Finding Common Ground between Ecological
Economics and Post-Keynesian Economics
Kronenberg, Tobiasa
a Forschungszentrum
Jülich
D-52425 Jülich, Germany
Phone: +49 2461 61 1721. Fax: +49 2461 61 2540 E-mail: t.kronenberg@fz-juelich.de
Abstract
Post-Keynesian economics and ecological economics have in common that they are
considered to be ‘heterodox’ schools of thought because they reject the neoclassical
approach of most ‘mainstream’ economists. Aside from that, there has not been a strong
connection between the two schools. “A New Guide to Post Keynesian Economics”
(Holt and Pressman, 2001) contains no chapter on environmental or ecological issues.
This neglect has led ecological economists like Herman Daly in his book “Ecological
Economics and Sustainable Development” to criticize Post-Keynesians for succumbing
to the same growth paradigm as the neoclassical school.
This paper argues that the two approaches are complementary in the sense that they
each have different strong points. Ecological economics has correctly pointed out that
the growth of the global economy may not be welfare-improving anymore, whereas
Post-Keynesians have gained valuable insights in how the growth process of a capitalist
economy actually works. Therefore, combining insights of both approaches may lead to
a much better understanding of how a capitalist economy operates in a natural
environment with limits to growth.
Both schools of thought share a dislike of aggregation, although for different reasons –
ecological economists reject neoclassical production functions because they are
incompatible with the laws of nature, whereas Post-Keynesians reject them because the
notion of an aggregate capital stock makes no sense to them. Therefore, both
approaches tend to favour multisectoral models, i.e. input-output models. Based on the
theoretical insight gained from both schools of thought, the paper then moves to an
empirical application by outlining a dynamic input-output model for Germany, whose
theoretical foundation is compatible with post-Keynesian and ecological economics.
Keywords: ecological economics, post-Keynesian economics, input-output model
Topic: 01 Methodological issues in input-output analysis
2
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Kronenberg, Tobias
Introduction
Post-Keynesian economics and ecological economics have in common that they are
considered to be ‘heterodox’ schools of thought because they reject the neoclassical
approach of most ‘mainstream’ economists. Aside from that, there has not been a strong
connection between the two schools. “A New Guide to Post Keynesian Economics”
(Holt and Pressman, 2001) contains no chapter on environmental or ecological issues.
This neglect has led ecological economists like Herman Daly (2007) to criticize postKeynesians for succumbing to the same growth paradigm as the neoclassical school.
This paper argues that the two approaches are complementary in the sense that
they each have different strong points. Ecological economics has correctly pointed out
that the growth of the global economy may not be welfare-improving anymore, whereas
post-Keynesians have gained valuable insights in how the growth process of a capitalist
economy actually works. Therefore, combining insights of both approaches may lead to
a much better understanding of how a capitalist economy operates in a natural
environment with limits to growth1.
Ecological economics poses a normative question: “Do we want further
growth?”. They criticize neoclassical resource economics for ignoring the laws of
nature, notably the principle of mass balance and the entropy law. According to the
former, the mass of output must be equal to the mass of inputs, which implies that the
production of material goods requires material inputs. Consequently, ecological
economists reject the neoclassical aggregate production function, which allows
generously for substitution between material and non-material inputs. The entropy law,
as Georgescu-Roegen (1971) pointed out, implies that production is an irreversible
process. This has led ecological economists to criticize the common neoclassical
assumption of ‘malleable capital’ and recognize the importance of path dependence.
1
Recently, other authors have also discovered the potential for combining insights from post-Keynesian
economics and ecological economics. Ric Holt and others are currently working on a book which seems
to be going in the same direction. Unfortunately, the book is not yet available in stores. However, a
chapter on consumer theory by Marc Lavoie is already available online.
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Post-Keynesian economists, by contrast, ask a positive question: “How does
growth come about in a capitalist economy?”. Therefore, they are not necessarily
growth maniacs. They agree with ecological economists in much of their criticism
against the neoclassical mainstream. Their theory of consumer behaviour, as Lavoie
(2005) shows, is in many ways similar. The same is true of their production theory:
Having rejected the neoclassical aggregate capital stock in the Capital Controversy,
post-Keynesians generally view production as a transformation of inputs into outputs
that is mostly characterized by fixed technology coefficients unless a capacity constraint
is reached. The importance of dynamic concepts such as path dependence and the
irreversibility of decisions, which is emphasised by ecological economists, was also
realised by Joan Robinson (1980) and other post-Keynesians.
