Ezio Tarantelli - Economic Theory and Industrial Relations

Ezio Tarantelli Economic Theory and Industrial Relations

.

Giovanni Michelagnoli

Ezio Tarantelli Economic Theory and Industrial Relations

Giovanni Michelagnoli, PhD Department of Economics University of Florence Italy [email protected]

ISBN 978-3- 642-22311-2 e-ISBN 978-3 642-22312-9 DOI 10.1007/978-3- 642-22312-9 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011938154 # Springer-Verlag Berlin Heidelberg 2012 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Foreword

I had the privilege of working with Ezio Tarantelli during the last few years of his life and, of course, greatly admired his enthusiasm and his ideas. The Italian political economy is richer for having had his analyses and proposals for many years, and poorer for his passing on in early 1985. So, when I heard about Michelagnoli’s project, I though the book constituted a tribute to him. I was wondering if this effort was well addressed. Why to write a book like this? Is it worth it, today, to study Tarantelli ideas? Looking at the project with attention, my own motivation lies in the conviction that this is a viable and respectable analysis of the events, the ideas, the agents’ expectations and their behavior which have characterized the economy in the last and crucial decades of the twentieth century. This book is not simply a collection of largely discussed events, but represents a fine historical reconstruction and a critical analysis capable of describing the evolution of contrasts and the institutional and socio-economic settings which have characterized that crucial and perhaps the most dramatic, period. Thinking about Tarantelli proposals again means thinking about the Italian economic history of the last 40 years again. At the beginning of the 1970s, the economy was undergoing a profound transformation in all its markets, behavior, expectations and strategies. International relations and the political economy were also calling for a change. Industrial relations, inevitably suffered this transformation, but also affected dynamics and outcomes of this transformations. Moreover, the changing model for analyzing and predicting the economic system was remarkably affected by the first big oil shocks, generating new prospective structures. The dramatic surge in oil prices since the economic boom, has disrupted the traditional models to interpret and predict the economy. Stagflation brought about the great struggle among the economic agents (firms and workers) to secure income and development. We watched the first major structural break since the Second World War, which required a different way of thinking and acting. The analysis of this peculiar period is also useful to study the reaction of agents and the economic institutions to shocks and events not predicted as well as to proposal and solutions. They have inevitably affected the process that led to our economic situation. The market is sometimes

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Foreword

viewed as a Leviathan who treats an economy like a single person in capital letters. Trade Unions and employers Unions do the same for their memberships and pursuing their goals envisage a status quo as being a “war of all against all”. An economy in a democratic society is not a monolithic coalition that pursues its goals with the same single-minded determination as its individual citizens. The decisions it makes reflect a whole raft of compromises that are necessary to achieve a consensus among people, firms and workers with aspirations that will often be very different. All this brings us to think of the economy like a Prisoners Dilemma, and although Ezio Tarantelli did not use theorems and concepts of game theory, his purpose was to solve this “dreadful” Dilemma to bring the economy towards the unique Pareto efficient solution. He was perfectly aware that the market solution, with the social parts (unions and employers) in a dangerously strong opposition led to the inefficient solution (the typical dominant solution in the prisoner’s dilemma) or (even worse) to others possible inefficient solutions characterized by a free rider behavior. The possible outcomes, were an impoverishment of workers in one case, and a drop in profits with a slowdown of investment in the other. As shown by the Folk Theorem, there must be another solution, based on cooperation between the social partners and conducted by appropriate “trigger strategies”. This is the framework of analysis of Tarantelli, and it is important because it is one of the first applications of the cooperative solution in Europe whose essential ingredients were concept as “agreement as a commitment”, “reputation of the economic institutions and social actors”, “credible announcement”. This pattern of analysis was important both because it was able to show a different solution to the standard proposed by many, and because on that occasion the scheme proved to be the most effective solution, while maintaining the real incomes and showing the way for an agreement that could get the economy out of stagflation. Indeed, such a compromise was hard to envisage. The problems were how find a median position between those who address their attention on the wrong problem, those who do not see that a problem exists and those who try to benefit from this situation. The “power of ideas” is therefore intended to be interpreted literally. It is intended to serve as a basis for making judgments about the real economy and the models to interpret it. To this end, the punitive “trigger strategies” (Tit for Tat or whatever) are not enough: in fact, often the players involved are very myopic. To this end, “cheap talk” is, again, not enough: cheap talk will never persuade rational players to act contrary to their own interests, it may help to coordinate their endeavors, but a commitment is required and a guarantor that controls and ensures compliance with this commitment is also necessary. The role of trade unions in a cooperative game, their help in coordinating actions against inflation and the “political exchange” with the Government which, along with the Central Bank, announce the rules of the game (and therefore are credible to unions and employers) should be read in this scheme. The intricacy of the Italian system is well known; it is determined by a complex interactions between social, institutional, political and economic actors. This is the history reconstructed in this book, without being overwhelming by the foundations of game theory, but reporting schemes, discussions, theories, economic and political facts, agents’ strategies which emphasizes the peculiarity of the Italian

Foreword

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situation and the importance of Tarantelli’s ideas and suggestions. I hope it will appeal to students who want to learn a little about the history of the Italian and European economy and the crucial period of the 1970s and 1980s. The book helps to expand the discussion on these issues beyond the confines of a journal article on one hand, and develops the political economy analysis beyond the confines of newspaper articles on the other hand. Bruno Chiarini

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Preface

The European left wing, in particular the Italian and the French, is the only social force able to put on the ropes the conservative block in Germany and in England through the strengthening, in the name of the shield of the unemployed, of the opposition, that in these countries still exists. The contrast to unemployment is a goal as meritorious for such a left wing, as it is stodgy for those governments which today are slowing down the recovery and the pro-Europe instances. This is the reason why the contrast to unemployment [. . .] does not represent only the first step towards the European Union, but also, maybe, a political guideline aiming at joining all the left wing parties in Europe. Is this just Utopia? The Utopia of the weak is not, maybe, the strong ones’ fear1? This is what Ezio Tarantelli wrote a few weeks before being murdered by two red brigades killers when he was 44, on 27th March 1985. This book aims at reconstructing his contribution to economic analysis and the economic and sociological theories which inspired his economic policy proposals. The content is organized in five chapters, the Appendix includes Tarantelli’s scientific writings bibliography. The first chapter aims at providing a historical framework to describe the social, political and economic setting for Tarantelli’s analysis. The second chapter offers a short profile of Tarantelli’s intellectual biography. In this context, Joan Robinson’s analytical contribution to the scheme of analysis of Tarantelli will be firstly examined. It is, in fact, mainly thanks to Robinson’s approach that Tarantelli was able to formulate his cyclic version of the mark up principle. As it will be seen later on, it is based on the notion of “subjective normal price” which she expounded in the Accumulation of capital. We will then concentrate on Tarantelli’s intellectual connection with Modigliani. Though they wrote

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Tarantelli (1985 [7], pp. 576–577). The number in the squared brackets refers to the appendix of Tarantelli’s scientific writings bibliography.

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several remarkable essays together, concerning analytical refinements of Phillips curve, this connection has been very fruitful, not only from the analytical point of view. Also Tarantelli’s methodological revision of his “four cards” Post Keynesian labour market model can be largely traced back to Modigliani’s influence. The third chapter will focus on Tarantelli’s analytical refinements and generalizations to the Post Keynesian labour market, moving from his criticism to the new labour microeconomics approach. The fourth chapter will deal with Tarantelli’s reformulation of the Post Keynesian model in a conflictual scenery. Within this context, Tarantelli’s social conflict theory will be examined. As is known, it rested on the generation leap hypothesis, i.e. the emergence at the end of the sixties of a more cultivated labour force, which could not be structured in a hierarchical and authoritative organization model inherited from the past. Such a phenomenon would cause a short circuit between the two “collective brains”, that is the conflict. The fifth chapter will be dedicated to a survey of the main economic policy measures elaborated by Tarantelli, i.e. the OPEC surplus recycling, the inflation recovery proposal and the shield of the unemployed and to a brief exam of economists’ attitudes towards them. Florence

Giovanni Michelagnoli

Acknowledgements

I am grateful to Nicola Acocella, Mirella Baglioni, Massimo Bordignon, Floro Ernesto Caroleo, Bruno Chiarini, Sergio Pietro Destefanis, Riccardo Fiorito, Riccardo Leoni, Claudio Lucifora, Bruno Manghi and Leonello Tronti for their comments on earlier versions of various chapters. I would especially like to thank the former disciples of Tarantelli, such as Paola Villa, whose reminiscences provided the initial impetus for the book. I am indebted to Giuseppe Amari, Michele Colasanto, Pier Francesco Asso, Daniela Parisi, Piero Roggi, Mario Scotti and Mario Tiberi, for their helpful suggestions and motivating conversations and to Katharina Wetzel-Vandai and Irene Barrios-Kezic for their outstanding editorial assistance. I am grateful also to Massimilano Badiali, Francesco Cattabrini, Omar Ottonelli and Luca Tarantelli for their supporting and continuous encouragement.

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Contents

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Macroeconomic Sceneries and Industrial Relations in Italy (1970–1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 The Hot Autumn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The International Monetary Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 The Agreement on the Sliding Scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Trade Unions and the EUR Turn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 The Constitution of EMS and the Second Petrol Crisis . . . . . . . . . . . . . . . . 1.6 The Problems of Labour Cost and Inflation Control . . . . . . . . . . . . . . . . . . . 1.7 The Predetermination Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 The Agreement on Labour Cost of 22nd January and the Valentine’s Decree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 8

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Ezio Tarantelli: Sketches of an Intellectual Biography . . . . . . . . . . . . . . . . 2.1 Deepening Price Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Joan Robinson and the Subjective Normal Price Principle . . . . . . . . . . 2.3 The Experience of the M1 BI Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 The Analysis of Phillips Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 The Consumption Equation and the Kaldorian Model . . . . . . . . . . . . . . 2.6 Tella’s Labour Supply Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 Tarantelli’s Academic Career . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 The January 1975 Agreement and Modigliani’s Criticism . . . . . . . . . . 2.9 The Replies to Modigliani’s Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.10 Tarantelli’s Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.11 Elaborating Economic Policy Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11 11 12 14 15 17 18 18 20 22 24 27 33

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Analytical Refinements of the Post Keynesian Model . . . . . . . . . . . . . . . . . . 37 3.1 Phillips Curve and Job Search Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.2 Extensions to Disequilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

1 1 2 2 4 4 5 6

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3.3 The Implications of a Non homogeneous Labour Force on Okun’s and Tella’s Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 The Analysis of the Phillips Curve in the Short Term . . . . . . . . . . . . . . . . 3.5 The Long Term Generalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48 50 54 57

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Post Keynesian Model and Industrial Conflict . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Reformulation in a Conflictual Scenery . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Indefiniteness of the Post Keynesian Model . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 A Neoresidual Distributive Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The Theory of Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 The Generation Leap Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 The Debate on the Conflict Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Neocorporatism and Centralization of Industrial Relations . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59 59 62 66 69 72 76 80 85

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Tarantelli’s Economic Policy Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 The OPEC Surplus Recycling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Inflation Recovery Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Opinions on Tarantelli’s Proposal and the January Agreement . . . . . . . 5.4 Tarantelli’s Self Criticism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 The Shield of the Unemployed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89 89 92 99 104 106 108

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Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Ezio Tarantelli’s Scientific Writing Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . 117 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

List of Figures

Fig. 3.1 Fig. 3.2 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4

Anti-cyclic loops around the Phillips curve . . . . . . . . . . . . . . . . . . . . . . . . The shifting of the Phillips curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shifting of the Phillips curve in consequence of the “hot autumn” wage claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The conflictual paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Neocorporatism and Okun’s index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployment and centralization degree . . . . . . . . . . . . . . . . . . . . . . . . .

47 53 60 73 82 83

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Chapter 1

Macroeconomic Sceneries and Industrial Relations in Italy (1970–1985)

1.1

The Hot Autumn

The two year period of 1969–1970 represented a phase of intense social collision.1 Whilst some big industrial groups, as Fiat and Pirelli, sensibly re-dimensioned the number of employed, the vast majority of the industry and agricultural categories began the season of contractual renewals. The lengthening of working hours, the persistence of significant wage differences, as well as housing and social services insufficiency, pushed the union organizations to claim social reforms, remarkable wage increases and the reform of work organization. On the base of L. 300/1970, better known as “workers statute”, which also foresaw the mobility of labour between plants and departments and the elimination of wage cages, the workers began to refuse piecework systems and incentive pays. The development of schooling and the re-dimensioning of female employment, furthermore reduced the possibilities for the firms to rely upon marginal skilled workers employable in the lowest categories. On the industrial relations level, some sort of “bilateral monopoly” was being consolidated, which saw trade unions on one side and Confindustria (the organization of industrial entrepreneurs) on the other. The trade unions, because of the fast growth of their status and their grade of representation, ended up taking charge of social demand. The management of big firms committed themselves to give force and prestige to the Confindustria’s organisms again, with a strategy aiming to credit the industrial e´lite as guarantor of the nation’s modernization in contraposition to immobilism or client procedure of the political class.

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These schematic sketches aim at furnishing a synthetic summary of the historical framework. For an extended historical reconstruction of the Italian economy in the 1970s compare Ciocca (2007, pp. 285–315), Valli (1980) and Nardozzi (1980). G. Michelagnoli, Ezio Tarantelli - Economic Theory and Industrial Relations, DOI 10.1007/978-3-642-22312-9_1, # Springer-Verlag Berlin Heidelberg 2012

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1.2

1 Macroeconomic Sceneries and Industrial Relations in Italy (1970–1985)

The International Monetary Crisis

In 1971, a deep crisis in the International monetary system occurred. The following year, the countries of the European Community, with the intent of getting around the consequences of the crisis, instituted the “European currency snake”, which was an agreement between the various European countries which binds their currencies with an oscillation of 2.25%. Public and private interventions livened up and a recovery of industrial production took place. Productive re-organization strategies of big firms began to take shape. Fiat introduced the first robots in the assembly lines. The main objective was that of subtracting productive processes to the bounds of high labour cost and union conflicts. In July 1972, the unitary Federation of trade unions, made up of CGIL (Italian general confederation of labour), CISL (Italian confederation of trade unions) and UIL (Italian union of labour) was founded. The round of national contracts renewals led to remarkable conquests on the stability of the employment level and on the wage guarantees level. Conflicts however continued to be high. The entrepreneurs reacted by limiting investments and maintaining, sometimes, reduced dimensions of firms (less than 15 employees) to avoid the application of the workers Statute. At the beginning of 1973, Italy came out of the “European currency snake”. On the International market a first big shake up was sensed with the abandoning of the fixed parity between gold and dollar, which led to a competitive devaluation of the American currency and to a diffused uncertainty in regard to monetary value with which International transactions were regulated. The Bank of Italy adopted beggar thy neighbour policies, with the aim of sustaining domestic exportations. At the end of the year, the OPEC countries decided for a gradual reduction of the crude oil production and an increase in the price of petroleum. The Government approved an austerity plan which foresaw a series of measures destined to confront the petroleum emergency. However, it did not result influential on the consumption containment. Industrial production and investments rapidly grew and the total production increased (even if mainly thanks to the tertiary sector expansion). Anyway, the phase of inflation take off began. The devaluation of the Lira affected the prices level. To slow down the inflation spiral, the Government introduced a block for the prices of 21 consumer goods and products of the big firms. Against the growing inflation tensions, the Bank of Italy passed a moderately restrictive policy and introduced the so called “portfolio bound”, which obliged banks to destine a fixed quota of investments in government bonds.

