Steady State Macroeconomics : Synthesis of Keynessian theories

 Overview

It is a general theme that in a steady state economy, the aggregate supply and demand of goods become constant. That is no blocker for compositional (from dirty to clean), technological (from labor augmenting to resource augmenting) or enterprenourship change. 

The achievemnt of a steady state economy is inevitable in the absence of technological progress. As long as there exists technological progress, the steady state could be postponed without sufficient interventions.  The tendency to invest more in labor saving technology, reduces the net demand from labor and requires goverment expenditures to keep artificially employment constant. 

Working hours reductions are required to keep output constant in the steady state with labor augmenting technological progress such as AI. The wage increase should be equal to the hour reduction to keep purchasing power intact. 

Constant demand requires contant investments to avoid ovecapacity, particularly to the same extent as the capital depreciates, that means in the steady state, aggregate net investments are zero. 

Net investments are compatible to technological innovation, as long as the additional productivity is accompained by a proportional reduction of the input augmented. If production quotas are not in place it is important to adjust the interest rate accordingly or taxation on capital to avoid the expansion of investment as a consequence of higher productivity. As long as the aggregate remains constant, some companies or sectors could grow while the others shrink.

We note that the form of organization of business and the degree of competition affect the growth motive. Shareholder value firms seek growth more intensively than others as this maximizes shareholder returns, and competition and economies of scale create a race to scale business and get more market share, as this increase profits.

The steady state economy requires health financials, and not the spirals of debt we normally see. There has to be a balanced financial flow between debtors and creditors, and in the absence of growth, returns on capital will be on average close to the depreciation rate. There is not steady state economy with large amounts of debt. Corrective actions will be needed if the balanced of payments leads to unsustainable concentration of assets by creditors and liabilities by debtors happened. The closer to the steady the state the smaller the gap could be.

There is an apparent contradiction between low investments and high wage share, as this situation would lead to high consumption and then incentives to expand investment. As long as investment is keep constant, a high wage share /distribution of income is not incompatible to a steady state economy. There will have to be goverment interventions as it does not seem likely that the investment rate will naturally tend to depreciation, and would be almost always larger.

 Scenario 1 - Labor augmenting technological change

In the following scenario,  the demand is force to stay constant and investments and savings are equal to the depreciation of capital. As the technological progress is labor augmenting, to keep income and production constant working hours go down while wages increase in the same proportion.

The amount of working hours to keep employment and consumption constant changes for other types of technological progress, being the input augmented by technology what needs to go down in usage.

Scenario 2 - Sectoral change

In this scenario, a shift in investments happens from the highly pollutin capital intensive sectors towards the low polluting labor intensive sector. Employment could be even higher after the full substitution is accomplish in a steady state economy. The aggregate environmental outcome could be better even with a higher output, within certain limit, as the clean sector generates less pollution per unit of output.

There are some very relevant key take aways:

• High levels of employment depend on the technology used and how supportive are institutions to working hour reductions
• Ceteris Paribus, a sectoral change can provide better environmental outcomes with no compromise on employment, but some compromise (depending on the productivity of the clean sector) in income/consumption.
• We need a change in the price of the inputs to make relatively capital and resources more expensive and labor cheaper (after taxes) to reallocated usage and innovation investments.
• Steady state economies provide better environmental outcomes that growing economies with little or no exeption
• The level of inequality results from the wage and profit share, and does not condition the steady state economy. A steady state economy could happen with almost any inequality level, as investments shape savings. Higher consumption and lower savings increase utilization and prices, when supply is fixed.  The increase in prices redistribute the price increase back to the profit share. 
• Economic instability from unemployment could be overcome with goverment policies
• Economic instability from high debt requires debt repudiation or monetary policy to devaluate it.
• There does not seem to be a natural system to keep investments equal to the depreciation rate, when there are expectations of further profit. This is particuarly problematic where there are economies of scale, which is very common in industry and digital.

Keynessian frameworks provide a much realistic framework to explain the economy. Even with the limited coverage on environmental issues, we can derive several conditions to achieve a zero growth economy. The politics of that transition and the mandate for growth are covered in detailed in the marxists theories I explored here:

https://alanfortunysicart.blogspot.com/2022/01/the-macroeconomics-without-growth.html

In the next post, I will explore in detail the relationship between interest rates and the growth mandate, and the problems with debt and high interest rates.