Economist L. Randall Wray writes in a paper, “[t] his approach , [M-C-M’], is su

Question

Economist L. Randall Wray writes in a paper, “[t]his approach, [M-C-M’], is suited to the study of realworld capitalist economies that can be characterized as operating at less than full capacity as the normalsituation. In contrast, the neoclassical [i.e., conventional], value theory is consistent with the study of the economy dominated by scarcity, in which Say's Law holds and flexible relative prices ensure full employment of all resources”(emphasis added).Explain Dr. Wray’s position as well as the position of the conventional approach, i.e., C-M-C’.  What are their similarities and differences, if any? What are their respective processes on how the economy operates (make sure to include the concepts of price movements or lack thereof, Say’s Law, loanable funds theory, inventory, quantities of money, labor & products, hoarding, scarcity)? Note this is a question about the economic adjustment process.

Does the government ever need to intervene in the economy from these two views? What argument does Keynes make about the components of GDP in a closed economy (C + I + G)? What role does expectations of the near future play in his argument?

Give two common sense reasons why businesses will not want to lower prices immediately when experiencing a decrease in demand (sales). Does this validate the orthodox or heterodox theory of the economic process?

Explanation / Answer

In M-C-M' is that when money is used to produce or buy a commodity and then sell it with higher price than M. Hence, M'-M is the surplus value. Larger will the surplus values larger will be the availability of quantity of money and loanable funds. Since hoarding does not help to raise the value of money for future it becomes saved and followed by investment. Thus, larger labourers get employed and larger output is produced. Since money supply rises, prices also rise. Hence, Say's law's holds too. Larger output is appropriated by higher wage and price level.

For C-M-C' commodity is sold and then, money is used to produce/buy another goods that has higher values than C. C'-C is the surplus value. Inventories are washed out by price adjustment. Rest analysis are same.

This case is based on wage-price flexibility. As this ensures free market and invisible hands mechanism govt. need not to interfere in this case. Keynse assumed:

1. Consumption is a linear and positive function of income.

2. Investment and govt. expenditures are autonomous.

In Keynesian model, expectation does not play any significant role. But for New-Classical and rational expectation school expectation is assumed to matched perfectly.

Downwards inflexibility of prices with having a chance to loss inconfidence, higher menu cost impede the price to fall steeply ehen demand falls. This is not valid in orthodox case as their thesis are based upon perfect wage-price flexibility.

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