1.3

The Agreement on the Sliding Scale

The trade unions conventions of 1973 strengthened the unification process. The VI convention of UIL passed the incompatibility principle between union posts and political posts. The CISL convention signed the definitive victory of Storti who was

1.3 The Agreement on the Sliding Scale

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supported by Macario and Carniti, against Scalia’s anti-unitary line. CIGL’s convention was centered on the reject of the social pact proposal of Confindustria. Lama, supported by Trentin, put the so called “global proposal” forward. It consisted of intensive reform policies to be integrated with the strenuous defense of wage and sliding scale and with the extension to the tertiary sector of those benefits acquired in the secondary one.2 In April 1974, Agnelli was elected president of Confindustria and the fundamental lines of his actions were exposed in the speech which he held on 30th May. He intended to pursue the actuation of three poles industrial relations in the framework of a pact which would give centrality to the industry again. During Agnelli’s presidency, the industrial relations system was characterized by two particularly significant moments. The first one was the FIAT–FLM (federation of metal workers) agreement (1974), which contemplated the opening of a permanent informative channel by the firm towards the trade union with regard to a group of economic and organizational subjects. The second one was the subscription with the unitary trade union federation, on 25th January 1975, of the agreement which concluded the long dispute on the integrative indemnity, introducing the unique superior point and the quarterly based sliding scale. Passing a similar agreement meant introducing acceleration factors of inflation, which levered the possibility for entrepreneurs of shifting the constantly increasing labour costs on prices. Whilst such an agreement could reply to the cooling of the conflict in big firms, it implied more costs than benefits to medium and small industries, as in this context conflicts were significantly more contained. Andreotti’s Government passed an austerity plan which foresaw the increase of indirect taxes burden, the block of prices and tariffs and the partial block of the sliding scale for higher incomes. Next to the restrictive monetary policy, the Government placed a more efficient control on the public expenditure dynamics, which reflected in an improvement of public accounts. In July 1976, Carli succeeded Agnelli in the presidency of Confindustria.

2

As it has been noted, the sliding scale “was introduced in Italy soon after the Second World War. A substantial reform was carried out in 1951 and set rules that remained basically unchanged until 1975. In the 1951 system, each percentage of the trade union cost-of-living index [. . .] caused contractual wages to rise, with a lag, by predetermined fixed amounts which differed by occupation, sex, age and geographical area [. . .]. At the beginning of 1975, trade unions and employers’ organizations agreed to radically change the system, with the declared objective to reduce wage differentials. After a transition period, the differentiated fixed amounts were to be replaced by a single amount equal across all employees [unique superior point] of value substantially higher than before” Brandolini et al. (2007, p. 33). Compare also Filosa-Visco (1980).

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1.4

1 Macroeconomic Sceneries and Industrial Relations in Italy (1970–1985)

Trade Unions and the EUR Turn

From 1973 to 1976 the Italian balance of payments had accumulated considerable liabilities, which only partly would be compensated by the following 3 year period of relative stabilization. In 1977, the Prime Minister Andreotti subscribed a Letter of intents with which he committed the Government to adopt severe deflationist measures and to reduce the financial requirement of the public sector. In the 3-year period 1977–1979 the Lira devalued in comparison to the Mark and, in smaller measure, to the French Franc, but it slightly re-evaluated in comparison to the dollar. On 26th January 1977, the Government had promoted an agreement between Confindustria and trade unions which it guaranteed to committing to adopt measures for the growth of employment, prices control and investments in the south. Trade unions accepted a slight diminishing of wages indexation, a revision of seniority increases and of the liquidation mechanism, a more restrictive control on absenteeism in firms and a higher labour mobility. The agreement represented a first embryonic attempt at political exchange between trade unions, firms and Government. The latter declared itself willing to facilitate firms in the reconstruction of profit margins through the social costs exemption, by charging the public balance with social security contributions originally due to firms. On 13th February 1978, the unitary trade union federation in the EUR conference, had sanctioned a policy turn. The new strategy consisted in accepting a certain degree of wage moderation and a higher labour flexibility in return for structural reforms and increases of social services supply. The meaning of such a turn emerged by the words of Lama, the CGIL’s leader. He had issued an interview to the director of the Italian daily “La Repubblica” Scalfari. His main thesis was that in an open economy, independent variables did not exist. This is the reason why, according to him, also the wage had to re-enter in the framework of economic compatibilities. Against the EUR turn, a contestation of the Federations exploded which interpreted the base’s humor of rebellion. Also against it was the aversion of CISL and UIL which denounced its instrumentality.

1.5

The Constitution of EMS and the Second Petrol Crisis

In December 1978, the European monetary system (EMS) came into being with the adhesion of Belgium, Denmark, France, Germany, Ireland, Holland and Italy. A limited fluctuation exchange was introduced as regards the Lira and the other European currencies. This turn in the exchanges policy pursued by the Bank of Italy definitely interrupted the beggar thy neighbour policy, which was adopted to sustain domestic exportations between the first and second half of the 1970s. It was no longer possible for Italian firms, therefore, to shift the higher labour cost on prices.

1.6 The Problems of Labour Cost and Inflation Control

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The Khomeinist revolution in Iran (the second petroleum exporter in the world) moreover, influenced the global market, since petroleum supplies from Iran were wiped out. Despite the marginal impact on crude oil availability, the Government’s reactions provoked a new hike in prices. In Italy, the economy’s growth rhythm increased. Next to the recovery of demand, profits and productivity, a rapid increase in the industrial capacity utilization, which nourished persistent inflation expectations, occurred.

1.6

The Problems of Labour Cost and Inflation Control

The five year growth period of Italian economy ended in 1976. While GDP’s real growth slowed down, the inflation rate began to accelerate again and so the differential in comparison to other European countries widened. The inflation expectations of entrepreneurs and the trade organization reaction to the fiscal drag caused by inflation gave rise to a rapid labour cost and prices increase. In 1980, the highest inflation peak (+21%) on annual basis of the entire after war period was reached. Two further factors contributed to the necessity of controlling the labour cost trend. The first one derived from the high rates policy which the Bank of Italy began to apply and which was meant to make the subscription of Government’s bonds desirable. On one hand, the drastic increase of the discount rate favoured the progressive internationalization of the Italian economy thanks to the entrance of capital flows. On the other hand, it also comported the growth of money cost for the firms as well as an accelerated increase of public debt. The second factor derived from the vital necessity for firms to face productive reorganizations which were functional to the utilization of new technologies. These events of economic and technologic nature brought mainly two social effects which contributed to the weakening of the trade union, i.e. the rapid growth of the unemployment rate and the decline of the worker-mass model, which contributed to subtract consensuses to the trade union culture of the hot autumn. From 1971 to 1991, occurred an expulsion of 30% of the labour force from industry and agriculture, which was only partially compensated by the increase of employment in the tertiary sector. The corollary of this phenomenon was the reduction of the unionization rate. Within FIAT, a long controversy began straight after the announcement of lay-offs (78,000 employees were laid off and 14,000 were made redundant) which lasted from 10th September to 15th October 1980. The main actors of it were the managing director of FIAT Cesare Romiti, who aimed for a drastic reduction of staff in order to re-equilibrate the firm’s accounts affected by a scary debt, and the trade union. The latter, for the first time after many years, saw itself attacked in a vital junction of its power and its credibility, i.e. the lay-offs control. The conflict led to the occupation of the factories by workers (known as the 35 days fight) and to a walk out of employees along with the firms management (the so called March of the 40,000). FIAT’s qualified staff

6

1 Macroeconomic Sceneries and Industrial Relations in Italy (1970–1985)

manifestation took place on 14th October 1980 and sounded like a condemnation of the trade union policy. The day after, Lama, Carniti and Benvenuto took cognizance of the defeat. The agreement, signed afterwards, completely welcomed FIAT’s requests. In the period 1981–1985, the American currency exchange strengthened in a persistent way in comparison to the other international currencies, massive capital flows were attracted towards the United States thanks to the high rate differential. At the same time, the realignment of currencies in EMS provoked the devaluation of the Lira and of the French Franc and the revaluation of the Mark and the Dutch Fiorin. The exchange devaluation, however, compensated only in a small part the inflation differential with the rest of the EMS countries. This is the reason why Italian firms became less competitive on the international market; such a phenomenon reflected in a persistent commercial unbalance with foreign countries. The quota of public debt abroad rapidly grew and led to an expenditure increase for interests towards foreign countries. A 3 year period of recession began, the industrial production index remained stagnant, whilst inflation remained significantly high. The situation due to the employment crisis worsened. On top of the effects of the second petroleum crisis (1979), there were the consequences of the reorganization and decentralization plans of the big firms. Recession and employment crisis provoked strong tensions within the industrial relations system. They were focused both on the sliding scale, for which Confindustria threatened the cancellation, and also on the renewal of national contracts.

1.7

The Predetermination Proposal

The balance Minister La Malfa elaborated a programmatic plan for the medium term 1981–1983, which was based on the assumption that monetary stability, demand growth control and wages policy would stimulate, in the medium term, accumulation and investments. Confindustria’s president Merloni had pressured the previous Government in order to obtain a legislative intervention on the sliding scale, but both Forlani and his successor Spadolini preferred focusing on the negotiation between the parties. Spadolini firmly believed in the necessity of activating three poles industrial relations as a privileged base of concertative practices to which entrust the task of cooling inflation down. The refusal by the union federation intervened in a particularly difficult moment. In March 1981, the Bank of Italy was forced to raise the discount rate to 19% and devaluate the Lira by 6% in the EMS. The trade union, however, was no more compact as regards such a subject. Symptoms of revisionism were easily perceivable. From the VIII congress of UIL held in Rome in June 1981, emerged the possibility of abandoning a claim strategy in order to convert to the co-participation of big choices in economic policy. For some months a proposal was circulating which was put forward by the economist and advisor of CISL, Ezio Tarantelli. It consisted in the predetermination of the sliding scale points and it

1.8 The Agreement on Labour Cost of 22nd January and the Valentine’s Decree

7

aimed to cool inflation down. On one hand, the proposal, which was accepted in January 1983, answered to the need of not attacking frontally the union, by proposing the abolition of the sliding scale and the freezing of the indexation mechanism. On the other hand, it aimed at involving trade unions in an inflation control plan. At the end of June 1981, when Spadolini formed his first Government, Confindustria had already programmed the unilateral denunciation of the sliding scale. In order to ward off this danger, Spadolini made the president of INTERSIND (the trade union of public firms which adhered to IRI and EFIM), Massacesi, the privileged interlocutor for the definition of the Government’s economic program. Spadolini, furthermore, acted on Confindustria in order to block every unilateral initiative which could obstruct the opening of triangular negotiations. From the X congress of CGIL, which was held in Rome in November 1981, originated the necessity to put a limit of 16% on wages increase. They also talked about fiscal drag, for which was proposed the restitution within increases below that threshold. Such a proposal, rejected by Confindustria, was difficult to be accepted by the Government. It would have, in fact, led to conspicuous expenses for public finance, without guaranteeing an adequate recovery from inflation. Confindustria requested an unilateral legislative measure of the Government to unblock the situation. The breaking of the Government with Confindustria became official when in December 1981 the president Merloni attacked the Government for its lack of intervention. An imminent cancellation of the sliding scale was being delineating. The manoeuvre margins became very narrow for the Government after the trade Federation had also issued in December 1981 a unitary document which requested fiscal policies to face the economic and financial crisis, but refused a compulsory intervention on the sliding scale. On 1st June 1982, Confindustria decided on the unilateral cancellation of the 1975 agreement regarding the sliding scale, openly focusing on recovering the widest flexibility in the labour force utilization. The denouncement of private industry was followed by INTERSIND’s.

1.8

The Agreement on Labour Cost of 22nd January and the Valentine’s Decree

By 1983 the recession of 1981–1982 was over and GDP grew 1% in Italy. Production and investments began to grow again with rates analogous or even higher in comparison to the main European partners. The bilateral agreement of 22nd January 1983 between the unitary trade union Federation and Confindustria maintained the sliding scale at an unique point, with a hook of the quarterly revaluations to the prices index, but redefined the indexation mechanism in order to limit the inflation effect (15% reduction of the contingency point value) and the integrative bargaining was suspended for 18 months. The category contracts which Confindustria had blocked as revenge until the negotiation with the trade unions had been pulled off, were renewed. The Government committed itself to maintain

8

1 Macroeconomic Sceneries and Industrial Relations in Italy (1970–1985)

consumer price growth below 13% in 1983 and below 10% in 1984, to reduce fiscal pressure on firms and to institute a solidarity fund destined to finance investments. Entrepreneurs and trade unions also committed themselves to set maximum increase roofs during the period 1983–1985. During the congress which the Italian communist party (PCI) held in Milan in March 1983, Berlinguer, was re-elected as secretary. He criticized trade unions because they were loosing contact with the working class and claimed to enter in subjects which regarded political parties. The elections of 23rd June 1983 saw the recovery of PSI (Italian socialist party) and this paved the way for Craxi’s rising to the Prime ministership. The questions about the income policy and the sliding scale returned to the economic and political debate, but the conditions for reaching an agreement had worsened even more compared to January 1983. The situation had worsened because of the long controversy regarding the recovery of non paid decimals by the industrials deriving from the 15% curtailment of the sliding scale foreseen by the 22nd January agreement. In January 1984, CGIL approved a document which asked for a prices and tariffs block against a programmed regulation of the wage dynamic. CISL board’s line was the opposite, in fact it reasserted the necessity of containing the most important indexation factors. PCI’s board of directors had in the meanwhile approved a document which condemned the method that the Government intended using for containing inflation and that would have being paid with the sacrifice of workers. After long negotiations, on 11th February there was the presentation to the social parties of the Government’s protocol. The Government put on the negotiation table the block of administrated prices and tariffs for 2 months, the suspension of increases of the equo canone (fair rent) for all 1984 and the fiscal drag restitution for the following year. Faced with this, a cut of some sliding scale’s points was asked for. The 48 h which Craxi, the chief of the Government, was allowed for making a decision compelled the trade union confederation to line up. CISL and UIL were favourable; the communist component CGIL (the majority) was against it. The agreement was not possible anymore and so the Government proceeded with a decree, known as Valentine’s decree, which reduced four sliding scale points. It was an event that caused the dissolution of the unitary trade federation. Every confederation had its autonomy again. On this basis, the long political referendum battle against the decree began. On 24th March 1984 in Rome an impressive manifestation against the decree took place. Proletarian democracy and PCI promoted the actuation of a referendum to abrogate the decree, it was held in June 1985. The people against the abrogation prevailed with 54.3% of votes.