The aim of this paper is to determine how the theoretical views of both schools
can be reconciled and to show how this could contribute to providing actually relevant
policy advice. To this end, the paper first confronts the views held by post.-Keynesian
and ecological economist on the theory of production (Section 2), consumption /Section
3), and economic dynamics (Section 4). Following that, it discusses the two schools’
policy recommendations (Section 5). In order to show the value of applying theory to
practice, it applies a macroeconomic model of a post-Keynesian nature to study the
impact of consumption dematerialisation on the distribution and the level of GDP
(Section 6). Finally, a conclusion is drawn and future research avenues are suggested.
2
Production Theory
This section explains why post-Keynesians and ecological economists reject the
neoclassical theory of production. It argues that their views are similar enough to permit
a unified Ecological post-Keynesian theory of production.
Ecological economists emphasise that a theory of production has to be
compatible with the laws of nature. That recommendation may seem obvious and
trivial, but it has in fact been ignored by many neoclassical economists who base their
theory on aggregate production functions. In a highly entertaining special issue of
Ecological Economics (the journal), Herman Daly (1997) exchanges his views on this
matter with Robert M Solow (1997) and Joseph E. Stiglitz (1997). He argues that the
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aggregate production function used by Solow and others ‘calls for making a cake with
only the cook and his kitchen. We do not need flour, eggs, sugar etc., nor electricity or
natural gas, nor even firewood. If we want a bigger cake, the cook simply stirs faster in
a bigger oven that somehow heats itself”.
What Daly expresses so visibly in his beautifully embellished metaphoric
language is the fact that much of neoclassical economics is based on a very simply
aggregate production function, where output is produced using only labour (the cook’s
stirring), capital (the oven), and no natural resources. Even if natural resources are
included as a third production factor, he argues, the problem is simply swept under the
rug, because it does not address his main criticism. The crucial mistake of neoclassical
economists, in Daly’s view, is that their production functions contradict the first
(conservation of energy) and the second law (the entropy law) of thermodynamics.
Ecological economists see production as the transformation of inputs into
outputs. This means that neither energy nor matter is produced or created. The principle
of mass balance implies that the production of material output requires material inputs,
so the scope of output dematerialisation is limited. It also implies that the production of
capital requires material input, since even intangible knowledge and ideas have to be
stored in brains, books, or some other material storage device. Ecological economists
therefore argue that man-made capital cannot be a substitute for material because it
consists of material. As a result, they believe that the loss of natural capital cannot
easily be compensated by the accumulation of man-made capital, as neoclassical
economists would have it.
Although post-Keynesians have not yet (to this author’s knowledge) dealt with
the substitution of man-made capital for natural capital, they would probably be just as
sceptical about it as Herman Daly, perhaps even more so. This is because postKeynesians completely reject the notion of an aggregate capital stock. Harcourt (1972)
describes how they developed this view during the famous Cambridge Capital
Controversy. Their main argument was that a unit of capital, unlike a unit of labour,
cannot be physically measured. Constructing an aggregate capital stock requires to
somehow value the individual capital goods, and this valuation process requires
knowledge of the rate of interest. Therefore, the capital-labour ratio, which neoclassical
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economists use as an indicator of the scarcity of labour, cannot be used to explain the
distribution of income between workers and capital owners. Instead, they view the rate
of interest (or the profit rate) as the outcome of complex social processes. If this is true,
the concept of an aggregate capital stock makes no sense, and theories based on the
aggregate production function are faulty.
The Cambridge Capital Controversy dealt a serious blow to the neoclassical
production function. More recently, there have been further attacks on it. These refer to
the ‘estimation’ of aggregate production functions. A number of authors, for example
Felipe and McCombie (2005), have shown that people are actually ‘estimating’
equations which are true by definition (they are identities derived from the national
accounts). This observation provides further support to the post-Keynesians’ rejecting
the aggregate production function.
