Post Keynesian Price Theory in view of Gobal Value Chains

Abstract

Many Post Keynesians think there is no necessity to have price theory. This is one of the reasons that Post Keynesian economics cannot possess its microfoudantions. Post Keynesian economics can possess its microfoundations that are totally different from those of neoclassical economics. The present paper presents Post Keynesian price theory that is basically the modernization of classical theory of value (or more precisely Ricardo's cost-of-production theory of value). This price theory, primarily constructed as a theory of national economy, can be extended to a theory of international economy, or globalized economy that is connected by global value chains.

Full text

2022.9.19 Y. Shiozawa 1
Post Keynesian Price Theory in View
of Global Value Chains:
Updating Ricardian Theory of
International Trade
International Conference on Economic Theory and Policy
September 18-19, 2022, Meiji University, Tokyo, Japan
Y. Shiozawa
Emeritus, Osaka City University
E-mail: y@shiozawa.net

Structure
Two worldly problems (Japan’s 30 years, GVC)
Trade theory as international micro
Why should we return to Ricardo?
Classical theory of value and globalization
Problem of case number explosion (methodological)
Drivers of global value chains (GVCs)
What are expected in future?
2022.9.19 Y. Shiozawa 2

2022.9.19 Y. Shiozawa 3
References:
(1) Shiozawa 2016 The Revival of the Classical Theory of Values.
Yokokawa et al. (Eds.) The Rejuvenation of Political Economy,
Routledge. S16
(2) Shiozawa 2017 The New Theory of International Values. Ch. 1 &
Ch. 7 in Shiozawa et. al. (Eds.) A New Construction of Ricardian
Theory of International Values, Springer. S17
(3) Shiozawa and Fujimoto (2018) The nature of international
competition among firms. Fujimoto & Ikuine (eds.) Industrial
Competitiveness and Design Evolution, Springer. SF
(4) Shiozawa, Morioka and Taniguchi 2019 Microfoundations of
Evolutionary Economics, Springer. SMT
Ch. 1, Ch. 2 (Shiozawa) & Ch. 4 (Morioka)
(5) Shiozawa (2020) A new framework for analyzing the technological
change. Journal of Evolutionary Economics 30. S20
(6) Shiozawa (2021) The principle of effective demand: a new
formulation. Review of Keynesian Studies 3. (open source) S21
☆Papers are cited by initials and last two digits of the year like S16.

Japan’s 30 year economic stagnation
A short history of stagnation
1991 Collapse of the 1980s’ Bubble
1990’s Keynesian economic policy (Miyazawa)
1998 Bankruptcy of financial houses (Takugin, Chogin, Yamaichi et al.)
2000’s Structural reforms (Koizumi, Takenaka)
2010’s Abenomics (Abe), Ijigenkanwa[new phaze] (Kuroda)
Hidden structural factors?
China’s reform and opening-up (Teng 1978, Socialist
market economy 1992)
Competition with China and South East Asia
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Japan in Asia 1990-2020
Big wage gap between C. and J.
1990’s: wJ / wC=20. 2020: wJ / wC=5.
Japanese firms
Invest in China and S.E. Asia, No investment in
Japan-> Huge retained funds (=GDP/y)
Wage restriction and non-regular employment
Labor productivity -> To keep product prices constant
or down
How could the economy grow?
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What is the problem with
economics?
National economy versus
international/world economy
1930’s Socialism in one country (Soviet Union)
Is capitalism in one country possible?
National / International economics
Ricardo: real start of international economics
Still, I.E. is notably retarded compared to N.E.
We need a true theory of international micro.
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Economics and globalization
We’ re in the age of Globalization.
More than 60% of Im. & Ex. are input goods.
Four generations of mainstream ec.
(Textbook) Ricardo (tR) [diff. of techniques]
Heckscher-Ohlin Theory (HO) [factor proport.]
New trade theory (NT) [intra industry]
New new trade theory (N2T) [prd. gap/data expl.]
Real theoretical development?