References Brandolini, A., Casadio, P., Cipollone, P., Magnani, M., Rosolia, A., & Torrini, R. (2007). Employment growth in Italy in the 1990s: Institutional arrangements and market forces. In Acocella N & Leoni R (Eds.), Social pacts, employment and growth (pp. 31–68). Heidelberg/New York: Physica-Verlag.

References

9

Ciocca, P. (2007). Ricchi per sempre? Torino: Boringhieri. Filosa, R., & Visco, I. (1980). Costo del lavoro, indicizzazione e perequazione delle retribuzioni negli anni ’70. In G. Nardozzi (Ed.), I difficili anni ’70. I problemi della politica economica italiana (pp. 107–139). Milano: ETAS. Nardozzi, G. (Ed.). (1980). I difficili anni ’70. I problemi della politica economica italiana. Milano: ETAS. Valli, V. (1980). La politica economica: una cronaca ragionata del periodo 1973–1979. In G. Nardozzi (Ed.), I difficili anni ’70. I problemi della politica economica italiana (pp. 83–104). Milano: ETAS.

.

Chapter 2

Ezio Tarantelli: Sketches of an Intellectual Biography

2.1

Deepening Price Theory

Ezio Tarantelli was born in Rome on 11th August 1941. He graduated in Economics in 1965 at “La Sapienza” discussing a thesis on Economic Geography with Ferdinando Milone and Federico Caffe´. His thesis – Caffe` says – was edited in the United States of America and its subjects were the differences between different zones; but the economic interests prevailed so much on the geographic ones that [. . .] Milone wanted to associate me in the thesis discussion.1

Once Tarantelli graduated, Milone, who was about to retire entrusted his pupil to Caffe´, so that he could take care of his formation and help him start his academic career. It was from here that Tarantelli’s career in the Bank of Italy began, where he entered just after obtaining a “Bonaldo Stringher” grant. It is also thanks to the support of the Bank of Italy that Tarantelli perfected his economic studies abroad. After Tarantelli’s death, Caffe´, incited by Parlato, expressed himself regarding his pupil like this Nobody like him has had this cooptation in the international community of economists. I want to say that Tarantelli formed himself outside the so called idola loci. These were superimposed after, with deviant effects on the comprehension of his economic thought even with semantic misunderstandings.2

Already a few months after starting work, Tarantelli asked to be discharged from the Bank of Italy because he wanted to improve his knowledge of economic theory. This is the reason why he intended to go to study abroad. The 1960s were the years of the controversy between the two Cambridges, and his first intent was to go to the

Chiaromonte et al. (1985, p. 7). It has to be noted that, as reminded in the documentary La forza delle idee, Tarantelli’s interest for labour economics, was also due to biographical reasons. Luca Tarantelli, author of the video, points out that his father had chosen this branch of research having suffered himself the consequences of unemployment because of some unfavourable family matters. 2 Caffe´ (2007b [1985], p. 142) 1

G. Michelagnoli, Ezio Tarantelli - Economic Theory and Industrial Relations, DOI 10.1007/978-3-642-22312-9_2, # Springer-Verlag Berlin Heidelberg 2012

11

12

2 Ezio Tarantelli: Sketches of an Intellectual Biography

United Kingdom in order to deepen the capital theory.3 He did so with Joan Robinson, who had just published The accumulation of capital and who was assigned to him as tutor. The main solicitations which Tarantelli drew from this first international experience regarded the distributive theory and the mark up principle. Tarantelli indicated the latter as the first card of the Post Keynesian labour market model. As it is known, the main subject of the debate which saw Samuelson and Solow on one hand contrasting with Robinson and Sraffa on the other, was represented by the distributive theory. With regard to this, the Cambridge (UK) economists called into question the concept of capital homogeneity. From here a series of problems arose so much on a theoretical level (the determination of distributive quotas due to capital) as on a political level.4 As we will see, Tarantelli with regard to the distributive theory showed, like Caffe´, his appreciation for the “flexibility” allowed by the Sraffian set up.5 In that case, the determination of distributive shares would have not resulted completely “dominated by prices”. On the contrary, it would have still been possible to identify the sufficient space for institutional interventions able to modify it.

2.2

Joan Robinson and the Subjective Normal Price Principle

The contribution of Joan Robinson to Tarantelli’s economic thought particularly emerged with regard to the mark up analysis.6 Robinson had expressed a fundamental concept for Tarantelli’s elaboration, i.e. the notion of subjective normal price. It is the price that allowed entrepreneurs to obtain a profit considered reasonable on the basis of their previous experience, given the framework related to the economic situation, the use of the plant and the businessmen’s expectations

3 A wide work and a remarkable close examination about the Italian economists education, even regarding the period 1950–1975 is (Garofalo and Graziani 2004). 4 Even conceiving the “capital” as a complex of capital goods, the problem of taking into account the consequences of the different productivity of the different vintages of production factor still arose. 5 Commemorating the disappearing of Piero Sraffa, Caffe` said “He provides a convincing demonstration according to which in correspondence of every particular income distribution between wages and profits, exists a corresponding set of relative prices. Consequently, it cannot be said that one set is better than another, because they are all instrumental to the income distribution. The only thing that can be said is that the income distribution can become better or worse. Anyway, it is not dominated by the prices mechanism, but it depends on an institutional choice and who can influence its determination has to be considered responsible for it” Caffe´ (2007a [1983], pp. 605–606). 6 For a close examination of Post Keynesian price theory Lee (1998), Downward (1999), and HoltPressman (2001) can be compared.

2.2 Joan Robinson and the Subjective Normal Price Principle

13

regarding the selling volumes.7 The notion of subjective normal price rested on the definition of normal price. The normal price for any kind of commodity – Joan Robinson argued – consists of prime costs plus a gross margin calculated to cover a due share of overhead costs, amortization and profit at the ruling rate on the capital invested, when the plant was being worked at normal capacity.8

From this basis it was possible to state the concept of subjective normal price. [It] is such that the gross margin entering into its calculation to yield a profit that the entrepreneurs concerned had to come to regard as attainable (on the basis of past experience) with the productive capacity in existence in the given short-period situation.9

Tarantelli made use of the concept of subjective normal price for formulating the “cyclic principle of the full cost”. This principle found application in a scenery of dynamic disequilibrium characterized by different utilization grades of capital and labour. In such a framework, it was possible to observe an actual sterilization of the effects of short term demand variations on costs. According to Tarantelli, this happened because, instead of maximizing the profit tout court, the entrepreneur pursued its stabilization charging a subjective normal price calculated on the basis of the expected average selling rate in a spell of time. In the short term, the effective selling rate could have even differed from the average value, but with regard to the whole economic life of the plant such gaps could have compensated each other if the demand cycle had presented a certain regularity. From the perspective of the stabilization of profits, if the demand had not been sufficiently high, it would have been plausible to hypothesize that increments of costs could have been transferred less than proportionally on prices. The contrary would have happened in the case of sufficiently high demand. Put into a nutshell, this is the meaning of Tarantelli’s “cyclic principle of full cost”. He also warned that while fixing the subjective normal price, entrepreneurs should have taken into account, as well as the objective of profits stabilization, the financing conditions offered by the banking system. According to him, the latter was a remarkable element, especially in a context like the Italian one, which configures with a strongly non homogeneous capital and in which the possibility of decision of a price more or less high can depend on the evolution of the cycle of bank financing, especially for the smaller firms which are less efficient and have less chances of self finance.10

7

In particular, Tarantelli refers to Robinson (1953) and Robinson (1965), Chap. XIX. Robinson (1965, p. 185). 9 Robinson (1965, pp. 185–186). 10 Tarantelli (1970 [1], p. 96). At the same time, Tarantelli specifies that “the aggregation level of empirical verification, which will be done for the total industrial sector, makes it difficult to split these last purely financial effects which can only presumably refer to small firms from the ones connected to the conditions of demand. This also because of the statistic collinearity between appropriate measures of the monetary expansion rate and those referring to the conditions of demand” (Tarantelli 1970 [1], p. 96). 8

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2.3

2 Ezio Tarantelli: Sketches of an Intellectual Biography

The Experience of the M1 BI Model

After his experience at Cambridge, Tarantelli went back to Italy in June 1966. In the meantime, in the Bank of Italy he was assigned to the studies and researches service, whose main activity was soon to become the elaboration of the econometric model of the Italian economy (M1 BI). Thanks to a scholarship from “La Sapienza” and an award of the Bank of Italy, in September of the same year he was able to set off to Cambridge (MA); destination MIT. Toghether with Antonio Fazio, he attended the course “Mathematical approach to economics”, which was held by Samuelson. The lessons were about the theory of differential equations and the calculus of variations beyond applications, as Fazio himself said “to basic subjects of the analysis, such as the economic cycle, growth and savings formation”.11 At the end of 1966, Carli, governor of the Bank of Italy, decided to make use of the MIT economist Franco Modigliani’s collaboration to build an econometric model of the Italian economy.12 The objective declared by the Bank of Italy’s model was that of “delving into the study of the operative modalities of the monetary and fiscal policies instruments” to prepare an instrument finalized “to establish not only the qualitative relations, but also the quantitative ones which exist between the variables of the Italian economic system”.13 M1 BI is a three-sector model (real, fiscal and financial). It is made up of 155 equations, of which 35 are definitional equations, 16 are balance constrains and 104 are behavioural equations. To Tarantelli, who amongst others worked next to economists such as Rey, Vicarelli, Fazio and Filosa, was assigned the part regarding

11

Fazio (2010 [1995], p. 71). With regard to the time that Tarantelli spent in the U.S., there are several anecdotes. Fazio narrates “Ezio turned on the magnetophone at the beginning of every lesson [of Samuelson’s course]; in one of these by mistake he turned the audio on while recording. The lesson was opened that morning by Joan Robinson’s voice; the initial moment of dismay turned into general hilarity” Fazio (2010 [1995], p. 71). Sarcinelli also remembered that “In January 1967 [. . .] he clearly wanted to show how he felt himself a member of Europe’s left-wing e´lite and waved The accumulation of capital in front of Robert Solow”. See Sarcinelli (2007, p. 24). 12 On the basis of both the econometric models of US economy set up by Klein in the 1940s and of the FRB-MIT-PENN model (compare Ando et al. 1974) several econometric models of the Italian economy were elaborated between the mid-1960s and mid-1980s. Although the first of them was Sylos Labini’s model (Sylos-Labini 1967), the main one can be considered the M1 BI built up by the study service of the Bank of Italy. Next to these, other models to be considered are the one proposed by the University of Bologna (D’Adda-De Antoni-Gambetta-Onofri-Stagni 1976) which later became Prometeia-Universita` di Bologna, then the “modellaccio” elaborated by Ancona’s University group (Fua` 1976) and finally the case of Confindustria (Tivegna 1984). A survey of the main qualifying elements of these models is proposed in Chiarini (1989). A list of the econometric models estimated and used in Italy in the years 1960–1980 and a synthetic description of their relation to the problems with the Italian economy is proposed in Valli (1993). 13 Banca d’Italia (1970, p. 9).

2.4 The Analysis of Phillips Curve

15

wages and productivity, referring to the real sector of the econometric model.14 Modigliani, who supervised the construction of M1 BI, acknowledged Carli’s invitation. It was actually the relationship between Modigliani and the central bank, which became more proactive since the end of 1967 (when Masera constituted an ad hoc work group) that would ratify the beginning of a fecundated intellectual association between Modigliani and Tarantelli.15 Modigliani’s influence on Tarantelli’s economic thought can be considered significative. Like Modigliani, who was influenced by Marschack, Tarantelli applied himself with fervor to the econometric researches, even urging the construction of a labour market econometric model by the side of the trade unions. Tarantelli and Modigliani, furthermore, conjointly elaborated an exhaustive econometric refinement and a generalization of Phillips curve, which Tarantelli identified as the second card of the Post Keynesian labour market model. Their analytical refinements consisted in the extension of Phillips curve to a developing country and in introducing in the regression equation an index to take into account the trade unions strength. They also suggested, but this criticism goes beyond econometric analysis, to reject the in-existence thesis of Friedman and Phelps.

2.4

The Analysis of Phillips Curve

Regarding the generalization of Phillips curve to a developing country, it was necessary to take into account the strong heterogeneity of capital and labour force stocks. In the latter, Modigliani and Tarantelli distinguished skilled from unskilled labour force: the first one was characterized by a higher productivity, the second one by a lower one. Thanks to the developing process, the unskilled unemployed ended up being assumed by firms and trained on the work place. This process determined a progressive improvement in the labour qualification. From this perspective, Phillips curve could be interpreted as a frontier which progressively translated towards the axis origin, with the proceeding of development.16 Tarantelli

14

Recent historiographic tendencies underline how, in reality, Modigliani’s contribution to M1 BI is not to be considered of crucial importance. In fact it widely suffers from some sort of embryonic model already prefigured in the Preliminary relationship of the work group instituted at the Electronic Center of the Bank of Italy in summer 1963, published in 1964. In regard to this, Rey’s intervention at the International Conference about employment, industrial relations and human capital can be considered significant. The actuality of Ezio Tarantelli’s thoughts (26–27th March 2010) Roma, University “La Sapienza”. Rey underlines that as Modigliani’s contribution, even Tarantelli’s to M1 BI has to be relativized. On the same interpretative line, but with exclusive regard to Modigliani’s contribution (Binotti- Ghiani 2008) are collocated. 15 Modigliani’s relationship with Italy have been extensively examined in (Asso 2007). An autobiographic narration regarding the period during which Modigliani supervised the construction of the econometric model M1 BI and his relationship with the Bank of Italy, is proposed in Modigliani (1999). 16 Tarantelli (1972 [3]) and Tarantelli (1972 [4]).