Having rejected the aggregate capital stock, post-Keynesians argue that the
purpose of capital goods such as machines and roads is not to increase the marginal
product of labour but to provide a capacity for producing output. In their view, the
amount of installed capital goods determines a firm’s capacity to produce output. As
long as actual output does not exceed capacity, firms are assumed to operate with a
technology that can be characterised by fixed input-output coefficients. According to
Eichner and Kregel (1975), most post-Keynesian economists agree that firms face
‘constant prime or direct costs over the relevant range of output, with the zone of
increasing costs lying to the right of that’. This means that within the ‘relevant range’
the firm operates with a constant input-output ratio (in value terms). From this view, it
is very easy to accept the assumption of constant input shares (as in the simple Leontief
model). Moreover, they mention that ‘profits, or residual income, of the firm will be an
increasing function of the rate of capacity utilization’. This is pretty much in line with
the simple Leontief model. Lavoie (2006b, p. 40) confirms that ‘Post-Keynesians
generally adopt Leontief-type technologies of production’.
Thus, the post-Keynesian theory of production is consistent with the laws of
nature, a requirement which ecological economists emphasise. With constant input
coefficients, an increase in output requires a proportional increase in intermediate
inputs. In Herman Daly’s beautiful metaphor, post-Keynesian theory would argue that
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the kitchen is large enough for the cook to bake a larger pie, but he will need to buy
more flour and more eggs to do so. He will also need more labour input – maybe he will
hire an apprentice, or he will work overtime. Thus, the post-Keynesian theory of
production is perfectly in line with the views of ecological economics.
To sum up, the views of post-Keynesians and ecological economists are very
similar in many respects. There is enough common ground to build a unified theory of
production. Such a theory would most certainly describe the relationship between the
output of a certain production process and the inputs in the form of constant
technological coefficients. Thus, it would be compatible with the laws of nature. It
would reject the existence of an ‘aggregate capital stock’ and, instead, assume that each
industrial sector has a certain capacity to produce. Each sector would be assumed to
operate below its capacity under normal circumstances, so an increase in demand would
be met by an increase in production, and the impact on prices would be minimal. In the
short run, changes in the relative prices of inputs would have no effect on the technical
coefficients, because the scope for substitution between inputs, especially between manmade goods and natural resources, is regarded as very limited. In the long run, the
unified theory of production could allow for changing technical coefficients as long as
the laws of nature are respected.
3
Consumption Theory
This section discusses the similarities between post-Keynesian economics and
ecological economics extend in the realm of consumption theory. It is based to a large
extent on the work of Marc Lavoie (Lavoie, 2005). Lavoie explains: ’I recently
discovered that heterodox economists in the environmental field (partisans of ecological
economics) have been, for a good 20 years, proposing models of consumer behaviour
that are very similar to those proposed by several economists of Post-Keynesian
influence’ (Lavoie, 2006a). His statement shows that communication was clearly
lacking between the two schools.
Lavoie argues that ecological economists have been using for some time
models which are in fact based on the post-Keynesian theory of consumption. They also
stress the importance of fundamental uncertainty, which renders the expected utility
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maximisation of neoclassical theory impossible and instead leads to the application of
the precautionary principle. Also, both schools believe that consumer behaviour is very
much driven by habits as long as no fundamental changes occur.
Ecological economists usually criticise the methods with which their
neoclassical colleagues try estimate the value of certain natural resources. These
methods are based on the assumption that all available consumption bundles can be
ranked in terms of value. However, ecological economists argue that people may have
lexicographic preferences, especially with respect to choices that involve the extinction
of a species or some such thing. Lavoie argues that this perspective is closely related to
what post-Keynesians call the subordination of needs.
Lavoie summarises his findings by stating that ‘the principles of consumer
behaviour which have been put forward by post-Keynesians have already been endorsed
or put to use by some specialists of ecological economics’. The fact that similar views
prevail in both schools, he argues, is actually not surprising, because both schools were
heavily influenced by the work of Georgescu-Roegen. Hence, ecological economics and
post-Keynesian economics share many similarities in their view of consumer theory.
4
Dynamic Theory
There is a widespread misperception in economics, probably caused by the popular
success of the ‘neoclassical synthesis’, that Keynesian economics is only relevant for
the analysis of short-term deviations from equilibrium, but that the grand questions of
economics – like long-term growth or the natural rate of unemployment – can still be
studied in a ‘proper’ general equilibrium model in which the classical dichotomy holds
and government interventions are generally detrimental unless some well-specified
market failure exists. This belief can be summarised by the recommendation that
economists should be Keynesian in the short run and neoclassical in the long run.
