Macro-economic models – the baseline setup

This post presents two simple macro-economic models. They are supposed to be the first two in a series of decreasingly simple models. In each case I wish to determine the implications of the assumptions of the setup – the number of people employed, the income available to each person, etc. This investigation is motivated by an attempt to make sense of Keynes’s analysis as it appears in his book The General Theory of Employment, Interest and Money. I hope to be able to test Keynes’s analysis against the various scenarios.

The baseline setup

Let the community be comprised of farmers and of landowners. Each person needs to eat at least 2000 calories per day, but would prefer to eat more, up to 3000 calories, at which point he is satiated and has no more use for food. Given access to land, a farmer can cultivate a plot of land and produce food containing 2100 calories per day.

Result: Under these conditions, assuming all the land is controlled by landowners and that unless they have something to gain landowners would rather leave land fallow than let farmers cultivate it (and also assuming that landowners prefer not to work), the resulting situation is that each landowner would allow 30 farmers to cultivate pieces of his land. Those farmers will then each consume 2000 calories per day. The landowner would consume the remaining food and thus enjoy idleness and an intake of 3000 calories per day. The landowner would thus be living without any further ambitions in life except for making sure that additional farmers do not trespass on his land. As a result, under the basic scenario, the ratio of farmers to landowners cannot grow beyond 30:1 since any excess farmers would not be able to find means of subsistence, and would therefore starve.

Variation: Foraging

The strict farmer-to-landowner ratio limit can be circumvented by assuming that farmers without access to land can subsist by, say, gathering 2000 calories per day in food growing in the wild¹. It is either assumed that farmers, given the option, prefer (for some reason) farming to gathering (Variation 1a) or that they actually prefer gathering, but can be tempted to farm if it provides them with 2050 calories per day or more (Variation 1b). In the latter case, landowners would have to extract only 50 calories-per-day from each farmer they allow to use their land, and thus would employ 60 farmers each. If the ratio of farmers-to-landowners is larger than 60, the remaining farmers would gather food in the wild.

---

[1] Ken Silverstein, writing for Harper’s magazine (Shopping for Sweat, January 2010) writes:

In October 2008, a Phnom Penh newspaper reported that foraging for food was “an increasingly popular weekend pursuit for garment workers feeling the pinch due to the spiraling cost of goods.” To survive, workers scavaged the fields near their factories for wild vegetables, snails, and crabs.

Advertisement

“[L]ive up to the conventional standard” vs. “outdo those with whom we are in the habit of classing ourselves.”

Chapter Five of Thorstein Veblen’s The Theory of the Leisure Class (1899), The Pecuniary Standard of Living, begins as follows:

For the great body of the people in any modern community, the proximate ground of expenditure in excess of what is required for physical comfort is not a conscious effort to excel in the expensiveness of their visible consumption, so much as it is a desire to live up to the conventional standard of decency in the amount and grade of goods consumed. This desire is not guided by a rigidly invariable standard, which must be lived up to, and beyond which there is no incentive to go. The standard is flexible; and especially it is indefinitely extensible, if only time is allowed for habituation to any increase in pecuniary ability and for acquiring facility in the new and larger scale of expenditure that follows such an increase. It is much more difficult to recede from a scale of expenditure once adopted than it is to extend the accustomed scale in response to an accession of wealth.