What’s achieved & what not?
Techn.
differenc
e
between
countries
Factor
proportio
ns
Intra
industr
y
trade
Differences
between
firms
Input
trade
Unemploy-
ment
t-R ️⭕️ ❌ ❌ ❌ ❌ ❌
HO ❌⭕️ ❌ ❌ ❌ ❌
NT ❌⭕️ ⭕️ ❌ ❌ ❌
N2T? ? ? ⭕️ ❌ ❌
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What is a GVC?
A GVC is a network of productions
linked with input trade.
All four generations cannot treat GVCs.
GVC Development Report
Bienniel 2017, 19, 21
WTO, OECD, IDE-JETRO, ect.
WB Report 2020
Trading for Development in the
Age of Global Value Chains 10

A short history of GVCs
Prehistory
MNEs (Vernon, Helleiner, Hymer) 1970’s
Global commodity chains
Wallerstein (world system), Gereffi (sociologist)
Global production network
Manchester group (geographer)
Global value chains
Humphrey, Gereffi & Sturgeon (2005) (mentioned later)
From design concept to final distribution
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A new theory is needed.
New theory:
General theory: M-country, N-good model
Given production techniques for each country
Can treat input trade
Inomata (2017) GVC D. Report Ch.1
 Need of new new new trade theory?
Such a wanted theory exists
New theory of international values
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What Ricardo thought
Was he a proponent of the labor theory of
value?
No, cost of production theory of value
Principles 3rd ed. 1821 (Sraffa 1951 p.47 note)
Mr. Malthus appears to think that it is a part of my doctrine, that the
cost and value of a thing should be the same; --- it is, if he means
by cost, “cost of production” including profits.
II. 11 If by cost Mr. Malthus means cost of production, he must
include profits, as well as labour;
Sraffa (1960) -> Various inspirations
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Unnoticed history: Ricardo vs.
John Stuart Mill
The origin of textbook Ricardo theory (t-R)
J. S. Mill (1844; 1848) Wanted to solve what Ricardo
left unsettled.
Inaugurated the price theory by the law of demand
and supply (anterior to cost of production theory of
value) (S17 Ch.7)
Real starting point of neoclassical economics
We must return to Ricardo, not to JS Mill.
A theory of international values i.e. compatible with
classical theory of value (S16, S17 Ch.1)
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Sraffians versus Post Keynesians?
Long Period Equilibrium Price
Interpretation: Kurz and Salvadori (1995)
Theory of Production: A long period analysis
What to do with short and medium period?
Sraffians are not a part of PK economics?
Technology changes in the long period.
No real theory of economic growth?
Need of short period price theory
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The OERG’s Inquriy
Oxford Economists’ Research Group’s
Inquiry on Prices and Interest 1936-39
headed by Henderson
Besoni (1998) Roy Harrod and the OERG
Two discovery:
Full cost principle => markup rate m
Irrelevance of interest rates on investment
Lee (1998) Post Keynesian Price Theory
2022.9.19 Y. Shiozawa 16

Classical Theory of Value (Domestic
theory, S16)
Production technique:
Single product production (No essential joint production)
Inputs are proportional to the output (constant returns)
Input coefficients: u = (u1, … uL); a = (a1, … , aN)
Value v=(w,p) satisfies the s. of eqs:
(1+mj){u(j), w〉+a(j), p〉}= pj
mj markup rate for good j, u, w〉=u1w1+…+uLwL
w=(w1, … , wL) remains conventionally constant.
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Price stability: NK vs. PK
Why are prices sticky?
NK: menu cost (price adjustment cost)
New theory: Whatever the final demand changes,
there is no need for firms to change price system.
(SMT)
This is an emergent property (S21 §4)
New theory of value provides a price
theory that PK economics needs. (S21)
No uniqueness: no th. in NK(NCE). (SDM, See later)
Product-level principle of effective demand (S21)

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Minimal price theorem (national economy)
Theorem (SMT Ch. 2) There exists a spanning set S
(⊂T the set of production techniques) such that
(1) (1+m(h)){ 〈u,w〉+〈a(h), p〉} = pJ(h) ∀h∈S
and
(2) (1+m(h)){ 〈u,w〉+〈a(h), p〉} ≧pj(h) ∀h∈T.
(3) This price system is unique if w is given.
N.B. This is a value version of Samuelson’s Non-substitution
theorem.
Important theorem that supports the new the theory:
(A) Authorizes the fixed set of production techniques
(B) Stickiness is an emergent property that does not exists for each firm
level. (See S21 §4)

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Quantity adjustment process
Taniguchi-Morioka’s results (SMT)
Setting: Final demand is fluctuating everyday.
If the average moves slowly, production with
input-output relations can follow the final
demand.
Corollary: Principle of effective
demand (S21)
Final demand vector d determines production
scale vector s and hence the employment.

