Slides from the 2016 PK Conference

1. Post Keynesian Demand and Cost,
and Marxist Unequal Exchange: An
International Trade Application
Ron Baiman
Chicago Political Economy Group (CPEG)
Graduate Business Administration
Benedictine University, Lisle, IL
rbaiman@ben.edu
International Post Keynesian Conference
Univ. of Missouri, Kansas City, MO
Sept. 17, 2016

2. Book Plugs:
• The Morality of Radical Economics: Ghost
Curve Ideology and the Value Neutral Aspect
of Neoclassical Economics, Palgrave, 2016
(Chapter 5)
• Ricardo’s Mathematical Free Trade Error:
There is No Alternative to Managed Global
Trade, Routledge, 2017
(Chapter 8)

3. The Mostly Fake SDM Story
• In one relatively simple story with just enough
analytical and graphical content to give it an aura of
objectivity and science, the fundamental principles of
our SDM social religion can be hammered home.
• The SDM shows that given a stable DC and SC, or
constant supply and demand shift-factors, competitive
markets will “clear” at the unique equilibrium price and
quantity where DC and SC intersect where “quantity
supplied” equals “quantity demanded.”
• This is a self-adjusting stable equilibrium that will be
arrived at through individual consumer and producer
reactions to “price signals.”

4. The SDM is the Intro Econ Version of
Smith’s “Invisible Hand”
• The fundamentally Walrasian SDM story is presented in
introductory texts as a description of the workings of Adam
Smith’s invisible hand
• SDM supposedly supplies a rigorous foundation for the
rhetorical message of objective market forces coordinating
individual self-interest and providing a beneficial and
balanced social equilibrium through freely adjusting price
signals.
• Given exogenous technological and natural constraints the
SDM model shows that capitalist market economies: gravitate
toward a social welfare maximizing, stable, market clearing
equilibrium that is perfectly determined by natural conditions
and individual choice.

6. High Theory, and Applied “Second
Best,” Justifications for the SDM Don’t
Work
• Now any, more or less, formal model ignores some aspects of
reality but a full half of the SDM model-is a complete fantasy
for most markets.
• In almost every case setting prices at “marginal costs” would
result in firm bankruptcy.
• “Second best” “Ramsey Pricing” efforts to resurrect “marginal
cost” pricing do not work (Baiman, 2016)
• Baiman (2016) shows that equity cannot be strictly separated
from efficiency in theory or “second-best” practice.

7. The Mostly Real “Demand and Cost
Model” (DCM) Story
• All firms also face average total cost curves which are
generally flat or slightly downward sloping in their normal
range of production (Lavoie, Chap. 2) (Lee, 1998).
• In order for the firm to stay in business these cost curves
must be below the demand curve in normal production
ranges.
• Firms will generally apply a “mark-up” over costs that will
demand on how much they want to sell and on their long
term strategy.
• If they want to sacrifice short-term profits to increase
market share over the long run they will keep prices
relatively low. If they want to maximize short-term profit
and don’t care about market share they will keep prices
high.

9. The DCM Meme
• the DCM shows that price and quantity
outcomes in market economies are
subjectively and socially embedded mostly
quantity choices that are:
– indeterminate (though constrained by objective,
institutional, and social conditions )
– unstable
– non-optimal

10. Quantity Rather than Price Changes
For example, in a survey of a representative sample of
200 non-agricultural firms in the U.S. (Blinder et. al.,
1998) found that:
• Almost all of the firms in the sample were “price-
makers” (as in the DCM) rather than “price takers” (as
in the SDM)
• And though prices were periodically reviewed they
were not determined instantaneously by supply and
demand as :
• “….the median number of price changes for a typical
product in a typical year is just 1.4 and almost half of
all prices change no more than once annually.“

12. International Trade Principles I
a) Prices in any society should reflect the true
social costs of that society.
b) Societies with higher social costs have the
right to impose tariffs on goods and services
produced in lower-social costs societies up to
a level that equalizes these costs to
producers in both societies, and rebate these
revenues to support broad-based increases
of social costs in lower-standard societies.

13. International Trade Principles II
c) When, for political reasons or in order to
support economic development, a higher social-
cost society subsidizes production in a lower
social-cost society by not imposing tariffs at this
level, the burden of these subsidizes should be
shared by all producers and workers in the
higher social-cost society, and not just by
directly affected domestic producers and
workers.
d) Only Tariffs on trade between societies with
comparable social costs, or tariffs that exceed
levels that can be justified based on b) above,
should be considered “predatory” and not
permitted.

14. International Trade Principles III
e) Developing country “infant industry”
protective tariffs should be permitted and
encouraged, along with other global
development initiatives including massive
grants to support green development, job
creation, and trade, including “productivity
pricing off-sets” that take into account
generally lower developing country
productivity when applying social-standard
raising tariffs as in b) above.