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2 Ezio Tarantelli: Sketches of an Intellectual Biography

and Modigliani also recognized the necessity of introducing in the regression equation a` la Phillips a trade union strength index. They identified this index in the quota of workers whose renewal would not be postponed beyond the contract expiry date.17 In the presence of a trade union endowed with a significant bargaining power, the counterpart would not have been able to evade from negotiating contractual clauses at the end of the contract. The opposite would have happened in the case of a “weak” trade union. Let us now turn to Tarantelli and Modigliani’s criticism of Friedman and Phelps’s approach to the analysis of Phillips curve. Friedman and Phelps rejected the possibility of obtaining an inverse relation between wage growth rate and unemployment level. According to them, in the long term the unemployment rate would reach its natural level, in correspondence to which it would be possible to observe any value of the inflation rate. With regard to the validity of such a conclusion, Tarantelli and Modigliani put forward significant doubts.18 The first one was that a unique value for the natural unemployment rate would not exist, but there are as many of these as there are Phillips curves in the short and long term. It could not be considered licit to assume perfect rationality in the workers expectations, at least within a plausible period of time. In the end, as regards the stagflation phenomenon, which monetarists assumed as an empirical confirmation of their set up validity, Tarantelli concluded that, contrarily to Phillips curve indications, it was possible to observe an increase in unemployment even in the presence of an accelerated price level growth. With a positive inflation rate caused by the wage push up, if policy makers had carried out restrictive policies to contain the inflation rate, the trade off between wage growth rate and unemployment level would have been growing instead of decreasing. This is the reason why Phillips curve would have transformed itself in a boomerang curve aimed against labour force. Tarantelli’s studies on potential income can be reconnected to that same cultural laboratory and once again to Modigliani’s solicitations. These studies were essentially concentrated on the verification of Okun’s law for the Italian economy, third constitutive card of the Post Keynesian labour market model.19 Okun’s analysis had evidenced that in econometric terms, an increase of 2.5% of unemployment resulted correlated with a decrease of 1% of the activity level. It was a regularity known as “principle of 2.5:1”, according to which an increase in the activity level contributed

17

Dicks-Mireaux-Dow had already proposed to take into account the trade union strength. They forwarded an hypothesis regarding the time lag between the moment of claim and the moment of effective wage variations. They calculated an average lag of 6 months between price variations and nominal wage variations. They also observed that with different union bargaining powers, a further delay in the adjustment could be possible, within a maximum of 3 months. Therefore they asserted that the nearer the effective delay was to 9 months, the trade union would have benefited of little contractual power; vice versa in the case in which the delay was nearer to 6 months. Compare Dicks Mireaux-Dow (1959) and Tarantelli (1972 [1]) and Tarantelli (1976 [3]). 18 Tarantelli (1972 [4]). 19 Tarantelli (1970 [1]), Tarantelli (1971 [1]), Tarantelli (1971 [2]), Tarantelli (1974 [2]) and Tarantelli (1975 [1]).

2.5 The Consumption Equation and the Kaldorian Model

17

to reducing unemployment in the limits of 2.5:1.20 This is that at every percentage point of production increase, there was a reduction of 0.4%. So Okun recognized a positive elasticity of labour demand to income variations, even if less than one. This result implied a pro cyclic productivity theory. To such a theory, Tarantelli opposed an anticiclic one, i.e. the productivity would show a progressively decreasing trend with the increasing of the system activity level. This was because labour force selection happened according to a Ricardian procedure, which first employed the more efficient labour units. Unskilled workers, without previous experience and training, would be put in the productive process only in presence of a sufficiently high level of demand. On this basis, as opportunely revealed, “the mechanic and simplifying Okun approach was refused” by Tarantelli.21

2.5

The Consumption Equation and the Kaldorian Model

A further relevant aspect with regard to which it is possible to perceive Modigliani’s intellectual influence, is represented by Tarantelli’s studies on the consumption function. These contributions allowed him to face the distributive problem.22 On the basis of Modigliani’s life cycle theory, Tarantelli approached a conclusion which was antithetical to the Kaldorian one.23 From the point of view of the quota destined to savings, it was not possible to identify any systematic difference between incomes such as wages and salaries on one side, and profits (or, from a wider perspective, other kinds of income) on the other. The investments could not be considered financed exclusively by profits anymore, as in the Kaldorian set up. In fact, savings could also be originated from labour incomes. According to Tarantelli, the distributive mechanism ended up being determined by the relative power relationships between social classes, as in the Sraffian set up, or in the terms suggested by Graziani, in the “conflictual scheme”.24

20

Okun (1962). Filosa-Rey (1988, p. xvii). 22 Tarantelli (1973 [2]); (1974 [3]); (1979 [4]); (1979 [5]); (1979 [6]). 23 Modigliani’s life cycle theory of consumption refers to intertemporal choices in an finite horizon (the consumer’s life). In 1957, Friedman developed the permanent income theory, which is a generalization to an infinite horizon (so with inheritance and wealth transmission from one generation to the next) of Modigliani’s life cycle model. Compare Brumberg-Modigliani (1954), Ando-Modigliani (1963), Friedman (1957). 24 With regard to the theory of distribution, Graziani identified four schools of thought in Italy: (a) the marginalists; (b) the neomarginalists or compatibilists, that is those who suggested “updating” marginalism using instruments “of classic derivation and of Kaldorian inspiration”; in particular the full cost theory and “the hypothesis of double propensity to savings, of workers and capitalists”; (c) the marxists, divided in orthodoxies and those who “abandoned the labour value theory even if they still continued being supporters of the marxian doctrine”; (d) the 21

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2.6

2 Ezio Tarantelli: Sketches of an Intellectual Biography

Tella’s Labour Supply Equation

As much as Modigliani’s contribution results less decisive, we still have to enunciate the third card of the Post Keynesian labour market model proposed by Tarantelli. This was the labour supply function formulated by Tella.25 Tella’s thesis was that secondary labour force, not the one which Tarantelli and De Cecco would have defined “the bloom of youth”, modified itself in a relatively slow way when variations of the system activity level occurred. This phenomenon was to be considered essentially due to the role played by information.26 He distinguished the working population into two groups which were: the units constantly revealable through official statistics (primary labour force) and the ones which were inserted in the calculation only when occupied, otherwise they were excluded (secondary labour force). The secondary workers would have known about the job opportunities only if they had been informed of their availability by primary workers or better informed secondary workers. On the contrary, every primary worker would have promptly reacted when faced with employment perspectives.27

2.7

Tarantelli’s Academic Career

Let us now turn to Tarantelli’s academic career. In 1971, also thanks to Mazzocchi’s good offices, Tarantelli assumed the assignement of Labour policy and social legislation at the Faculty of political science at the Catholic University of Milan.28 He stayed there until 1975, having in the meantime become assistant of the professorship of Economic and Financial Politics, held by Caffe´ in the Faculty of Economy and Commerce of “La Sapienza”. From November 1976, he was professor of economic and financial politics at the faculty of Political science “C. Alfieri” at the University of Florence. Tarantelli’s course, illustrated in the guides available

conflictualists, that is those economists who found “their theoretical support in Sraffa’s famous book” (Graziani 1981, pp. 287–288). It has to be said, however, that Tarantelli considered that such a set up would end up resulting excessively simplifying. This is the reason why he ironically commented “[According to Graziani] Italy est omnis divisa in partes tres: marginalists, compatibilists and conflictualists (not without heroic approximations and exchanging people). Everyone enters the circle they deserve” (Tarantelli 1978 [5], p. 90). 25 Tella (1964) and Tella (1965). 26 Simler-Tella (1968). 27 A first estimation of Tella’s labour supply equation in Italy was proposed in La Malfa-Vinci (1970). 28 Tarantelli became professor commissioned to the professorship of Labour policy and social legislation of the academic year 1971/1972–1976/1977 (from 1st November 1971 to 31st October 1974 and from 1st November 1975 to 31st October 1977). He was stabilized in the academic year 1974/1975 (from 1st November 1974 to 31st October 1975). Compare UCSC, human resources direction, Series of files of professors, pos. 2869, Prof. Tarantelli Ezio.

2.7 Tarantelli’s Academic Career

19

to the students, was made up of three parts. After a first historical recognition regarding the economic analysis of labour market until the Post Keynesian developments, the students were called to confront themselves against the approach objectives-instruments of economic policy. The last part was dedicated to an examination of Italian economy’s problems carried out through the main economic policy documents: the prevision and program relation and the final considerations of the Bank of Italy’s governor. It is interesting to notice that, as an integration and specification of what was indicated in the guide, the Florentine exam program traced out, at least until the end of the 1970s, what Tarantelli proposed at the Catholic University.29 The contents were articulated into two sections: the first one regarding the labour market models, the other ones concerning respectively the different structural interpretations and the problems of Italian labour market.30 The students who wanted to, were allowed to present a paper regarding the problems related to emigration. From 1980 on, the course held by Tarantelli at the University of Florence began to assume a different structure. A first block of lessons was dedicated to subjects such as the construction of the Keynesian macroeconomic model in a closed and in an open economy and the exposition of the instruments-objectives approach to economic policy suggested by Tinbergen. On these subjects the students were invited to see (Caffe` 1978). Then there was the part regarding labour market and the trade union role, which made use of (Tarantelli 1978 [5]). Bordignon, who had sat the exam in 1980 with Tarantelli, remembers that during the lesson a large space was dedicated to the critical examination of Phillips curve and to the construction of the Post Keynesian labour market model. Various lessons were also dedicated to the different inflation theories. Furthermore, Tarantelli abundantly illustrated the generation leap hypothesis which he had elaborated. The conclusive part of the course consisted of an analysis of the main economic policy documents, such as the final considerations of the Bank of Italy’s governor and the prevision and program relation. In July 1983, Tarantelli moved to the University of Rome “La Sapienza”, where he held the full professorship of political economy.

29

It has to be taken into account that the exam program distributed to the students, was still the one relative to the Milanese course of labour policy. I thank Franco Bortolotti, who sat the economic and financial policy exam with Tarantelli, for allowing me to view all the didactical material assigned by him to the students. 30 Referring to the models, the textbooks indicated were: some lecture notes edited by Paola Villa, compare Villa (1984), Gandolfo (1975), some sections of Ackley (1971), Roccas (1971) and Tarantelli (1974 [2]). With regard to the structural analysis, these were the suggested contributions: Mottura-Pugliese (1975), Paci (1974), and Tarantelli (1972 [4]). Take note that before moving to Rome, during the academic years 1981–1982 and 1982–1983, Tarantelli substituted part of the above mentioned materials with some sections of the widely diffused macroeconomics handbook by Dornbusch and Fischer and with Tarantelli (1978 [5]).

20

2.8

2 Ezio Tarantelli: Sketches of an Intellectual Biography

The January 1975 Agreement and Modigliani’s Criticism

On January 25th 1975, Confindustria and trade unions signed an agreement which determined a fundamental revision of the sliding scale, by fixing at a unique superior point the mechanism of indexation.31 From here, originated a heated debate between economists concerning the labour cost and the economic policies to face a high rate of inflation, better known as the Modigliani controversy. Modigliani, the economist with whom Tarantelli had deepened the analysis of Phillips curve, was amongst the economists who expressed themselves in a more lively critical way about the agreement.32 According to his forecasts, this would determine an unjustified increase of labour costs unhooking them from the dynamics of productivity.33 And this, making impossible the exit of the Italian economy from the “infernal triangle”, as he defined it, would block the upswing. Any economic policy measure, in fact, would have only the effect of inducing a cyclic movement from one vertex to another of the triangle. This movement would be disastrous and without a way out, because in correspondence to every vertex only two out of the three objectives (full employment, balance of payments equilibrium and price stability) could be satisfied contemporaneously.34 More specifically, he identified the following mechanism. The wage increase, and so that of costs, would be transferred from the firms on prices, but only partly – as a consequence of constraints imposed by international competition – determining an increase of real wage. In the Keynesian vision, this would have been translated in a spending increase and so in a stimulus to the upswing. In reality, since the internal prices increased, the major propensity to spending would provoke an increase in importations that, added to the probable reduction of exportations, would have negatively effected the balance of trade. The result was that restrictive policies would be necessary with a consequent fall of income and employment. An alternative solution would be the devaluation of the exchange. This measure would allow firms a higher charge on prices. But in such a case, the indexation mechanism of the sliding scale would make the wages rise, with a consequent price increase, a

31

As it has been noted, the sliding scale “was introduced in Italy soon after the Second World War. A substantial reform was carried out in 1951 and set rules that remained basically unchanged until 1975. In the 1951 system, each percentage of the trade union cost-of-living index [. . .] caused contractual wages to rise, with a lag, by predetermined fixed amounts which differed by occupation, sex, age and geographical area [. . .]. At the beginning of 1975, trade unions and employers’ organizations agreed to radically change the system, with the declared objective to reduce wage differentials. After a transition period, the differentiated fixed amounts were to be replaced by a single amount equal across all employees [unique superior point]) of value substantially higher than before” (Brandolini-Casadio-Cipollone-Magnani-Rosolia-Torrini 2007, p. 33). Compare also Filosa-Visco (1980). 32 Modigliani’s contributions which we refer to have been very recently reprinted in Asso (2007), where it is possible to find an accurate reconstruction of Modigliani’s relationship with Italy. 33 Modigliani (1975a, 1975b, 1976a) and Modigliani (1976b). 34 Modigliani-Padoa Schioppa (1977, p. 45).