However, many economists are not truly aware of the fact that post-Keynesian
economists have actually been quite busy studying long-term growth. Eichner and
Kregel (1975) mention the work by Harrod (1939) as the starting point of postKeynesian growth theory. Following Harrod’s work, Joan Robinson and Nicholas
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Kaldor also studied long-term growth from a post-Keynesian perspective. In some
instances, they came to quite radical conclusions. For example, Robinson (Robinson,
1980) wants to ‘throw out concepts and theorems that are logically self-contradictory,
such as the general equilibrium of supply and demand, the long-run production
function, the marginal productivity of capital and the equilibrium size of firms’. She
also asserts that ‘the construction of a long-run model does not lead up to any plausible
hypotheses about reality’.
Currently, most post-Keynesians study long-term growth using models based
on the work by Michal Kalecki (‘Kaleckian’models). An important feature of these
models is that the paradox of thrift is maintained in the long run as well as in the short
run. This ‘paradox’ refers to fact that an increase in the savings rate, which is usually
intended to cause faster growth since saving is thought of as sacrificing current
consumption for future consumption, actually reduces output. This is because in the
post-Keynesian view an increase in saving implies a reduction in effective demand, and
firms react to this by producing fewer goods. Many neoclassical economists of the
‘New Keynesian’ school would agree with this line of reasoning in the short run.
However, the Kaleckian models show that the paradox of thrift may also hold in the
long run. If this is the case, an increase in the propensity to save reduces the long-term
rate of growth.
Some post-Keynesians do not agree with all the implications of the Kaleckian
model, for example the lack of a tendency toward a ‘normal’ rate of capacity utilisation.
However, virtually all post-Keynesians agree that economy dynamics are very much
governed by path dependence and hysteresis. What this means is that if the economy is
shocked by some exogenous disturbance, it will not return to the same steady state or
balanced growth path that may have prevailed before the disturbance occurred. In some
models, no such balanced growth path exists. In other models, a balanced growth path
does exist, but its characteristics depend on past events, so after a temporary shock the
economy will move toward a new balanced growth path which is different from the old
one. In one word, the economy exhibits path dependence.
It should be mentioned that neoclassical authors have – after some decades of
criticism from their post-Keynesian colleagues – realised the importance of path
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dependence. The models which they developed starting in the 1980’s – the so-called
new growth theory – share some of the features which post-Keynesian growth theorists
emphasise, for example path dependence. For this reason, Palley (2002) argues that new
growth theory is compatible with Keynesian macroeconomics, whereas old growth
theory was not.
The post-Keynesian view on economic dynamics is similar to what ecological
economists say. The latter emphasise that due to the law of entropy, the economic
process has a direction, implying that certain actions are irreversible once they have
been carried out. When a lump of coal has been burned to produce heat and electricity,
it is simply impossible to convert the resulting emission back into a lump of coal
(actually, it might be possible using some yet-to-be-developed technique, but the two
conversion processes would still increase the entropy of the system, which renders a
return to the previous situation impossible). Therefore, the concept of a ‘malleable’
capital is an abhorrent idea for ecological economists.
Hence, post-Keynesians and ecological economists once again share important
ideas. In the field of economic dynamics, these ideas include the importance of path
dependence and the irreversibility of actions, which are likely to cause technological
lock-in and other kinds of complications which suggest that even if the economy tends
toward a balanced growth path, market forces will not assure that this path will be
optimal in any respect. Hence, both schools argue that governments should take action
to influence the rate of long-term growth. However, while post-Keynesian generally
recommend policies that are intended to promote growth, ecological economists often
argue that growth needs to be slowed down. These different policy recommendations
will be discussed in the following section.
5
Views on Policy
The previous sections have shown remarkable similarities in the theoretical background
of ecological economis and post-Keynesian economics. This section, however, will
show that despite the theoretical consensus the two schools tend to hold differing views
on policy.
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Ecological economists accuse post-Keynesians of ignoring environmental
issues. Daly (2007, p. 25), for example, admits that Keynesians and post-Keynesians put
forth a well-founded critique of neoclassical economics, but when it comes to GDP
growth, they succumb to the same “growthmania” and ignore the environmental limits
to growth This may be true for many but certainly not all of them. For example, Joan
Robinson was well aware of ‘the notorious problem of pollution’ (Robinson, 1972) and
the work by J. W. Forrester. Also, Eichner and Kregel (1975) mention in passing the
‘recently revived Malthusian sensitivity to what are the true limits on economic
growth’.