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Paramount achievement
Adam Smith problem (Arrow-Hahn 1971)
How does decentralized market economy work?
Arrow-Hahn estimated GE theory as
“the most important intellectual contribution that economic
thought has made” (p.1)
New results: SMT
Agents with minimally rational agents
Process analysis (sequential in an essential way)
How an economy works: a new vision
Cf. Marc Lavoie (2022) Post-Keynesian Economics (2nd ed.)
§3.7.4

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New vision of how market economy
works
Three pillars of the new theory (SMT)
(1) Prices and quantities are in principle independent.
(2) Price of a product is set by producers (or merchants)
by normal markup pricing. [New theory of value]
(3) Procurers (consumers and procurers of producer
firms) decide how much to buy the product at the
price set by producers (or merchants) and producers
respond to this demand. [Quantity adjustment]
All three pillars depends on two others.
Stable prices have a different function (S20)

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Dynamic vs. allocative efficiency
Hayek problem
Questioned allocative efficiency.
New theory of value (S20)
Can explain growth as effects of technical
change.
Cumulative and dynamic efficiency
Dynamics of industrial capitalism explained
The new vision explains the dynamicity of
capitalism.

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Real wage movement (1200-2000)
Sources: Gregory Clark The Condition of the Working-Class in England,
1200-2000: Magna Carta to Tony Blair.

2022.9.19 Y. Shiozawa 25
How should the new theory of
international trade be organized?
Many countries (M), many goods (N)
Two country, two good case is not a good example.
Not terms of trade but wages of countries.
A value v is a couple of a wage vector w= (w1, .. , wM)
and a price vector p = (p1, … , pN).
All wages and prices are expressed by a single
international currency (say US dollar).
Admits
Input trade
Choice of production techniques

A theorem for international
economy (similar to the minimal price theory)
Theorem (Existence of regular values)
There exists a spanning tree S [⊂T the set of
production techniques] such that
(1) (1+m(h)){ 〈u,w〉+〈a(h), p〉} = pJ(h) ∀h∈S
and
(2) (1+m(h)){ 〈u,w〉+〈a(h), p〉} ≧pj(h) ∀h∈T.
(3)This price system in general is unique.
Note:
Bipartite graph of production techniques
Spanning tree: (1) all vertices are covered. (2)
No cycle (2) connected
2022.9.19 Y. Shiozawa 26

A123 B1 A● ●1
●2
B● ●3
A123 B2 A● ●1
●2
B● ●3
A123 B3 A● ●1
●2
B● ●3
A12 B23 A● ●1
●2
B● ●3
A12 B13 A● ●1
●2
B● ●3
A23 B13 A● ●1
●2
B● ●3
A13 B12 A● ●1
●2
B● ●3
A13 B23 A● ●1
●2
B● ●3
A23 B12 A● ●1
●2
B● ●3
A1 B123 A● ●1
●2
B● ●3
A2 B123 A● ●1
●2
B● ●3
A3 B123 A● ●1
●2
B● ●3

When there is no input trade
2022.9.19 Y. Shiozawa 28
Country A
Good 1
Good 2
Good 3
wA
p3
p2
wB
p1
The case of A13B23
Country B
a11
a13
a21
a23
p1=wA a11
wB a23 = p3

All values do not necessarily
satisfy condition (2)
If S is spanning tree of T, we get a positive
international value v=(w, p).
But they do not satisfy the condition (2) of
Theorem.
Definition (Regular value)
The international value v=(w, p) is called
regular value when it satisfies conditions (1)
and (2) of the above theorem.
2022.9.19 Y. Shiozawa 29

M
N
2 3 4 5
24 12 32 80
312 81 432 2,025
432 432 4,096 32,000
580 2,025 32,000 390,625
6192 8,748 221,184 4,050,000
7448 35,721 1,404,928 37,515,625
The number of (M, N)-type spanning
trees MN-1NM-1

M
N
2 3 4 5
22 3 4 5
33 6 10 15
44 10 20 35
55 15 35 70
66 21 56 126
77 28 84 210
The number of (M, N)-type regular
values