2.8 The January 1975 Agreement and Modigliani’s Criticism

21

new devaluation and so on, in a vicious cycle of inflation-devaluation. In Modigliani’s opinion, it was evident that proceeding this way meant going against the general interest. Not only because modest advantages would be obtained (the increase of monetary wages counterbalanced by inflation would have left real wages substantially unaltered), but because the depressive effects would move the system away from full employment. In regard to this, the behaviour of trade unions that aimed at the protection of the employed without worrying about the total effects of their policies on the general level of employment, was not justifiable.35 Once the main cause of the crisis propagation was identified – the sliding scale – a solution was soon found. Today, the main and immediate problem to solve is that of the excessive unitary labour cost that produces the fall in profits, destroys every incentive to invest and so blocks the increase of productivity [. . .]. I want to be even more brutally sincere and explicit: it is necessary to decrease the real wages level.36

According to Modigliani, it would have been preferable to follow the “via maestra”, that is increasing the productivity. However, this would have requested improvements of technical progress and the notable commitment on the level of investments, the planning and the industrial reconversion, which would have anyway given tangible results only in the long term. In the short term, therefore, the only thing to do was to reduce the cost of labour.37 It was not said, even though it was not excluded, that we should have intervened on the “pay packet”. Contrary to monetary policies – which would have accentuated the inflationist process if expansive, while would have incised negatively on income and employment if restrictive –, Modigliani was instead favourable to “tax artifices”. The objective was to move “fiscal and para-fiscal burdens from the

35

Modigliani-Padoa Schioppa (1977, p. 48). Modigliani (1976a, pp. 82–83). It is interesting to note – with all the caveats of the case –, that Modigliani’s analysis is not that different from the position assumed by Keynes in an article from 1930. According to Keynes, in an international context characterized by the mobility of financial flows, a wage increase provoked a shift of capital abroad, where labour cost was lower. Without going into details of his reasoning, his conclusion was that the “Movement of high wages” worsened the tendency of capital exportation towards countries that offered higher profits. This would have determined an increase in internal unemployment and, at the end, a fall of wages until going back to the level of foreign countries. We could not make wages increase indiscriminately, stated Keynes, but we had to base ourselves on a “higher efficiency”. Anyway, it is not on the dynamics pointed out by Keynes that it is possible to recognize a certain affinity with Modigliani, but more on the importance of the role attributed to profits and on the alternatives to high wages policies. The most controversial question between Modigliani and his critics was that he identified as the main cause of the stagnation of the Italian economy the wage increases that squashed profits. Substantially, Keynes proposed a policy of “high profits” and then to use taxation to promote the improvement of a wide range of social services (pensions, houses, education, subsidies for families, health insurances, unemployment) (Keynes 1930). 37 Modigliani-Padoa Schioppa (1977, p. 49). 36

22

2 Ezio Tarantelli: Sketches of an Intellectual Biography

firms profit to the generality of incomes”.38 This could have been obtained, for example, by increasing direct taxes and reducing indirect ones and social security contributions at the same time. In this way “apparently the real wage remains unchanged, in reality the higher imposition reduces its available quota”.39 It was clear that opting for a labour cost reduction meant asking workers for sacrifices which would be transformed in future benefits. This is the reason why Modigliani spurred trade unions to cooperate with the policy makers, in order to pursue the increase of productivity, which should have also included the war against waste and bad administration in the public sector. According to him, only with a growing economy the problem of a different income distribution could have been faced. In any case, it was not by asking for higher wages that an improvement in the living conditions of the working class would have occurred. It was necessary to identify different goals, such as a more equal fiscal system or the “fulfillment of a large social infrastructure program, such as houses, schools and hospitals”.40

2.9

The Replies to Modigliani’s Analysis

Amongst the first that replied to Modigliani were Caffe´ and Colajanni.41 The former did not like that the capacity of analysis of Italian economists was discussed, even if only indirectly, by a scholar who had left his country some time before. Caffe´ argued that Modigliani’s proposal did not take into account a series of elements, for example the “parasitical, and even predatory character of the financial-credit intermediation”, or “of the decisive weight of capital exportations on the payment balance”.42 More generally, what was not acceptable – and other economists agreed on this – was to ask workers for sacrifices in exchange for advantages which would have arrived in a non identified future. “We cannot set the sacrifices of today against the reforms of tomorrow” he said.43

38

Modigliani-Padoa Schioppa (1977, p. 49). Modigliani- Padoa Schioppa (1977, pp. 49–50), Modigliani (1976b, pp. 132–133). 40 Modigliani (1976a, p. 85). 41 Also Napoleoni and Convenevole, however, replied to Modigliani’s thesis. The first one wrote “Andreatta [who shared Modigliani’s point of view] and Modigliani are right wing men, even if they have the reputation of not being so. To convince us, it is necessary to demonstrate explicitly the ideology (because it is ideology we are talking about) from where they started” (Napoleoni 1976, p.112). Convenevole believed that Modigliani “is the main enemy of the working class” and he adds “It is surprising that a scholar like Sylos [. . .] affirms – in order to save today’s spreading conformism – that Modigliani is a “friend” and so cannot be criticized. However, I believe that Modigliani should not be anyone’s friend. As regards this, there is a moral abyss between us and him” (Lunghini (ed. by) 1981, pp. 430–431). 42 Caffe` (1976, p. 87). 43 Caffe` (1976, p. 88). 39

2.9 The Replies to Modigliani’s Analysis

23

Colajanni underlined the fact that we should not reduce wages but increase productivity. The difference with Modigliani consisted in the belief that it was not possible to wait for the long term. In fact, he wrote “competition is not only a brutal question of costs but also the organizational capacity and the quality of production”.44 The responsibility of businessmen who, when they could have benefitted from high profits, preferred to concentrate on the low cost of work instead of putting more resources in productive investments, had to be taken into account. Napoleoni and Graziani’s replies to Modigliani were more articulated. Napoleoni’s analysis was based on two main arguments. With the first argument, the attention was moved outside the profit-wage conflict which could not be eliminated, but in that specific conjuncture became secondary. Getting over the crisis, needed a temporary “alliance” between wages and profits against the unproductive work, which was the real problem pointed out by Napoleoni. In his opinion, the classic Smith’s distinction between productive work “which is paid for with capital” and unproductive work, “which is paid for with income, the “servants” of Adam Smith”, needed to be recuperated.45 One of Modigliani’s mistakes was not considering the difference between wages and profits. Wide unproductive areas existed (which regarded first of all the public sector, but also commercial intermediation, the self employed and the agricultural sector) which “withdrew incomes from sectors in which productivity really increases or increased”, that is the industrial sector.46 So, it was not wrong to say that wages had reached a level incompatible with productivity but we were talking about the existing productivity not the potential one. By reducing the transfer of “net product” from industries to services, it would have been possible to increase productivity in a way that made it compatible with the level reached by wages. Also Napoleoni, this is the second argument, focused on the problem of time jointly with that of compensations. Starting with the “hot autumn”, the unions had won important battles, depriving the capitalistic economy of a decisive tool for its working, i.e. the flexibility of the labour force. If Modigliani’s proposal had been successful, the old status quo would have been re-established and the occasion to take advantage of the crisis, to reform the system from the unproductive area would have been lost. If we continue to cover these structural deformations in any way, one of which could be the wage containment or on the other hand inflation, these problems not having been eliminated, the actual crisis will continue forever. If the long term never begins, it will become an inexistent period.47

Graziani criticized the presumed incompatibility between wage rise and the equilibrium of the balance of payments acknowledged by Modigliani. In an export

44

Colajanni (1976, p. 93). Napoleoni-Modigliani (1976, pp. 173–174). 46 Napoleoni-Modigliani (1976, p. 171). 47 Napoleoni-Modigliani (1976, p. 163). 45

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2 Ezio Tarantelli: Sketches of an Intellectual Biography

oriented economy as was the Italian one, the firms strategy had always been that of earning in competitiveness by lowering the labour costs mainly through production decentralization. When this strategy did not produce satisfactory results, policy makers carried out monetary restrictive policies in order to achieve the balance of payments equilibrium. Only at this point it was possible to restart the economy. Such a modus operandi floundered with the oil shock of 1973, when the other economies had also slowed the growth with negative consequences for exports and more generally for the whole Italian economic system. In Graziani’s opinion, the alternative was to increase labour productivity concentrating on economies of scale. The reaching of this objective – apart from needing a more enterprising strategy turned to commercial expansion beyond traditional markets (Germany, France, Great Britain) – could not prescind from the stipulation of agreements between firms and international governments because “the world markets were not in fact competitive markets”.48 In any case, by increasing exports not only could we avoid the debit of the balance of payments, but by reducing costs it allowed wages to reach levels compatible with highly industrialized countries. Moreover, the upswing should have hinged on the development of social spending (houses, schools, transport, etc.). But also in this case the consensus of the “employers” was necessary, without which “any action to relaunch the economy is destined to sink in a sea of capital flight, inflation, tax evasion or even from the strategy of tension”.49 Graziani concluded his observations in a pessimistic way, so that he wrote If conflicting forces had wanted to and had known how to fight to the extent of leading the country to the resolutive crux of today, it is childish to expect that these same forces now want to link arms, cancel their conflict and proceed with agreement along a common line.50

2.10

Tarantelli’s Position

Now it is necessary to describe how Tarantelli placed himself within this controversy. At the beginning, his analysis could appear ambiguous, if not even schizophrenic. He showed that he shared Modigliani’s set up on the theoretical level. He affirms “a sliding scale which compensates one by one the price variations is not technically maintainable. It should be subject to revision”.51 It was a conclusion that rested on the theoretical analysis which will be examined in the fourth chapter. In the case of wage indexation at the unique superior point, inflationary spiral becomes dynamically unstable. The inflationary potential generated by every point of monetary wage in excess of the increases in productivity, increases for a geometrical

48

Graziani (1976a, p. 121). Graziani (1976b, p. 15). 50 Graziani (1976b, p. 15). 51 Tarantelli (1976 [4], p. 57). 49

2.10

Tarantelli’s Position

25

reason in correspondence to increases in the grade of coverage of the sliding scale (where the increase was tending to infinite for an average unitary coverage). Regarding this, Tarantelli said he was aware that through the indexation at the unique superior point the “retributive jungle” often stigmatized by him was circumscribed. Yet, he claims “we could have obtained the same effect [. . .] through a progressive grouping of the sliding scale by income ranges and with the institutionalization of a minimum wage completely guaranteed by the indexation mechanism”.52 Even Monti agreed upon the necessity to abandon a similar indexation mechanism, because the indexation at the unique superior point had to be considered strongly distortive.53 Monti, as well as pointing out the necessity of purifying the indexation mechanism from the imported inflation, then indicated in the extension of the contracts terms the best tool to cool down the price dynamics.54 But he suggested not to abandon the sliding scale, an objective which Tarantelli fundamentally aimed at. In a country like ours – Monti observed – a similar regime could be even more inflationist than the actual one. In fact, contracts would be renewed at least yearly. And every time they were to be renewed there would have been three difficulties [. . .]. There is a big uncertainty in forecasting the inflation rate. This is the reason why the trade unions would protect themselves commensurating the increases requested to the higher available forecast. The conflict is higher and therefore the renewal costs of the more frequent renewals would be higher. Higher is the propensity of public powers to assume a role of renewals mediation, a mediation that many times has contributed to solve the disputes in an inflationist way.55

A different thesis was supported by some economists such as De Vincenti and Zevi, who gravitated around La Rivista trimestrale.56 They underlined the importance of two elements to which even Tarantelli, as we will see in the fifth chapter with regard to the predetermination hypothesis, acknowledged a primary role. These were the coordination of the duration of contracts along with the synchronization of renewals and a balance – that in De Vincenti and Zevi’s opinion should have been attributed to the Government – in case delays in the adjustments occurred. In particular, they proposed to renew contracts annually and to adjust, with the same frequency, the wages to prices. At the same time, Tarantelli said he was against Modigliani’s proposal of exiting the “infernal triangle” through a simple real wage reduction. From which arises the “schizophrenic” characteristic of Tarantelli’s position about Modigliani’s controversy. That reconstruction of the profit margin to which Modigliani appeared indefeasible should have, instead, been determined “through an increase of real

52

Tarantelli (1978 [5], p. 165). Monti (1981) and Monti (1982). 54 On the methods of depuration of the price index of prices from the imported inflation compare Guiso (1985). 55 Monti (1984). 56 For an articulated explanation of the De Vincenti-Zevi’s proposal (De Vincenti-Zevi 1983). 53

26

2 Ezio Tarantelli: Sketches of an Intellectual Biography

wages compared to higher wages and therefore necessarily to the disadvantage of both big and small privileged wage and normative areas”.57 In order not to make this affirmation seem as an absurd theoretical concept, it is worth tracing back Tarantelli’s reasoning. In his opinion, the experience of the 1970s had made the Keynesian paradigm emerge whereby the Government was called to relaunch the economy through public expenditure, “failed for a very simple reason”. He affirms “in Keynes’ General theory, in the schemes and in the Keynesian paradigm there was an hypothesis of stable wages and prices which break dramatically”.58 In his opinion, the main reason why the monetary stability hypothesis broke off was the mismatch between the political demand of the base and the dominant block’s supply. This mismatch gave rise to an instrumental commitment of the “weapon of labour cost” by the side of trade unions. He proposed to interpret the crisis which emerged at the end of the 1960s in the main industrialized countries drawing on the generation leap hypothesis. A generation equipped with qualifications necessary for aspiring to the best posts was flowing into a condition of intellectual unemployment or badly paid employment in jobs not in keeping with their qualifications. This was the origin of the crisis. It was about a subject which seemed to recall, in some way, the contraposition evidenced by Napoleoni between productive and unproductive work. The best jobs, or the notion of internal labour markets which Tarantelli refered to, emerged mainly within the “unproductive work” (banks, insurance companies, universities). It was necessary therefore to attack these privileged areas: this was a first step to bring the offered rules nearer to those demanded.59 But this would not have been sufficient to re-establish monetary stability. Regarding this, Tarantelli implicated the notion of political exchange. The initial hypothesis on which he rested is that a direct proportionality link between the level of prices and that of nominal wages exists. Prices rise, as well as vertiginous rises in the price of petroleum, because the trade union uses labour cost as a real weapon. So, if it is possible to identify goods that the dominant block is able to offer, it is just as licit to hypothesize an exchange of the above and wage moderation. In the end, wage moderation depended on the behaviour of the trade union. The workers [. . .] – he explains – are interested in macro goods such as unemployment and pensions benefits, health insurance and professional formation, in general, to social or redistributive policies. There can be attempts to exchange these macro goods and wage stability, which depend more directly on the workers.60

57

Tarantelli (1976 [4], p. 45). Tarantelli (1984 [2], p. 739). 59 In regard to this Tarantelli asserts “unproductive work can from today be impeded in the view of the retributive jungle beginning with discouraging it by attacking its remunerative and normative levels” (Tarantelli 1976 [4], p. 39). 60 Tarantelli (1986 [3], p. 792). 58

2.11

Elaborating Economic Policy Proposals

27

However, an income policy based on the criteria of consensus and political exchange could not be inspired to the principle of the two times, or of the two speeds, as had happened in the previous years. A policy which bartered the “today’s wage moderation with tomorrow’s reforms” affirm Tarantelli, Caffe` and Napoleoni, could not be retained feasible or licit. On this basis, Tarantelli’s dissent regarding Modigliani’s conclusions matured. He reached a correct conclusion on a technical level, that is from the point of view of the mere recovery from inflation, as Tarantelli revealed. But at the same time, it prescinded from the before said considerations of sociological order. In my opinion – he stated – what militates against this way of facing the problem is what emerges from the root fact of the new working class conscience, manifested in the late seventies.61

In Modigliani’s hypothesis, Tarantelli spotted the risk that the real wage reduction, even if obtained through a fiscal instrument, could at the most obtain a monetary stability in conditions of latent conflict and not in conditions of consensus. The relational system’s rules would have remained so unaltered and the obtained result would have been that of weakening the trade union compressing, and substantially rejecting, the reform and renewal requests. Anyway, there were scholars who judged even the measures wished by Tarantelli inadequate for general interest. This is the case, for example, of Francesco Indovina, who pronounced himself in favour of measures conducive to the “improvement in the conditions of life of the masses”.62 It would have been possible to achieve a similar objective, he explained, only through a “strong collectivization of social organization and the loss of meaning (economic and mythic) of many private and individual consumptions with their transformation (or elimination) in collective”.63 Every alternative policy could have at the most saved the capitalistic enterprise. Such an aim, according to Indovina, was as miserable as it was reductive, because it was prerogative to the interests of few and because of circumscribed capacity towards the more general problem of institutional adequacy.64

2.11

Elaborating Economic Policy Proposals

In 1978 Tarantelli became professor of labour economics at the European University Institute, where he directed the project “Comparative European labour markets and industrial relations”, which referred to France, Italy, United Kingdom, Germany and Sweden.