It is clear, however, that even if post-Keynesian economists did not completely
ignore environmental issues, they certainly did not put them on the top of their agenda.
This is evidenced by the fact that “A New Guide to Post Keynesian Economics” (Holt
and Pressman, 2001) contains chapters on many interesting issues, such as income
distribution, unemployment, and inflation, but no chapter on environmental issues. King
(2001), in his chapter on labour and unemployment, does propose that ‘increased public
sector employment should be targeted to neglected areas of social services and
environmental improvement’. However, the main objective of his proposal is to reduce
the rate of unemployment, and environmental improvement is seen as a secondary
objective, which allows the policy to obtain a kind of double dividend. In the same
volume, Wray (2001) proposes that governments regulate energy prices, but his concern
is not the internalisation of pollution externalities but the reduction of energy price
volatility in order to stabilise inflation.
These examples would show that post-Keynesians are certainly not totally
ignorant of environmental issues. However, they seem to have different priorities, and
environmental problems only play a minor role in most of the post-Keynesian literature.
This might be related to the post-Keynesian view that ‘resources are not typically
scarce’ (Setterfield, 2001). However, what is true for unskilled workers may not be true
for endangered species. Therefore, post-Keynesians should consider paying more
attention to those resources which are scarce, especially natural and non-reproducible
resources. Once they do this, they will quickly realise that growth is a double-edged
sword – it may help reduce unemployment, but it exacerbates environmental problems.
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The attractiveness of growth-promoting policies should be reconsidered in the light of
this, and the distinction between qualitative and quantitative growth should receive
more attentions by post-Keynesians. Since their rejection of aggregate production
functions often leads them to use multisectoral models, they are actually in a good
position to study these issues.
In contrast to their post-Keynesian colleagues, neoclassical economists see
scarcity everywhere. This might explain why they realised the crucial importance of
natural resource scarcity much sooner. From the early 1970’s, a huge neoclassical
literature on these issues has emerged. Neoclassical economics has developed the subfields resource economics, environmental economics, and energy economics (although
the neoclassical authors in these fields tend to be less ‘fundamentalist’ than in other
fields).
The relative neglect of environmental issues may partly explain why postKeynesian economics was not (yet) very successful in its attempt to become a fullfledged alternative to neoclassical economics. It is regrettable, because post-Keynesians
could contribute important insights into the debate on environmental policy, for
example to the question of resource taxation. Pointing out that natural capital is the
ultimate scarce resource, ecological economists are generally in favour of taxing the use
of natural resource heavily and reducing the tax burden on other production factors,
notably labour. However, since they do not have a well-developed theory of income
distribution and growth, they are not in a good position to discuss the macroeconomic
impact of such a tax reform. As a result, the macroeconomic impacts of environmental
tax reforms are usually studied by neoclassical economists using neoclassical models,
who usually come to the surprising conclusion that high taxes, including those on
natural resoures, are detrimental to social welfare. If post-Keynesians were to take up
this issue, they could come to very different results, because their macroeconomic
theory is quite different. In order to provide a glimpse of what a post-Keynesian
analysis might contribute, the next section presents a simple post-Keynesian model and
applies it to the study the macroeconomic effects of output dematerialisation-
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Macroeconomic Effects of Dematerialisation
This section uses a stylised macroeconomic model of a post-Keynesian nature to assess
the impact of dematerialisation, which is recommended by ecological economists, on
the distribution and the level of income in an economy.
6.1
A simple macroeconomic model
The simple macroeconomic model we use in this section is basically an input-output
model with an income multiplier. Effective demand, as post-Keynesians suggest, is
divided into autonomous demand and induced demand. In this simple model, which
serves only illustrative purposes, we assume that the investment by businesses can be
treated as autonomous demand. Induced demand consists of consumption expenditure
(final consumption) and the demand for intermediate goods. The goods markets are in
equilibrium when the following condition is fulfilled:
(1)
x  Cx  Ax  f .