How to deal the problem when
the number of cases explodes?
Combinatorial explosion of the
number of cases is inevitable:
Arrow-Debreu model: Sonnenschein-Debreu-
Mantel’s theorem (Plurality of equilibrium)
The number of cases explodes if N is big.
Serious question for large systems
Seldom asked in economics
Because it always assumed a small economy.
2022.9.19 Y. Shiozawa 32

G.E. and the ab ovo
construction hypothesis
Ab ovo (From scratch) [Walras 1900, Schumpeter 1912,
1926]
Schumpeter (1934[1926] trans. by Opie)
We assume all this experience to be nonexistent, and reconstruct it ab
ovo, as if the same people, still having the same culture, 1tastes,
2technical knowledge, and the same 3initial stocks of consumers' and
producers' goods, but unaided by experience, had to find their way
towards the goal of the greatest possible economic welfare by
conscious and rational effort.
Three conditions1,2,3 of G.E model (Walras, Arrow-Debreu)
Why is all experience assumed to be nonexistent?
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Main cause of case number
explosions: ab ovo construction!
Ab ovo is the cause of the explosion.
Tacit assump. of classical economics:
Circular flow (Kreislauf) ■Tableau Economique (Quesnay)
System of production and consumption as a circular process (Sraffa
1960 Appendix D)
Striking contrast to the view presented by modern theory (ibidem)
Lesson to us: Start from the structure (that is
always already given)!
Louis Althusser (1965 Pour Marx): Structure toujours déjà donnée,
Le toujours-déjà-donné d’une unité complexe structurée
2022.9.19 Y. Shiozawa 34

Assume the regular value that is
already given
No need to decide which regular
value holds.
Assume the regular value that is
always already given.
Then, study what happens,
When the wage rate of a country changes
When the labor of a country becomes tight
When the set of prod. techniques changes
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New Theory of International Values
More powerful than all four generations of
mainstream trade theories:
Can treat input trade.
Can analyze unemployment. (The regular value is not
defined now on the frontier of the world production
possibility set, the points of full employment.)
Historical Note:
Old definition: S17 ( 塩14 最終解決 )
New definition: SF, S20 ( 塩19 異端派貿易論 )
Ricardo, true vs. textbook model
If w=(w1, … ,wM) is given, classical theory of value holds.
In a modern economy, wi of a nation is dependent of others.

Why were economists late in noticing the
importance of GVCs?
Gerrefi, Humphrey, and Sturgeon (2005)
Gerrefi, a sociologist, influence by Wallerstein
Sturgeon, management science
Humphrey, sociologist
GPN (Manchester school), geographer
All four generations assumed off input trade (i.e.
they had the common defect).
The new theory is manifestly superior than
mainstream trade theories:
GVCs study ■Analysis of unemployment situation
2022.9.19 Y. Shiozawa 37

My thesis: GVCs are a t-GPT.
t-GPT (Lipsey, Carlaw, & Bekar 2005
Economic Transformations)
t- : Transforming (society)
GPT: General Purpose Technology
Table 5.1 (LCB p.132) 24 examples (Domestication of plant, … ,
Internet, Biotechnology, Nanotechnology)
GVCs are a new form of organizational
technologies (Ex. factory system 18-19c, lean
production 20c)
2022.9.19 Y. Shiozawa 38

GVCs Study Again
Gerrefi, et al. (2005) The governance of
global value chains. Review of
International Political Economy 12(1)
Basis of almost all later research
Types, Theory of VC Governance, Dynamics of GVCs
New Theory: gives economic reasons
What drives GVCs ■Technological change
Upgrading: wider scope of analysis
Negative side of globalization
2022.9.19 Y. Shiozawa 39

Conclusion
Mainstream trade theory
No capability to deal important problems
Two defects: lack of input trade, unemployment
A paradigm change is coming
Vision (Allocational to dynamic efficiency)
Methodology (Equilibrium to causal processual)
Agent (Unbounded to bounded rationality)
Theory (Demand and supply to quantity adjustment)
Classical theory of value including the NTIV.
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Contact information
For details, read my papers in the
References. Communications and
discussions are welcome.
To obtain PDFs in the reference,
send an e-mail to: y@shiozawa.net