Research on quantity adjustment

This is our reply to contributed papers to a Symposium in Metroeconomica 73(1): 2-48. The symposium was dedicated to discussions on the significance and implications of our book : Shiozawa, Morioka, and Taniguchi (2019) Microfoudnations of Evolutionary Economics. Please go to page 33 where our reply starts. The symposium is published free read basis. https://onlinelibrary.wiley.com/doi/epdf/10.1111/meca.12345 There are two book reviews on the book by Yoshio Inoue http://www.shiozawa.net/chosho/Inoue2020AReviewOnShiozawaMorioka&Taniguchi2019.pdf and by Marc Lavoie https://link.springer.com/article/10.1007/s43253-020-00004-5

This article was published on on-line base without fixed pages and issue number on 13th October, 2021. This was formerly included in the journal with fixed pages as an article of Metroeconomica 73(1): 2-48. This article is free to read. Please access to https://onlinelibrary.wiley.com/doi/abs/10.1111/meca.12345

(An open sourced paper. Please crick the DOI.) This paper provides a new formulation for the principle of effective demand. With this new formulation, the principle boils down to a specific behavior of producer firms (and sellers). After giving new definitions in Section 2, the main part of this paper (Section 3), based on the study by Shiozawa, Morioka, and Taniguchi (2019) Microfoundations of Evolutionary Economics, Springer, Tokyo, proves that the behavior of individual firms generates the macroeconomic result that is typically interpreted as the principle of effective demand. Sections 4 and 5 provide the price theory that explains the irrelevance of price rigidity arguments. While the paper provides a new scheme of microfoundations, Section 6 presents a new framework for methodology arguments between micro and macro. Many Post Keynesians claim that microfoundations are impossible and unnecessary. The paper demonstrates why they are wrong. Finally, Section 7 shows that many fields of economics may find unexplored paths of development in the new scheme which sees micro and macro coherently linked.

The question of how prices and quantities interact and decisions and activities of large numbers of agents are coordinated in market economies has been a major theme in systematic economic investigations since their very inception at the time of French, British and Italian scholars in the seventeenth and eighteenth century. Adam Smith's analysis of the problem in The Wealth of Nations of 1776 is a locus classicus of the literature under consideration. Time and again, the definitive answer to the question has been proclaimed, from John Stuart Mill in his Principles of Political Economy in 1848 to Kenneth Arrow and Frank Hahn in their General Competitive Analysis in 1971. However, time and again, after careful scrutiny, the solutions put forward were found wanting for various reasons, from a lack of logical consistency to a lack of realism. Nevertheless, many economists accepted neoclassical general equilibrium theory of the Arrow–Debreu type as a coherent and convincing answer to the problem at hand. Critics of the theory and advocates of alternative approaches to economics either disregarded the problem of the price-quantity nexus altogether, dealt with it in a cavalier way or took diluted forms of the neoclassical theory to take care of it in an otherwise fundamentally different analytical framework. The resulting incomplete theories or attempted crossbreeding of essentially incompatible theories implied a competitive disadvantage in the market of ideas compared with general equilibrium theory, and accounts for the continuing dominance of the latter in economic theorising. // This is the view expressed in the book by Yoshinori Shiozawa, Masashi Morioka and Kazuhisa Taniguchi, Microfoundations of Evolutionary Economics. They argue that this unsatisfactory situation, unsatisfactory to non-neoclassical economists to which they count themselves, is over because solid and realistic ‘microfoundations of evolutionary economics’ are available now. // They stress that these are ‘as fine and logically sure as Arrow and Debreu's model of competitive equilibrium’ (p. vii). Their work, they claim, does not only offer the long-awaited breakthrough in this important field in economics, it also allows for a unification of several alternative theoretical currents in economics under a single umbrella. Although their focus of attention is on Evolutionary Economics, they insist that their findings provide support also for the Keynesian theory of effective demand and Post-Keynesian economics (PKE) (see p. vii) and the Classical approach to the theory of value and distribution as reformulated by Piero Sraffa in Production of Commodities by Means of Commodities in 1960. In fact, the authors emphasize the close relationship of their theory with Sraffa's: ‘The new theory stands basically on the same theory and formulation begun by Piero Sraffa’; they add that it is not limited to the study of long-period positions of the economic system, but can analyse both ‘short-and medium-period questions’ (p. 133). // Such auspicious promises were, of course, bound to attract the attention of all scholars on the lookout for alternatives to the neoclassical theory. Because Metroeconomica has always catered for novel developments and has provided a platform for such alternatives, it was close at hand to organise a symposium devoted to the book by Shiozawa, Marioka and Taniguchi. We invited a number of distinguished scholars who are familiar with Evolutionary, Classical and Keynesian Economics and have worked and published on related themes as those the authors of the book dealt with. We asked them to scrutinize critically whether the claims of the authors are justified and to comment on the book, its achievements, shortcomings (if any) and open questions. We asked in particular: Can the book be expected to provide solid foundations for economic theory without having to postulate ‘unrealistic capabilities’ (p. ix) of human agents and instead allowing for ‘limitations of human behaviour’ (p. vii) // Tony Aspromourgos, Kenji Mori, Arrigo Opocher and Barkley Rosser kindly accepted our invitation. Yoshinori Shiozawa, Masashi Morioka and Kazuhisa Taniguchi were asked to respond to the comments. We are grateful to all participants for their cooperation. May the symposium contribute to the dissemination and in-depth discussion of the challenging propositions of the book and inspire readers to advance the subject of economics. // (Editorial by Heinz D. Kurz and Neri Salvadori)