Equation (1) states that the total output of goods x (i.e. supply) must be equal
to the demand for goods, which consists of investment f (autonomous demand), induced
consumption and intermediate consumption. A is a matrix of technical input-output
coefficients which reflects the production technology. Element Ai,j tells us how many
units of input i are required to produce one unit of output j. C is a matrix of incomeinduced consumption. Element Ci,j tells us how much demand for good i will be induced
when the production of good j rises by one unit.
The elements of A can be computed if an input-output table is available. In the
following, we assume that A is exogenous and constant. This assumption is consistent
with the post-Keynesian theory of production as well the ecological economists’ view
on production (see Section 2). In the short term, it is realistic because most firms cannot
instantly change their production recipe. In the long term, one could allow for changes
in A because firms may adjust their production recipe in response to altered prices.
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However, changes in A must be compatible with the laws of nature discussed in Section
2.
The elements of C can in principle be computed from a social accounting
matrix, if such is available. It is defined as:
(2)
C  PcˆY
Where P is a matrix describing the consumption patterns of different social
groups, c is a vector containing the propensities to consume, ĉ is the diagonalised form
of that vector, and Y is a matrix describing the distribution of income (surplus) between
the social groups. In the following, these matrices are assumed to be constant.
According to post-Keynesian theory, autonomous demand is exogenous, at
least in the short term. As firms produce output to fulfil the requirements of autonomous
demand, they produce a surplus, which is distributed to workers and firm owners in the
form of wages and profits. Workers and firm owners spend part of that income,
inducing further demand, to which firms react by producing additional output. This
process continues until the goods markets are cleared, i.e. condition (1) is fulfilled.
The level of output (of each good) which is consistent with a given level of
autonomous demand (for each good) can be determined by re-arranging (1) and
substituting (2) for C. The result is
(3)
x  (I  A  C) 1 f  (I  A  Pcˆ Y) 1 f ,
where I denotes the identity matrix.
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6.2
Kronenberg, Tobias
A numerical example
In order illustrate the logic behind equation (3), it may be useful to discuss a numerical
example. In line with Kaleckian theory, let us assume that there are two social groups
(or ‘classes’ for those who prefer that term): workers and capital owners. Workers earn
income in the form of wages, whereas capital owners receive profits. In the production
sector, let us assume that there are two sectors. The manufacturing industry produces
manufactured goods, whereas the service industry produces services. There is no joint
production, outputs are homogeneous, as are inputs.
Table 1
Manufactured goods
Services
Production of
Production of
manufactured goods
services
0.3
0.2
0.2
0.3
Production technology
The production technology is given by the matrix A, as shown in Table 1. In
this example, the production of one unit of manufactured goods requires 0.3 units of
manufactured goods and 0.2 units of services. In the following, it is assumed that the
units of measurement are normalised such that the price of each unit is equal to one.
Table 2
Workers
Capital owners
Production of
manufactured goods
0.3
0.2
Distribution of income
Production of services
0.2
0.3
Table 2 shows how income is distributed between the two social groups in the
two industries (matrix Y). When a unit of manufactured goods is produced, workers
earn 0.3 units of income, and capital owners earn 0.2 units of income. In the service
industry, the numbers are exactly reversed. The values in Table 2 were chosen to reflect
the fact that in reality the income share of workers is higher in the manufacturing
industry than in the service sector. They were also chosen to reflect the requirement that
the entire surplus generated must be distributed. Note that the coefficients of Table 1
and Table 2 sum up to one in each sector. If, for example, one unit of services is
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produced, a surplus (or value added) of 0.5 units is generated. That surplus is then
distributed between workers and capital owners according to Table 2.
Workers and capital owners will spend part of their income (consumption
expenditure) and save the remainder. For simplicity, let us assume that workers spend
all their income, so their propensity to consume is equal to one. For capital owners, we
assume that they spend 80% of their income and save the remainder, so their propensity
to consume (both marginal and average) is equal to 0.8. Thus, c = (1, 0.8).
Table 3
Workers
Capital owners
Manufactured goods
0.5
0.5
Services
0.5
0.5
Allocation of consumption expenditure over manufactured goods and services
Finally, we assume that both workers and capital owners allocate their
consumption expenditure evenly over manufactured goods and services. Thus, the
matrix P looks as shown in Table 3. Substituting the assumed parameter values into (3)
yields the following relationship between autonomous demand and sectoral output:
1
(4)
 1 0   0.3 0.2   0.5 0.5  1 0  0.3 0.2 
  
  


 f
x  
0
1
0
.