61

Tarantelli (1976 [4], p. 38). Indovina (1978, p. 53). 63 Indovina (1978, p. 54). 64 Indovina (1978, p. 54). 62

28

2 Ezio Tarantelli: Sketches of an Intellectual Biography

Italy was completely invested by the second petrol shock. Restrictive monetary policies to face the OPEC surplus were to be carried out. Tarantelli and Carli tried to indicate an alternative proposing a different recycling mechanism. The basic idea was to transform the surplus, represented by financial activities raised by the Arab countries on the international financial market, into a direct bilateral loan indexed to the growth rate of the country in deficit. In the same year Il ruolo economico del sindacato e il caso italiano was published by Laterza.65 In his intentions, this study should have been a first contribution for the overtaking of that considerable gap, which affected even the researches of the most outstanding economists. From Smith to Marshall to Pigou – he observed – the economists have considered the trade union role partly independent from sociological and political considerations. They considered it as an institutional fact, external to the theoretic paradigm beneath their model. They considered it as a natural event of which we only observe the economic consequences.66

Tarantelli intended to lay the foundations of that “epistemological revision” of which The economics of neocorporatism (1982) would have had to constitute the highest peak.67 The last result of his intellectual project consisted in the codification of an economic analysis scheme and of a structure for the industrial relations system in which, according to the political exchange principle, the trade union would assume

65 This phase of Tarantelli’s intellectual iter, has been accurately examined by Vicarelli (1987) and Ciocca (2007). 66 (Tarantelli 1978, p. 8). Not even with the Keynesian analysis, would an independent role have been recognized for the trade union. “In Keynes General theory of 1936, the trade union was considered as a sufficient condition because of the downward rigidity of the monetary wage, which is at the base of the involuntary unemployment equilibrium. But it is not a necessary condition. Maybe it is the state of deep skepticism towards the possibility of an independent role of the trade union, typical of the traditional economic set up, [. . .] which suggests to Keynes not to base his result of a stable involuntary unemployment equilibrium uniquely on the trade union presence” (Tarantelli 1978, p. 15). Furthermore, aside from the relevant methodological differences, Tarantelli refers to the studies of “Hicks, Zeuthen, Dunlop, Von Neumann and Morgenstern” as contributions “more informed about the economic role of the trade union”. Anyway, according to him, these would still end up “edging the motivations of the economic role of the union in the demand and offer curves of the Marginalist scheme” (Tarantelli 1978 [5], p. 18). 67 Although a preliminary draft of it is sometime mentioned, The economics of neorcorporatism has never been published in English, even though Tarantelli in the last months of his life had made an agreement with an international publishing house. Its contents were reproposed and integrated by Tarantelli with some refinements in the last years of his life, in (Tarantelli 1986). A copy of The economics of neocorporatism is kept in the Rare book, manuscript and special collections library of the Duke University. Comparing the version of 1986 with the preliminary one, it emerges that the sections of the work re-proposed in a more faithful way can be considered the central ones, where Tarantelli carries out an empirical compared analysis of the efficacy of the inflation recovery policies in 16 industrialized countries. The remaining materials have been reallocated in various appendixes and chapters.

2.11

Elaborating Economic Policy Proposals

29

the economic role of contractor with public powers and counterparts of the functioning rules of the system.68 In 1980–1981, the internal inflation rate reached an unsustainable level. Tarantelli put forward the proposal of inflation recovery in April 1981. The idea was that in order to allow a realignment of the internal inflation rate to the one registered by the main competitors, the various social parts, i.e. the Government, trade unions and Confindustria set a target level for the inflation rate and therefore had to accept the consequent behaviour. The moderation of wage claims would have been accompanied by the contextual carrying out of structural reforms by the Government.69 It was an economic policy inspired both by Heiner’s reliable interaction theory, with which Tarantelli came into contact at UCLA and by the economic policy implications of rational expectations.70 At UCLA – Leijonhufvud remembers – a lively debate about Ron Heiner’s theory, the “reliable” interaction [. . .]. Ezio was one of the first who saw the great innovation that Heiner’s ideas had and was one of the first to apply them. Heiner’s influence is in fact visible in the last version of Ezio’s neocorporatist theory.71

Tarantelli began with the relations of “reliability ratio” and “tolerance limit” with the intent of deriving, on a theoretical level, the conditions in which for the trade union resulted reliable to make wage claims exceeding the expected inflation rate, that is behaving as a free rider or accepting an income policy.72 He concluded

68

Even though Tarantelli was not an isolated voice, it is useful to note that in that period, the trade union was still treated from a theoretical point of view as an external element to the analytical scheme, or however treatable through the mainstream approach. Compare (Hunter-Robertson 1969). Clegg’s and Corina’s contributions can be however considered contiguous to Tarantelli’s modus operandi. Clegg shares with Tarantelli the method of compared analysis as regards the systems of industrial relations. He carries out, in fact, a compared examination of the structure and of the articulation of the collective bargaining system in six different countries (Clegg 1976). Similarly, Corina affirmed that “Institutional analysis is not a substitute for economic analysis of the labour market. But neither is it a competitor. To the extent that economic analysis fails to incorporate elements of institutional analysis, so it will tend to fall short of architectonic success in matching greater finesse with greater realism” (Corina 1972, p. 64). 69 This was Tarantelli’s original formulation. He would have improved and integrated it again before the agreement of 22nd January 1983. 70 Heiner (1983). 71 Chiaromonte et al. (1985, p. 7). 72 A compared analysis of Heiner and Tarantelli’s studies has been carried out in (Giocoli 1998). He identifies mainly two elements of incompatibility between their modus operandi. Heiner makes use of a methodology typical of experimental sciences, in the framework of which the economist acts as an external observer. Giocoli points out, however, that such an approach cannot be considered applicable to Tarantelli’s study subject, i.e. the industrial relations system. In such a framework, Giocoli asks himself “First of all, who is the external observer? Secondly, is there a sequence of choice situations long enough which allows us to estimate the probability by the observer?” (Giocoli 1998, p. 70). In Giocoli’s opinion another element of incompatibility has to be connected to a mistake made by Tarantelli. Whilst in Heiner’s model the result of a certain choice depends on the state of nature which is independent from the choice itself (this means that the notion of subordinated probability finds correct application), this does not happen in Tarantelli’s analysis, where it is the action that determines the situation or the choice. Compare Tarantelli (1986 [1], p. 112).

30

2 Ezio Tarantelli: Sketches of an Intellectual Biography

that the reliability ratio should be at least equal to the tolerance limit so that trade unions could benefit from the income policy. But since nothing, in principle, guaranteed equality or even positive inequality between the reliability ratio and the tolerance limit, so in Tarantelli’s opinion it was necessary to identify institutional solutions for this to happen. In regard to this, he put forward the proposal of centralizing the industrial relations system. A centralized system – he affirms – can provide the single trade unions or isolated groups of workers better information regarding single demands of the other groups, so allowing more coordination.73

The new indexation mechanism of wages to prices, i.e. the indexation of monetary wages to a future inflation rate predetermined in advance and in mutual consent by the social parties, was conceived by Tarantelli also thanks to the implications of the rational expectations approach. According to such a set up, the perpetuation of the inflation dynamics is caused by the signing of overlapping wage contracts. However, if the economic agents who are called to set prices and wages consider reliable the anti-inflationist program planned by the policy makers, the recovery from inflation can be gradual and with lower costs in terms of unemployment and potential lost output.74 This would have happened if the economic policy grade of reliability had been increased through the centralization of the industrial relations system. In the same year, the unitary trade union began to cherish the hypothesis of constituting a research centre in the field of labour economics and industrial relations. As Carniti remembers, it was Modigliani, who was left out of a similar project by the CISL secretary, who suggested Tarantelli’s name as a possible scientific referent.75 At the beginning CGIL, CISL and UIL seemed to agree on proceeding this way, but very soon CGIL changed its mind. The Institute of Labour Economics Studies (ISEL) arose from the Tarantelli-Carniti “association” which was supported by the confederal secretaries Crea and Merli Brandini. A group of researchers which was composed of union experts and young economists, many of whom are professors today, gathered around it.76 Tarantelli admitted that the objective he wanted to reach through the trade union’s collaboration was very ambitious. For a trade union like the Italian one – he asserted – whose role does not only consist of protests and movements, but that also wants to be a “unitary” institution which contracts with the Government [. . .] the “demanded and offered rules”; the technical competence is a

73

Tarantelli (1986 [1], p. 116). More details can be found on pages 111–122. Compare Muth (1961), Lucas (1973) Barro and Gordon (1983) and Dornbusch (1983). 75 Compare Carniti’s presentation at the international congress dedicated to Ezio Tarantelli held on 26–27th March 2010 at the University “La Sapienza”. 76 Amongst the trade union experts Franco Archibugi, Luigi Di Vezza and Marina Ricciardelli should be mentioned. Amongst the young scholars who collaborated more steadily with ISEL can be found: Elisabetta Addis, Massimo Bordignon, Giuseppe Cananzi, Bruno Chiarini, Elvio Dal Bosco, Claudio De Vincenti, Riccardo Fiorito, Gabriele Olini and Leonello Tronti. 74

2.11

Elaborating Economic Policy Proposals

31

necessary condition, even if not sufficient (insertion of the communist party in the Government) for the possibility of exerting influence on the politics level [. . .]. Unfortunately, while Confindustria is today getting ready to sustain the old subject of the firm centrality [. . .] organizing the second biggest study service in Italy, the trade union and the Italian left wing party still find it hard to give themselves those technical instruments [. . .] which their new economic role make necessary and which would help them to transform the social demand of the most combative labour force in Europe into a new constructing hegemony. In the case that such a social demand was left to itself, however, it would become a disruptive force.77

From the ISEL research group an abundant scientific production arose, it regarded econometrics, economic policy and labour economics. These surveys permitted the construction of an econometric model of labour market, which was elaborated by Riccardo Fiorito at Tarantelli’s solicitation.78 The name of the model was suggested by Archibugi, who was then responsible for the CISL study office, the name suggested was MOMEL. It was the first econometric model elaborated in Italy by a research centre connected to the trade union and even one of the first econometric models, relating to Italian economy, ever set up. MOMEL assumed as outputs: the value added obtained in the industrial sector, the one obtained in the private services, agriculture and public sectors. It consisted of five blocks of equations, which described respectively: the operating of the goods market, of the labour market, the formation of prices, the behaviour of fiscal and monetary sectors. The model did not propose a partial equilibrium analysis as the approach widely shared in the 1970s and beginning of the 1980s did.79 This means that it was not limited to the relation wages-employment valid in only one sector. And it did not either assume a labour offer function able to close the model and endogenize the unemployment rate. Generally, the reject of the partial equilibrium approach was due to the fact that a similar modus operandi impedes examining wages feedback on prices and so even the role of the functional distribution of income on the demand composition, which influences wages and employment.80

The structure of the labour demand and supply, of the relationships between wages and prices and of the price equation reflected the form of the four cards of the Post Keynesian labour market model conceived by Tarantelli. Also a disaggregated version of the model at a regional level was suggested, with particular regard to the Piemonte case, in collaboration with USR-CISL of that region. Giovanni Avonto remembered that periods like this

77

Tarantelli (1978 [5], p. 111). As regards the model’s structure, the specification of the behaviour equations and interesting indications regarding the origin of MOMEL, see Fiorito (1984). 79 Compare Black-Kelejian (1970) Lucas-Rapping (1969), Rosen-Quandt (1978), BeenstockWarburton (1982). 80 Fiorito (1984, p. 20). 78

32

2 Ezio Tarantelli: Sketches of an Intellectual Biography We wrote some pages about the experimental project agreed between the Piemonte Cisl and ISEL and I found as a researcher Pietro Balla [. . .]. Cananzi was put besides Balla as an ISEL researcher. Balla [. . .] had to prepare a graduation thesis in economy with the professor Gianluigi Vaccarino (who in that period collaborated with the formation courses of the regional CISL). [. . .] Vaccarino agreed on an experimental thesis about MOMEL developed with Tarantelli, but the research work, which began in the last months of 1983 at ISEL, was stopped because of the tragic event of 27th March 1985. The thesis was reconverted into a thesis about Tarantelli, his research and his proposals. It was defended in Turin in the academic year 1984–1985.81

Beside the program of scientific research and carrying out of the econometric model, ISEL gave rise to an intensive work of scientific divulgation. Between 1980 and 1985, ISEL promoted the publication of ‘Forum ISEL’, ‘Forum ISEL previsioni’ and ‘Prospettive del mercato del lavoro’. The proposal of predetermination was the base of the agreement on labour cost ratified by the Government, trade unions and Confindustria on 22nd January 1983. With some qualifications, it can also be considered the base of the decree signed on 14th February 1984, which is called Valentine’s decree. Through this measure, the Government ended up attributing law force to a separate agreement, from which was missing the adherence of the Communist component of CIGL and against which was promoted an abrogate referendum, sustained by the Communist party. In 1985 his last two contributions were published, they were: An income policy against the failures of monetarism (which was elaborated together with Fitoussi and which appeared in two parts on the Italian economic review ‘Politica ed economia’) and The shield of the unemployed (which was followed by How to build up the shield). In the first one, Tarantelli criticizes the implications of an excessively restrictive control of monetary aggregates.82 In the second one, he proposed to actuate the shield of unemployed against unemployment at the beginning of the 1980s. It was a Community investment fund (in ECU) from which every European country could have drawn out resources to carry out employment policies without generating pressure on the balance of payment. Tarantelli’s career ended on 27th March 1985, near classroom III of “La Sapienza” in Rome, where he had just held a lesson. That was the day when he was assassinated by two killers from the Red Brigade, which had ordered his death. [Tarantelli] – it can be read in “strategic resolution” n. 20 – [is] one of the most authoritative techno-political exponents in the service of big capital, who ‘works’ to solve one of the fundamental aspects of the economic crisis of the bourgeoisie, i.e. the institutional regulation of the conflictual relation between classes, which deals with the conditions and mechanism of purchase and sale of labour. That is to say the judicial-legislative ratification

81

Avonto (2010, p. 2). Compare also Balla (1985). In order to deepen the subject of the optimal control techniques, Tarantelli, had suggested to some of this students, one of whom was Bruno Chiarini, to perfect it under the guidance of David Vines. Tarantelli had also indicated Meade (1982) and Vines-Meade-Maciejowski (1983) as fruitful reference works.

