment: 3c) Classicals: High rates of profit attract capital to industries. Low rates of profit repel capital 3n) Neoclassicals: Tâtonnement

  6. 4c) Classicals: Prices and quantities are determined separately Non-substitution theorem. • 4n) Neoclassicals: Prices and quantities are determined simultaneously

  7. Classicals: • The notion of capital and neoclassical production function are controversial and hence the distribution of national product between wages and profits cannot be explained by marginal productivities of labor and capital. • Distributional (class?) conflict

  8. Hahn (1982) and Burmeister (1983): Neo-Ricardians try to differentiate non-differentiable functions (Leontief technologies are non- differentiable) and in general classical models are special and uninteresting particular case of neoclassical theory.

  9. Arrow and Hahn (1971) • Varian. (1978-), • Mas-Colell, Whinston and Green. (1995) r=0 • McKenzie. (2002) r0, but…

  10. Classicals: Long-run positions • Neoclassicals: Intertemporal (or static?) equilibria • Steady-growth equilibria cannot be defined in the Arrow-Debreu model

  11. Tâtonnement is meaningless in the case of constant returns to scale. • Mas-Colell (1983) and McKenzie (2002) implicitly introduce profit rates in adjustment process

  12. Sraffian indeterminacy • Mandler (1999): The problem is with intertemporal choice. • Steady-growth equilibria cannot be defined in the Arrow-Debreu model but can be defined in infinite-dimensional models, e.g. in OLG models or in the Ramsey-type models.

  13. In the Ramsey-type models the equilibrium interest rate r* is a solution to • = , • where n is the rate of growth and  is the discount factor of • the social planner or • the representative consumer or • the most patient (the rich) consumer.

  14. However, the assumption of exogenously given discount factors is not reasonable. They depend on many factors and in particular on distribution and social conflict.

  15. discount factor 1 inequality

  16. Increase in natural recourse abundance  increase in inequality. real wage rate or discount factor 1 natural recourse abundance

  17. CONCLUDING REMARKS • Neoclassicals are wrong in their belief that classical models are special and uninteresting particular case of neoclassical theory • Classicals are wrong in their belief that neoclassical theory of distribution is reduced to the theory of marginal productivity and the problem is with the notion of capital • The problem is with endogenous intertemporal preferences.

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