Technological evolution is widely thought to be the primary process that brings about economic growth. It is one of the main targets of evolutionary economics, but how technological change induces economic growth has remained unexplained. Based on the new theory of value, this paper explains how technological change leads to long-run improvement in real wage rates and income per capita. Section 2 gives a brief overview of the new theory and presents two theorems (minimal price and the convergence theorem) that afford the basis of analyses in Sections 4 and 5. Before these, Section 3 compares two price systems, traditional and new, and compares efficiency from two points of view. Traditionally economics with equilibrium has been concerned with those conditions that provide allocative efficiency. However, technological evolution comprises a series of half-blind selections of ‘better’ production techniques and exhibits another kind of efficiency that can be named dynamic efficiency. The latter is more important than the former. Allocative efficiency is self-destructive, while dynamic efficiency is cumulative in its effects. Section 4 shows how technological change works cumulatively and how it leads to real wage increases and income per capita. Section 5 shows that the new theory can explain the emergence and growth of global value supply chains as a part of technology choice arising through international trade. This paper is mainly focused on supply-side theory, while problems concerning the demand side are considered in Section 6. Section 7 concludes.

Abstract and references are given in the first comment to this presentation.

(First paragraph of the Preface) This book explicitly provides microfoundations of evolutionary economics that have been absent thus far in evolutionary economics. The evolutionary economics continued to criticize mainstream neoclassical economics as insufficient framework of analysis, but it had no other choice than to use ideas and analytical tools of neoclassical economics implicitly or explicitly, because it lacked microfoundations of its own. It is clear that without microfoundations of its own, evolutionary economics will not become an academic discipline independent of neoclassical economics. Evolutionary economics needs theoretical foundations as fine and logically sure as Arrow and Debreu’s model of competitive equilibrium (Arrow and Debreu, “Existence of an equilibrium for a competitive economy”, Econometrica 22(3): 265–90, 1954) is, but it lacked this firm basis of analysis for a long time. This book was written in order to change this state of evolutionary economics. Although discovered by a series of studies that were not directly connected to evolutionary economics, the results we have obtained have a good chemistry with evolutionary economics and with Keynesian analysis of effective demand. We believe that our results serve as microfoundations for both evolutionary and Post-Keynesian economics. (Continue. You can read the whole Preface if you download the Full-text)

An evolutionary point of view is the best way to understand the economy and its development. This is the central dogma of evolutionary economics. In this chapter on the foundations of evolutionary economics, we discuss (1) why this dogma is supportable, (2) why most of economic entities evolve, (3) what are the defects of standard (or neoclassical) economic theories, and (4) ideas to reconstruct economics in an evolutionary way.

In this chapter, we will describe the basic framework and some key concepts of the economic theory of quantity adjustment. Section 3.1 characterizes the capitalist system as a demand-constrained economy in which firms are almost always competing to capture the demand for their products. This aspect of capitalism has a profound relevance with the long-term changes in technologies and products through incessant innovations. Section 3.2 formulates production rules for stockout avoidance behaviors by individual firms facing uncertain demand under sales competition. Here “stockout avoidance” means that firms seek to suppress their expected stockout occurrence ratio to a considerably low level by holding a certain amount of inventory. Section 3.3 outlines quantity adjustment in the capitalist economy as a dynamic process generated by the interactions of firms each of which follows production and ordering rules for stockout avoidance. An emphasis will be given to roles of inventories as buffer and information sustaining the loose stationarity of the economy. Section 3.4 provides a historical overview of preceding contributions to the analysis of quantity adjustment. After the appearance of General Theory by Keynes, the development in this field has been attained mainly through attempts to build dynamic and multi-sector models of the multiplier process and to clarify factors affecting the stability of this process.

In this chapter, we will extend the model of the quantity adjustment process presented in Chap. 4 in several directions. Section 5.1 examines the models considering work-in-process inventory, partial adjustment of production volume, and heterogeneity of firms within a sector. It will be shown that, under certain conditions, the stability conditions of these models are given in similar forms to those in Chap. 4, and thus, the introduction of the above factors into the model does not change the basic dynamic properties of the process. Section 5.2 traces the process with stockout, rationing, and bottleneck. A stockout of product inventory leads to a rationing of sales volume among buyers, whereas a stockout of raw material inventory leads to a reduction in the production volume due to bottleneck. Numerical computations will highlight the buffer role of inventories in the adaptations of the whole economy to a one-time increase or random fluctuations in final demand. Finally, Sect. 5.3 investigates the effects of mid- and long-term changes in final demand. It will be confirmed that, while quantity adjustment can follow the gradual movement of final demand accompanied by the inducement of consumption demand from past income, it cannot suppress the oscillations caused by unstable movements of final demand itself.