82

References

33

of the terms of the relative power of workers versus capital, from the point of view of bourgeois interests.83

References Ackley, G. (1971). Teoria macroeconomica. Torino: Einaudi. Acocella, N., & Leoni, R. (Eds.). (2007). Social pacts, employment and growth. Heidelberg: Physica-Verlag. Amari, G., & Rocchi, N. (Eds.). (2007). Federico Caffe`, un economista per gli uomini comuni. Roma: Ediesse. Ando, A., & Modigliani, F. (1963). The life cycle hypothesis of saving: aggregate implications and tests. American economic review, 53(1), 55–84. Ando, A., Modigliani, F., & Rasche, R. (1974). Equations and definitions of variables for the FRBMIT-Penn model. November 1969. In B. Hickman (Ed.), Econometric models of cyclical behaviour (pp. 543–598). New York: NBER. Asso, P. (Ed.). (2007). Franco Modigliani L’impegno civile di un economista. Scritti editi ed inediti sull’economia e la societa` italiana. Siena: Fondazione Monte dei Paschi. Avonto, G. (2010). Ricerca e proposta nelle sfide di Tarantelli, Fondazione Vera Nocentini. Balla, P. (1985). Mercato del lavoro e inflazione. L’analisi di Ezio Tarantelli. Torino: Universita` degli studi di Torino. Banca d’Italia. (1970). Un modello econometrico dell’economia italiana (M1 BI). Roma: Centro stampa della Banca d’Italia. Barro, R., & Gordon, D. (1983). Rules, discretion and reputation in a model of monetary policy. Journal of monetary economics, 12(1), 101–122. Becchi Collida`, A. (1978). L’economia italiana fra sviluppo e sussistenza. Milano: Angeli. Beenstock M., & Warburton, P. (1982). An aggregative model of the UK labour market. Oxford Economic Papers, 34(2), 253–275. Binetti, A. M., & Ghiani, E. (2008). At the origins of the NAIRU: short-term economic policy and the development of the first Italian macroeconometric models. History of economic ideas, 16 (1–2), 103–132. Black, S., & Kelejian, H. (1970). A macro model of the US labour market. Econometrica, 38(5), 712–741. Brumberg, R., & Modigliani, F. (1954). Utility analysis and the consumption function: an interpretation of cross-section data. In K. Kurihara (Ed.), Post Keynesian economics (pp. 388–436). New Brunswick: Rutgers University Press. Caffe`, F. (1976). Una dichiarazione al “Manifesto” dell’economista Caffe`, in (Tarantelli 1976 [11]), pp. 87–88. Caffe`, F. (1978). Lezioni di politica economica. Bollati Boringhieri: Torino. Caffe`, F. (2007a [1983]). Morte di un grande economista. La solitudine insidiata di Sraffa, ‘Il Manifesto’, 7th September. In G. Amari & N. Rocchi (Eds.), Federico Caffe`, un economista per gli uomini comuni (pp. 605–606). Roma: Ediesse. Caffe`, F. (2007b [1985]). Il conflitto e´ ammaestrabile? L’economista nello scontro sociale, ‘Il Manifesto’, 30th May. In R. Carlini (Ed.), Federico Caffe`. Scritti quotidiani (pp. 141–145). Roma: Il Manifesto libri. Carlini, R. (Ed.). (2007). Federico Caffe`, Scritti quotidiani. Roma: Il Manifesto libri.

83

From an excerpt of strategic resolution n.20 of the Red Brigade reported in Corriere della sera of 31st March 1985.

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2 Ezio Tarantelli: Sketches of an Intellectual Biography

Chiarini, B. (1989). Il mercato del lavoro nei modelli macroeconomici. Una rassegna dell’evidenza econometrica dei modelli italiani. Economia & lavoro, 23(3), 3–24. Chiaromonte, G., Caffe`, F., Leijonhufvud, A., & Thurow, L. (1985). Ricordando Ezio Tarantelli. Politica ed economia, 16(5), 5–7. Ciocca, P. (2007). ‘Doing good’. Ezio Tarantelli’s approach to political economy. In N. Acocella & R. Leoni (Eds.), Social pacts, employment and growth (pp. 15–22). Heidelberg/New York: Physica-Verlag. Clegg, H. A. (1976). Trade unionism under collective bargaining. Oxford: Basil Blackwell. Colajanni, N. (1976). Perche´ non sono d’accordo con Modigliani sulla riduzione dei salari reali in Italia, in (Tarantelli 1976 [11]), pp. 89–94. Corina, J. (1972). Labour market economics. London: Heinemann Educational Books. D’Adda, C., De Antoni, E., Gambetta G., Onofri p., & Stagni, A. (1976). Il modello econometrico dell’Universita` di Bologna: struttura e simulazioni. Bologna: Il Mulino. De Vincenti, C., & Zevi, A. (1983). Cambiare per non tornare indietro. Quaderni della rivista trimestrale, 73–74, 57–101. Dicks-Mireaux, L. A., & Dow, J. C. R. (1959). The determinants of wage inflation: United Kingdom (1946–56). Journal of the Royal Statistical Society, 122(2), 145–184. Dornbusch, R. (1983). Inflation, debt and indexation. Cambridge: MIT Press. Downward, P. (1999). Pricing theory in post Keynesian economics. Cheltenham/Northhampton: Edwar Elgar. Fazio, A. (2010 [1995]). L’attualita` del pensiero di Tarantelli. Rivista italiana di ragioneria e di economia aziendale, 95(5–6), 226–230. Reprinted in Dal conflitto allo scambio. L’attualita` del pensiero di Tarantelli (2010). Edizioni Lavoro, Roma, pp. 71–77. Filosa, R., & Rey, G. M. (1988). Presentazione, in Tarantelli (1988 [2]), pp. xiii–xxviii. Fiorito, R. (1984). Mercato del lavoro e politica economica. Venezia: Marsilio. Friedman, M. (1957). A theory of the consumption function. Princeton: National Bureau of Economic Research. Fua`, G. (Ed.). (1976). Il “modellaccio”: modello econometrico dell’economia italiana. Milano: Angeli. Gandolfo, G. (1975). Appunti di macroeconomia. Roma: Edizioni ricerche. Garofalo, G., & Graziani, A. (2004). La formazione degli economisti in Italia (1950–1975). Bologna: Il Mulino. Giocoli, N. (1998). Neocorporatismo ed incertezza: la soluzione di Tarantelli-Heiner. Studi Economici, 53(2), 49–79. Graziani, A. (1976a). Blocco dei salari, medicina sbagliata, ‘Paese Sera’, 29th January, in (Tarantelli 1976 [11]), pp. 118–121. Graziani, A. (1976b). Processo alle “intenzioni” del Cespe. Rinascita, 33(41), 14–15. Graziani, A. (1981). La teoria della distribuzione del reddito. In G. Lunghini (Ed.), Teorie economiche e scelte politiche in Italia (1945–1978) (pp. 285–340). Torino: Einaudi. Guiso, L. (1985). Wage indexation: income and inflation. Roma: Banca d’Italia. Heiner, R. (1983). The origin of predictable behaviour. The American economic review, 73(4), 560–595. Holt, R., & Pressman, S. (2001). A new guide to Post Keynesian economics. London/New York: Routledge. Hunter, L. C., & Robertson, D. J. (1969). Economics of wages and labour. London: Macmillan. Indovina, F. (1978). Gli ostacoli alla trasformazione. In A. Becchi-Collida` (Ed.), Le relazioni industriali fra sviluppo e sussistenza (pp. 46–55). Milano: Angeli. Keynes, J. M. (1930). The question of high wages. The Political Quarterly, 1(1), 110–124. La Malfa, G., & Vinci, S. (1970). Il tasso di partecipazione della forza lavoro in Italia. L’Industria, 84(4), 443–469. Lee, F. (1998). Post Keynesian price theory. Cambridge: Cambridge University Press. Lucas, R. (1973). Some international evidence on output-inflation trade off. American Economic Review, 63(3), 326–334.

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Lucas, R., & Rapping, L. (1969). Real wages, employment and inflation. Journal of Political Economy, 77(5), 721–754. Lunghini, G. (Ed.). (1981). Scelte politiche e teorie economiche in Italia: 1945–1978. Torino: Einaudi. Maciejowski, J. M., Meade, J., James, E., & Vines, D. (1983). Stagflation. vol. I Demand management. London: Allen and Unwin. Meade, J. E. (1982). Stagflation. vol. I. Wage fixing. London: Allen and Unwin. Modigliani, F. (1975a). Attenzione ai pericoli della contingenza unificata, ‘Corriere della sera’ 3rd February, in (Tarantelli 1976 [11]), pp. 71–74. Modigliani, F. (1975b). Se un operaio guadagnasse mezzo milione al mese, ‘Corriere della sera’, 9th March, in (Tarantelli 1976 [11]), pp. 75–80. Modigliani, F. (1976a). Intervista negli Stati Uniti con Franco Modigliani, in (Tarantelli 1976 [11]), pp. 81–86. Modigliani, F. (1976b). Primo: la disoccupazione, in (Tarantelli 1976 [11]), pp. 129–134. Modigliani, F. (1999). Avventure di un economista. Roma-Bari: Laterza. Modigliani, F., & Padoa-Schioppa, T. (1977). La politica economica in una economia con salari indicizzati al 100 o piu`. Moneta e Credito, 117(1), 3–53. Monti, M. (1981). Ridisegnare la scala mobile, ‘Corriere della sera’, 25th April. Monti, M. (1982). Come migliorare la scala mobile, ‘Corriere della sera’, 8th July. Monti, M. (1984). Scala mobile depurata, ‘Corriere della sera’, 30th January 1984. Mottura, G., & Pugliese, E. (1975). Agricoltura, mezzogiorno e mercato del lavoro. Bologna: Il Mulino. Muth, J. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315–335. Napoleoni, C. (1976). La falsa ricetta del prof. Andreatta, in (Tarantelli 1976 [11]), pp. 111–117. Napoleoni C., Modigliani F. (1976). Chi paghera` per la crisi?, in (Tarantelli 1976 [11]), pp. 154–177. Nicola, A., & Riccardo, L. (Eds.). (2007). Social pacts, employment and growth. Heidelberg/New York: Physica-Verlag. Okun, A. (1962). Potential GNP: Its measurement and significance. Proceedings of the Business and Economic Statistics Section, American Statistical Association, Washington, DC, pp. 98–103. Paci, M. (1974). Mercato del lavoro e classi sociali in Italia. Bologna: Il Mulino. Robinson, J. (1953). Imperfect competition revisited. The Economic Journal, 63(251), 579–593. Robinson, J. (1965). The accumulation of capital. London: Macmillan. Roccas, M. (1971). Gli studi sulla funzione del salario nell’industria in Gran Bretagna e negli Stati Uniti, supplement to ‘Congiuntura italiana’, 14(8–9), 1–54. Rosen, H., & Quandt, R. (1978). Estimation of a disequilibrium aggregate labour market. The Review of Economics and Statistics, 60(3), 371–379. Sarcinelli, M. (2007). The 1960s and Ezio’s awakening to the social problems of Italy. In N. Acocella & R. Leoni (Eds.), Social pacts, employment and growth (pp. 23–30). Heidelberg/New York: Physica-Verlag. Simler, N., & Tella, A. (1968). Labor reserves and the Phillips curve. Review of Economics and Statistics, 50(1), 32–49. Sylos-Labini, P. (1967). Un modello dinamico per l’economia italiana. Roma: Edizioni dell’Ateneo. Tella, A. (1964). The relation of labour force to employment. Industrial and Labour Relations Review, 17(3), 454–469. Tella, A. (1965). Labour force sensitivity to employment by age and sex. Industrial Relations, 4(2), 69–83. Tivegna, M. (1984). Inflazione, occupazione ed equilibrio esterno: analisi empiriche con un modello dell’economia italiana. Bologna: Il Mulino.

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Valli, V. (1993). Politica economica (Vol. I–II). Roma: La Nuova Italia Scientifica. Vicarelli, F. (1987). Le idee forti di Tarantelli. In F. Vicarelli (Ed.), La questione economica nella societa` italiana (Analisi e proposte, pp. 396–399). Il Mulino: Bologna. Villa, P. (1984). Economia del lavoro: dalla teoria neoclassica alla teoria della segmentazione. Milano: ISU.

