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

Answer 1

Both the approaches have M and C. M stands for Money and C is for Commodity. Both the approaches have three agents in the first it is CMC and in the second MCM. Both the approaches have the same agents in the economy to carry out their processes.

In the CMC approach, the commodity is exchanged for money which in turn is exchanged for commodity and in the MCM approach, the money is exchanged for commodity which generates more money M’. In CMC approach the purpose of money is to create commodity unlike in the case of MCM where it is to create more money. In the case of C-M-C, the final product is a use-value, and thus gets spent once and for all. There is no "reflux" of money because it is lost in exchange for the product bought. In M-C-M the seller gets his money back again; the money is not spent, but rather advanced. This reflux of money occurs regardless of whether a profit is made, by the nature of the process. In C-M-C money serves as a passing mediation between two use-values. But in M-C-M’ the commodity stands between two sums of money. In C-M-C, the commodity is the end. It will satisfy some want, and for that reason it has 'use-value' as the aim of the operation. M-C-M begins with money and ends with money. Money is "the goal that attracts it" and for this reason its aim is exchange value.

      The heterodox concept is based on three components; the first interdependency is the production of goods and services requires goods and services to be used as inputs. Hence, with regard to production, the overall economy is represented as an input and output of material goods combined with different types of labour skills to produce an array of goods and services as outputs. Many of the outputs replace the goods and services used up in production and the rest constitute a physical surplus to be used for social provisioning, that is for consumption, private investment, government usage, and exports. A second interdependency is the relation between the wages of workers, profits of enterprises, and taxes of government and expenditures on consumption, investment, and government goods as well as non-market social provisioning activities. The last interdependency consists of the overlay of the flow of funds or money accompanying the production and exchange of the goods and services. Together these three interdependencies produce a monetary input-output structure of the economy where transactions in each market are a monetary transaction; where a change in price of a good or the method by which a good is produced in any one market will have an indirect or direct impact on the entire economy; and where the amount of private investment, government expenditure on real goods and services, and the excess of exports over imports determines the amount of market and non-market economic activity, the level of market employment and non-market labouring activities, and consumer expenditures on market and non-market goods and services.

Answer 2

In the CMC or the classical view economy, the government intervention is not considered necessary, the economy is supposed to be working by the invisible hands. By the classical approach, the demand and supply adjust itself automatically and also, government interventions in any form such as taxes or subsidies are not promoted. In heterodox concept, the overlap ad inter connectivity in the economy is considered important, The heterodox view rejects the existence of any automatic mechanism bringing aggregate demand to a presumed supply-side equilibrium derived from the labour market. In particular, real wages do not adjust to clear the labour market and the real balance effect is not operative.

In a closed economy, Components of GDP are C, I, G where it stands for Consumption Spending + Investment Spending + Government Spending, Consumption (C) is the households final consumption expenditure, Investment (I) is the business investment that are made and Government Purchases (G) plus general government investment that are made for the economy.

According to Keynes, “expectations are the means by which changing future influences present”, Keynes divided expectations as:

Short term expectations, these are short period expectations are events of near future and are persistently repeated on the basis of the consequences recently obtained, they get mixed up with mutual effects.

Long term expectations are formed by projecting for the future the entrepreneurs are fully confident on the forecast though these forecasts are unstable.

Answer 3

According to me businesses will not want to lower prices immediately when experiencing a decrease in demand as the decrease in the sale can be seasonal in nature or the demand could have decreases because there is a substitute of the product in the market. In both of these cases the firm will not decrease the production immediately but will wait to study the change in the pattern of consumption of the consumers.

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