2
0
.
3
0
.
5
0
.
5
0
0
.
8
0
.
2
0
.
3











1
 0.47  0.42 
 f
x  
  0.43 0.48 
10.67 9.33 
f
x  
 9.56 10.44 
Under the aforementioned assumptions (constancy of A and C), equation (4)
can be used to compute the sectoral output x that is required in equilibrium for a given
autonomous demand f. If, for example, autonomous demand amounts to 5 units of
manufactured goods and services each, the economy needs to produce 10 units of each
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good to achieve an equilibrium situation. That equilibrium situation can be described by
an input-output table as shown in Table 4.
Table 4
Use
Intermediate use
Prod.
Prod.
of
of
manuf. services
goods
Supply
Total
Final use
Cons.
Cons.
exp. by exp. by
workers capital
owners
Total
use
Investment
Total
Manufactured
goods
30
20
50
25
20
5
50
100
Services
20
30
50
25
20
5
50
100
Total
50
50
100
50
40
10
100
200
Wages
30
20
50
Profits
20
30
50
Value added
50
50
100
Total supply
100
100
200
Input-output table describing the equilibrium state in the numerical example
One can easily see from Table 4 that capital owners receive an income of 50
units and that they spend only 40 units on consumption. Thus, their savings amount to
10 units. This is exactly equal to the 10 units of autonomous demand, which we
interpreted as investment. Hence, the fundamental equilibrium condition for a closed
economy is fulfilled – savings are equal to investment.
The very simple model described above can of course be extended by including
international trade (exports and imports), a government collecting taxes and demanding
additional goods and services, more social groups and more industries. However, the
simple model of a closed economy with only two industries is quite sufficient for the
purposes of the present paper. In the next section, it will be used to examine the impact
of output dematerialisation on the level and distribution of income.
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17
Short-term effects of dematerialisation
Ecological economists, as mentioned above, argue that since the production and
consumption of material goods is invariably associated with environmental degradation,
we need a dematerialisation of output. This can be brought about, on the one hand, by a
change in technology – if a production process becomes more efficient, a given good
can be produced with less pollution. However, there are thermodynamic limits to this
kind of technological dematerialisation. The other type of dematerialisation is a change
in consumption patterns. There are also thermodynamic limits in this respect, since
humans need a certain amount of calorie intake to stay alive. However, as ecological
economists would point out, consumers in the OECD countries are very far away from
such binding limits. Therefore, there is ample scope for a dematerialisation of
consumption.
Strictly speaking, the simply model described above cannot be used to analyse
the dynamic process of consumption dematerialisation, because it is a static model.
However, it can be used to compare to different static equilibria associated with
different consumption patterns. Even though a comparative static analysis cannot
capture the dynamic effects of consumption dematerialisation, it can yield certain
valuable insights.
In the simple two-sector model, a dematerialisation of consumption means that
consumers demand fewer manufactured goods and more services – for a given income.
However, as post-Keynesian theory emphasises, the structure of consumption
expenditure affects the distribution of income between social groups, and since the
propensity to consume differs between these groups, the level of output is affected as
well. In theory, the change in consumption patterns could raise the level of output, and
if this effect is large enough it could offset the intended reduction in material
consumption. Before recommending a shift in consumption patterns, this theoretical
possibility has to be addressed. Furthermore, since the distribution of income is
important from a social point of view, it should also be discussed.
In the economy described by the simple post-Keynesian model, an increase in
the savings rate will reduce the level of output due to the paradox of thrift. Generally,
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the savings rate of capital owners is higher than that of workers. Thus, the question is
whether the shift in consumption patterns affects the distribution of income between
workers and capital owners. In general, it will do so if the income distribution
coefficients differ between industries, as they do in Table 2. Under the assumed
parameter values, a consumption shift toward services raises the income share of
capitalists, which in turn raises the macroeconomic savings rate and hence reduces total
income.
