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General Equilibrium Analysis and Public Policy*

Published online by Cambridge University Press:  07 November 2014

Mabel Timlin
Mabel Timlin*
Affiliation:
The University of Saskatchewan
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Extract

It is the intention in this paper to conduct an inquiry into the relations between general equilibrium analysis and public policy by the indirect method of examining the place of such analysis in the solution of a definite economic problem. The problem selected is the possibility of raising wages without raising prices. Traditional partial equilibrium theory made the solution of this problem a fairly simple one, but modern general equilibrium considerations, dynamic qualifications on these, and institutional changes in the organization of business and labour have opened up such areas of indeterminateness in the formation of prices that we may no longer trust the answers given by the simpler generalizations.

In the development of ideas during this paper, the term “degree of monopoly” will be employed rather frequently. The term will be used in Professor Lerner's sense of the ratio between the excess of price over marginal cost and price itself. In terms of Figure 1, this is the ratio RP/MP. This definition has limitations but it is retained as the simplest to which analysis may be referred and sufficient for the particular purposes for which it is required here.

The idea that the rise of wages in relation to prices may have consequences for the levels of employment and national income is, of course, based upon the Keynesian hypothesis that larger wage incomes in relation to national income as a whole tend to mean a lower level of savings, and the corollary that a lower level of net new investment will be needed to maintain a given level of employment and income where the wage share is higher. There is also some opinion that changes in the degree of monopoly during the business cycle are such as to aggravate the operation of the disequilibrating forces. For example, Dr. M. Kalecki in an article published in Econometrica in April, 1938, suggests that the Keynesian analysis respecting the relation between wages and prices requires emendation and expansion because it appears from his statistical and theoretical analysis that the degree of monopoly increases with recessions of the business cycle and decreases with its upward phase. If this be so, Dr. Kalecki points out that the cyclical redistribution of income carries with it the necessity of attaching a larger quantity of new investment to any given level of national income as the level of national income recedes, though this reasoning is qualified for effects of falling wages on the foreign balance.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 12 , Issue 4 , November 1946 , pp. 483 - 495
Copyright
Copyright © Canadian Political Science Association 1946

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Footnotes

*

This paper was presented at the annual meeting of the Canadian Political Science Association in Toronto on May 23, 1946. It was prepared while the writer was holding a fellowship granted by the John Simon Guggenheim Memorial Foundation.

References

1 Lerner, Abba P., “Monopoly and the Measurement of Monopoly Power” (Review of Economic Studies, vol. I, 06, 1934, pp. 157–75).CrossRefGoogle Scholar See p. 169 for definition.

2 As Professor V. W. Bladen pointed out during the discussion of this paper at the May meetings, under conditions where the prices of factors and products are controlled, there may be a gap between marginal cost and price even where there is no monopoly element and where demand for a good from an individual firm may be perfectly elastic at the ceiling price for an output much greater than the firm is able to supply under existing conditions. Policy decisions are certainly involved in these cases as well as in the ones discussed during this paper, for such gaps may be closed in a number of different ways, some of which may and some of which may not involve raising the price of the product. It may, for example, be a matter of policy in such cases to hold price controls on both factors and product until removal of priorities on materials for war or related uses has proceeded to a stage where the availability of these materials may enable production to be extended to the point where marginal cost approximates price. The problem of wage rates in relation to prices comes in here also. But the dynamic aspects of these questions are so many and so various that it is necessary to restrict discussion in the paper to more general cases.

3 “The Determinants of Distribution of National Income” (Econometrica, vol. vi, pp. 97–112).Google Scholar This essay is republished in a modified form in Dr.Kalecki's, book, Essays in the Theory of Economic Fluctuations (New York, 1939).Google Scholar The section to which special reference is made here is removed from the first essay and expanded into a separate essay entitled “Money and Real Wages.” See pp. 75-92.

4 Bloomington, Ind., 1945, pp. 41-2.

5 There seems to be an implicit assumption in these studies that the degree of monopoly shifts with the business cycle in such a way that turning points tend to coincide with other main turning points of the cycle. The writer wonders if the relationship may not be less simple. Differences in the nature of the markets for factors, differences in the velocities of price changes in factor and product markets, and differences in the shapes of real cost functions as output changes, all may enter, it would seem, to vary and complicate the pattern of change.

6 Robinson, Joan, The Economics of Imperfect Competition (London, 1936), p. 81.Google Scholar

7 “Price Theory and Business Behaviour” (Oxford Economic Papers, no. 2, 05, 1939, pp. 12–45).Google Scholar

8 Journal of Political Economy, vol. XLVII, pp. 568–73.Google Scholar For quotation, see p. 570.

9 Bronfenbrenner, M., “Applications of the Discontinuous Oligopoly Demand Curve” (Journal of Political Economy, vol. XLVIII, pp. 420–7).Google Scholar

10 The kinked demand curve has had various interpretations. Messrs. Hall and Hitch and Dr. Sweezy treat it as an imaginary curve, following Dr. Nicholas Kaldor (see Kaldor, N., review of Robinson's, Joan Economics of Imperfect Competition, Economica, vol. I, n.s., 08, 1934, pp. 340–41).Google Scholar Dr. Oscar Lange in Price Flexibility and Employment (see p. 40n.) treats the kink in the curve as “real” and the resulting demand function as one which may be used in a system of demand and supply equations. But taken either way, the demand curve is irreversible and can exist only in relation to a specific price which is one price of a specific price system in a general equilibrium situation with given parameters. It is thus strictly short-term.

11 For examples of these studies, see Dean, Joel, Statistical Determination of Costs with Special Reference to Marginal Costs (Chicago, 1936)Google Scholar, Statistical Cost Functions of a Hosiery Mill, (Chicago, 1941)Google Scholar, and The Relation of Cost to Output for a Leather Belt Shop (New York, 1941).Google Scholar

12 Lange, , Price Flexibility and Employment, pp. 75–6.Google Scholar

13 If the firm is not operating at or near equilibrium levels, the reasoning must be qualified in accordance with the specific dynamic factors which may be affecting the situation. In particular, the ending of a period of price and wage controls, priorities, quotas, subsidies, and the like, will mean lack of equilibrium both with respect to division of production among products and with respect to total outputs of industries. It is entirely possible that such conditions should leave room for a considerable rise in wage ‘rates in an industry. The reasoning set out here will still apply, however, since when and if equilibrium in the production of various products is reached its character will be affected by the considerations set out in this section. For an analysis of some of the factors affecting the post-war wage-price relationships, see Chapter VII, and particularly pages 67 and 68, of Report II, entitled The Maintenance of High Levels of Employment during the Period of Industrial Rehabilitation and Reconversion, prepared by the International Labour Office at Montreal for the International Labour Conference in Paris in 1945.Google Scholar

14 Lange, , Price Flexibility and Employment, pp. 75–6.Google Scholar

15 Ibid.