Table 5
Expenditure share of…
…manufactured goods
0.5
0.4
0.3
0.2
0.1
0.0
…services
0.5
0.6
0.7
0.8
0.9
1.0
Production of…
200.0 196.1 192.3 188.8 185.3 182.0
…manufactured goods 100.0 88.3 77.0 66.3 55.9 46.0
…services
100.0 107.8 115.3 122.5 129.4 136.0
Total income
100.0 98.0 96.2 94.4 92.7 91.0
Wages
50.0 48.0 46.2 44.4 42.7 41.0
Profits
50.0 50.0 50.0 50.0 50.0 50.0
Wage share (%)
50.0 49.0 48.0 47.0 46.0 45.1
Profit share (%)
50.0 51.0 52.0 53.0 54.0 54.9
The level and distribution of income for different consumption patterns
Table 5 shows the sectoral production corresponding to a given consumption
structure as well as the level and distribution of income. Moving from left to right,
consumption becomes more biased toward services. In the last column, consumption is
completely dematerialised, an no manufactured goods are consumed.
Even a complete dematerialisation of consumption, however, does not lead to a
dematerialisation of production. One reason for this is fact that autonomous demand still
contains a material component. However, even if autonomous demand is also
dematerialised (10 units of services and no manufactured goods), the economy still
needs to produce 40 units of manufactured goods, because services cannot be produced
without material inputs (A1,2 is larger than zero).
In the numerical example shown in Table 5, the impact on the level of income
and its distribution are noticeable are modest. A complete dematerialisation of
consumption allows a reduction of material production – and the associated pollution –
by 54% and is accompanied by a reduction of total income by only 9%. However, the
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income loss is distributed unevenly. The income of capital owners is not affected at all,
because the equilibrium condition does not allow a fall in aggregate savings, and since
capital owners are the only ones who save a (constant) portion of their income, their
income cannot fall. Workers, by contrast, lose almost 20% of their income. Thus, there
is a conflict of interest between capital owners and workers, since the latter have to bear
the ‘cost’ of output dematerialisation. Whether they are willing to do so depends on
their norms and values.
However, the effect of consumption on the income of workers can be much
more pronounced if the income distribution coefficients differ more significantly
between the two industries. If, for example, A = ((0.4, 0.1), (0.1, 0.4)), the income of
workers falls from 50 units to 25 units as consumption expenditure is completely
dematerialised. In this case, workers would suffer an income loss of 50% instead of
18%, and total income would fall by 25% instead of 9%. Thus, a dematerialisation of
consumption can have serious unintended consequences on the level and distribution of
income, which may be unacceptable for certain groups. Policymakers may therefore
consider cushioning its impact by, for example, using fiscal instruments to affect the
allocation of income or strengthening the bargaining rights of workers.
It should be noted, however, that the model discussed above is essentially a
short-term model, where investment is simply a component of autonomous demand.
Such a model does not take into account the ‘dual role’ of capital investment. Therefore,
the analysis of the previous sections should be complemented in the future by a longterm analysis to examine the dynamic impacts of consumption dematerialisation.
7
Conclusion
Eichner and Kregel (1975) believed that ‘post-Keynesian theory has the
potential for becoming a comprehensive, positive alternative to the prevailing
neoclassical paradigm’. More than 30 years later, however, neoclassical economics still
dominates the mainstream of our science. Although Lavoie presents post-Keynesian
theory as a ‘true alternative to the dominant school of economic thought’ (Lavoie,
2006b, p. xii), it seems that most of his colleagues still find neoclassical theory more
convincing than the post-Keynesian alternative. It is my impression that one of the
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reasons for this is the failure of post-Keynesians to address environmental issues such as
climate change and energy security. Many young economists are very much interested
in these matters, and since the literature on these topics is almost exclusively written by
neoclassical authors, they tend to follow in that tradition. The notable exception to this
pattern arises in the field of ecological economics, whose founding fathers were very
critical about the neoclassical theory of production. The literature that was reviewed
Sections 2 – 4 of this paper shows that ecological economists have come to hold similar
views as the post-Keynesians. However, communication between these two schools has
been limited in the past.
Combining insights from post-Keynesian economics and ecological economics
could be beneficial for both schools. It would give post-Keynesian economics the
practical relevance it needs, because environmental issues will continue to be on top of
political and research agendas in the coming decades as the Earth gets warmer and
natural resources get scarcer. Ecological economics, on the other hand, would benefit
from a proper macroeconomic framework with which to tackle the impact of
environmental policy on other important issues such as income distribution,
unemployment, and growth.
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