Chapter 3

Analytical Refinements of the Post Keynesian Model

3.1

Phillips Curve and Job Search Theory

In the previous chapter, beside some biographical sketches, we provided a synthetic illustration of the four cards of the Post Keynesian labour market model, as conceived by Tarantelli: the mark up principle, the Phillips curve, Okun’s law and Tella’s equation.1 It is now necessary to focus on the analytical refinements which Tarantelli brought to this general model. The starting point of his analysis can be considered the critical reassessment of the derivation of Phillips curve as suggested by Holt, who proposed researching the conditions of imperfect information which can determine the existence of a relationship a` la Phillips on the labour market.2 The main qualifying element referable to this plan needs to be identified in the ousting of the Walrasian auctioneer and in the consequences of imperfect information conditions on the worker’s choices.3 “The island parable”, as coined by Phelps, is particularly significant in describing the sampling process of potentials offers by the unemployed in conditions of imperfect information. Regarding this, it’s worth mentioning the works of Archibald and Mortensen.4 The former proposed taking into account the existence of a positive unemployment rate referring to a variation in the make-up of the labour market forces.5 The latter proposed to show from a more general point of view Archibald’s ideas and Holt’s contributions. As we will see later, Tarantelli had considerable doubts about the validity of such an approach.6

1

Tarantelli (1974 [2], p. 2). As regards Tarantelli’s analytical contribution, see also Fiorito (1985) and, from a broader perspective Acocella et al. (2007). 2 Holt (1970), Stigler (1961) and Alchian (1970). 3 For an exhaustive investigation of the new microeconomics see Pissarides (2000 [1990]). 4 Phelps (ed. by) (1970). 5 Archibald (1970). 6 Mortensen (1970). G. Michelagnoli, Ezio Tarantelli - Economic Theory and Industrial Relations, DOI 10.1007/978-3-642-22312-9_3, # Springer-Verlag Berlin Heidelberg 2012

37

38

3 Analytical Refinements of the Post Keynesian Model

Holt examined how the stocks and flows, which are found to interact on the labour market, would contribute to determine the relationship between available posts and unemployment, taking into account the process of wage formation. He points out that the market can determine the contemporary presence of stocks of unemployed and vacancies which change moment by moment, because of their variable flows. The unemployed, or the employed aspiring to a more favourable post, start the process of looking for a job. At the same time, firms which need to fill vacant posts, activate a process of job selection. Holt explains that, at the beginning of the job search process, the reservation wage is usually set at a higher level. However, with the passage of time, wage expectations shrink into perspective, and from here the relationship between searching for a job and the wage requested is inverse. The expression for the requested wage can be written like this: m0 < 0

Wdt ¼ AWdt1 mðTu Þ

(3.1)

The parameter A measures the level of wage aspiration with respect to Wdt1 , which is the nominal wage requested in the previous period, and Tu represents the research time. An analogous mechanism regulates variations of the offered wage. At the beginning, this is usually quite contained, little by little the average vacancy time begins to protract, then the undertakers will have to think again about raising their offer. The offered monetary wage can then be expressed as an increasing function of the vacancy time Tv . 0

Wot ¼ BWot1 ’ðTv Þ

’ >0

(3.2)

Considering that Ts is the average time requested to cover a vacant job post and Ps is the probability that an unemployed person can find an attractive post in that time unit, we have Ps ¼ 1=Ts . In the end, Pa is considered the probability that the job interview, after the search for a vacant post, ends with an agreement between both parties. The probability Pu that an unemployed person finds a job can so be expressed through the product of the probabilities Ps Pa multiplied by V, stock of vacant post. We obtain: Pu ¼ VPs Pa ¼

1 Tu

(3.3)

where Tu represents the average unemployment time. At the same time, the probability Pv that a firms fills a vacant post in the time unit, can be expressed by the product Ps Pa multiplied by U, the stock of unemployed people on the market. In other words, we have: Pv ¼ UPs Pa ¼ UPa =Ts ¼ 1=Tv

(3.4)

3.1 Phillips Curve and Job Search Theory

39

In a specular way, Tv represents the average time to fill a vacant post. Multiplying the probability of employment in the time unit Pu , by the total number of unemployed U, we obtain the flow of employment in the time unit. F ¼ Pu U ¼ U=Tu

(3.5a)

The flow of employment is equal, by definition, to the flow of covering vacant posts, given by the product of the probability of filling a post, Pv , by the number of vacant posts available in that spell of time. F ¼ Pv V ¼ V=Tv

(3.5b)

In fact, F can be read as: F ¼ U=Tu ¼ V=Tv ¼

UVPa Ts

(3.6)

where the product UV indicates the potential of job interviews that could take place in that spell of time. Dividing the obtained result by Ts , we obtain the number of interviews that are available, and multiplying by Pa we obtain the flow of employment, that is the filling of vacant posts. F can be therefore expressed as a ratio between the stock of unemployed or of vacant posts and the average time of unemployment, or the filling of one of them. Holt’s model assumes that the system finds itself in conditions of stochastic equilibrium. In this case and for this given labour force, F can be considered approximately constant; this implies that the components of (3.6) are themselves constant or variable, so they can reciprocally compensate. As Holt himself perceives the expected (mathematical expectation of) flows levels and composition of stocks would be constant, and the expected flows into and out of each stock would be equal in level and composition.7

In conditions of equilibrium, it can be assumed that Ts and Pa have stable values. Ts, the average time for individualizing a vacant post, can be interpreted as a technical constancy, determined by conditions of information prevalent on the market. Pa , the probability of employment deriving from a job interview, tends to remain unchanged because, in the expansion phase of the cycle, even increasing the labour demand for the given stock of work force, the offer decreases. The opposite happens in recession. We can derive that even the product UV has to be considered steady with a good probability. In fact, U and V move in opposite directions when demand varies.

7

Holt (1970, p. 58).

40

3 Analytical Refinements of the Post Keynesian Model

Holt believes he can verify the existence of a certain constancy in the level of unemployment. According to him, this comes from the fact that the flows of hirings and dismissals tend to level out during the economic cycle. The unemployment rate u ¼ U=FL will then show stochastic oscillations around an average level uˆ.8 This implies that the flow of separations will tend to equalize the flow of employment (or the filling of vacant posts). These are the reasons why F can be considered constant and can be interpreted indifferently as a flow of filling vacant posts, that is employment and flow of vacant posts, or as a total flow of separations, as it is the sum of dismissals and resignations. In conditions of stochastic equilibrium, when the stock of labour force is given, a substantial similarity can be assumed between these. Such a phenomenon implies an automatic tendency of the system to generate a vacant post for every firing or resignation in that spell of time, so preventing the annulment of the unemployment rate. Because of this, Holt proposed to take into account a positive rate of unemployment in the market economy. By dividing both members of (3.6) by the total labour force, FL becomes the following expression: F=FL ¼ U=FLPu ¼ Pv V=FL ðwhere f ¼ Pu u ¼ Pv vÞ

(3.7)

From the expression, remembering the inverse relation between T and P, we can obtain: Tu ¼ u=f

(3.7a)

Tv ¼ v=f

(3.7b)

Where u ¼ U=FL is the rate of unemployment, v ¼ V=FL the rate of availability of work places and f ¼ F=FL the turn over rate. In conditions of stochastic equilibrium, the constancy and similarity of F and, given the total of the labour force, of the turn over rate f, therefore permit the demonstration of a direct relationship between the unemployment rate and its duration and between the rate of available posts and the average time of filling vacant posts. In fact, the higher the number of unemployed, the lower will be the possibility of finding work and the longer will be the time spent being unemployed. In stochastic equilibrium, the

In particular, we can assume u ¼ uˆ  e wheree : e  Nð0; s2e Þ This assumption implies that at any given time there is a flow of workers, for example, from production units in a restructuring phase, who have to leave their jobs, and at the same time there is a flow of labour force which is trying to find a job in expanding businesses. The constancy of the unemployment rate, apart from stochastic variations, implies that the flow of separations (as the sum of dismissals and resignations) is approximately the same as the flow of employment, that is approximately constant. This constancy is assured by the negative correlation between dismissals and voluntary resignations in response to variations of demand. When there is a steady demand, there is an increase in workers enticed to better posts; at the same time firms reduce dismissals in order to tame the loss of their labour force. On the other hand, when the demand is less favourable, fewer resignations tend to correspond to a larger number of dismissals.

8

3.1 Phillips Curve and Job Search Theory

41

flows which originate from the stock of unemployed and vacant posts tend to be the same and constant. Accordingly, the average permanency in the two stocks will be proportional to their length. Considering that U and V are linked by an inverse relationship, we can conclude that stochastic variations of the associated demand provoke variations of contrary signs in U (also in Tu ) and in V (also in Tv ). Seen that Tu and Tv are directly linked to the wage aspirations of the workers, it is possible, remembering (3.7a) and (3.7b) and given F, to link the situation of the labour market, representing the relationship between V and U, with the rate of the wage variation. Holt postulates a decreasing relationship between requested wage and the time spent looking for work. In conditions of stochastic equilibrium and for the labour market as a whole, given the turn over rate f, the longer the average length of unemployment, the higher the rate of unemployment. So, given the initial level of expected wage and the monetary wage previously perceived, by the decreasing ^ d , and the average relationship between the rate of variation in the nominal wage W time of unemployment Tu , it is possible to derive from (3.7a) an analogous relationship between the variation rate of the requested wage and the unemployment rate; hence a Phillips curve, for the given f. At the same time, we affirm a growing relationship between the monetary wage offered and the average time to fill a vacant post. So, substituting Tv in (3.7b), given f, we obtain a growing relationship between the average variation rate of the nominal wage offered and the rate of availability. Algebraically we have: ^d ¼ mðTu Þ ¼ mðu; f Þ W

m <0

^o ¼ ’ðTv Þ ¼ ’ðv; f Þ W

’ >0

^d ¼ W ^o W

0

0

(3.8) (3.9) (3.10)

^ o , Tu ^d , W The Eqs. 3.8–3.10 form a model of three equations in four unknowns: W and Tv . To close the model, it is necessary to add another equation, which takes the form of a substitute expression for (3.9). ^o ¼ W ^o ðu; j; f Þ W

(3.11)

The relations (3.8), (3.10) and (3.11) form a system of three equations in the ^o , W ^d , u, which can be resolved, given f, for every value of j. In this unknowns W way, j assumes the role of parameter, whose level determines the solution of stochastic equilibrium of the system.9

9

Synthetically, the procedure through which (11) can be obtained is the following. J is the total labour demand, which is the number of job posts offered on the market. Some of these, which we indicate with E, will result filled by workers; others indicated with V will result vacant. So, generally we can write (J ¼ E + V). At the same time FL, the total labour force which is offered on the market, can be divided into employed workers, E, and in workers looking for a job, U

42

3 Analytical Refinements of the Post Keynesian Model

What mentioned above can be considered sufficient to give importance to the qualifying elements of Holt’s plan. Now it is necessary to illustrate Tarantelli’s observations regarding this. In Tarantelli’s opinion, the demonstration of the existence of Phillips curve had to be generalized to take into account the structural unemployment, and not only frictional unemployment or, in the best of cases, voluntary unemployment. If the constancy of f, which is the flow of separations and employment, is not assumed as a hypothesis, it does not appear legitimate, Tarantelli points out, hypothesizing that they vary, in general, so they compensate reciprocally. In particular, he explains, the probability that a job interview, which ends with the acceptance of both parties, cannot be considered independent of the prevalent conditions of supply and demand.10 He points out, furthermore, that the average time spent looking for a vacant post cannot be considered independent from the number of vacant posts, or we can assume that the value of product UV is invariable compared to market conditions. Another limit which Tarantelli notices in Holt’s analysis is the hypothesis of homogeneity of the labour force. In particular, he explains that in a system such as the Italian one, marginal workers have particular relevance. They are the last ones to be employed in a phase of expansion and the first ones to be laid off in a phase of recession. This is why they are characterized by a higher turnover.11 Tarantelli affirms that Holt does not seem inclined to take into consideration the hypothesis of introducing any kind of distinction. Let us now turn to Tarantelli’s considerations on the demonstration of the Phillips curve. There is nothing [. . .] – he notes – in Holt’s model [. . .] that allows us to explain the position, set against the inclination, of Phillips curve on a Cartesians plan, and so the existence of a structural unemployment rate rather than another. Because of these reasons, the model is only able to explain the frictional quota of the given unemployment rate inherited from the past. Moreover, the unemployment explained by the model is all voluntary.12

Tarantelli noted that in Holt’s model, given the level of j, within the stochastic variability level consented, it is possible to observe a shift of Phillips curve, no longer as the effect of structural movement, but as a result of a lowering of the level of the initial requested wage. The equilibrium rate of unemployment is reduced

(FL ¼ E + U). Relativizing the two previous expressions compared with FL, we can write (j ¼ e + v) and (1 ¼ e + u). Where “e” indicates the employment rate, which is the percentage of the employed workers in the total labour force, and j the rate of labour demand. Subtracting (1 ¼ e + u) from (j ¼ e + v), we obtain a linear relationship between available posts and unemployment for every value of j, i.e. (v ¼ u + j  1). Given the amount of the labour force, FL and the number of available posts J, every increase or decrease in employment, E, will determine a variation of the same amount in unemployment and vacant posts. Now, substituting in (3.9) the expression of v derived from the last equation, it can be derived (3.11). 10 Tarantelli (1974 [2], p. 38). 11 Hall (1970). 12 Tarantelli (1974 [2], p. 46).

3.2 Extensions to Disequilibrium

43

compared with the starting position, because workers lower their monetary wage expectations. This result is compatible with the traditional neoclassical set up. Existing unemployment can be then eliminated through a wage reduction. In the set up suggested by Holt it is defined as frictional, as determined by the conditions of imperfect information which impede the achievement of market clearing, which instead is achieved in the neoclassical-walrasian model. However, in the case of finding an auctioneer able to communicate to the parties a full employment wage, the workers will change their wage expectations and the equilibrium of the system will take place when j ¼ 1 and v ¼ 0, which imply also u ¼ 0.

3.2

Extensions to Disequilibrium

It has been possible to show that, in Holt’s approach, the adjustment of the relevant variables could be determined not only in price terms, as in the Walrasian model, but, at least in the short term, also in terms of quantity, these being the unemployment rate and the missed potential income.13 On the other hand – Tarantelli points out – in the feeble perspective of the non walrasian equilibrium, the range of variability of these quantities is the only one allowed by the frequency distribution of accidental errors implicit in the definition of stochastic equilibrium.14

As we have already said, the part of unemployment which Holt’s analysis could take into account is the frictional one. These are the main reasons that induce Tarantelli to extend the model from conditions of stochastic equilibrium to conditions of disequilibrium, that is cases of voluntary unemployment and overemployment. As Tarantelli and Modigliani perceive, the assumption of Holt regarding the constancy of the turnover components in response to variations of demand, deriving from the above-mentioned hypothesis, cannot be applied to the Italian case.15 In this context, they point out that both the flow of employment and separations are modified by cyclical determinants, regarding the different pressure of labour demand, and by structural determinants, linked to the heterogeneous composition of the employed labour force. Within the labour force, they suggest distinguishing

13

It will be useful to remember, with regards to the methodological mutual aspects, that in Tarantelli’s opinion, the temporal horizon in which the hypothesis of non Walrasian equilibrium and disequilibrium assumes validity, must be considered the Robinsonian notion of logical time. Historical time should be considered, instead, as a dimension inside of which the structural analysis would find legitimization (Tarantelli 1970 [1], p. 16) and (Tarantelli 1974 [2], pp. 1–18). For the concept of logical and historical time compare (Robinson 1962, pp. 23–28). 14 Tarantelli (1974 [2], p. 67). 15 Tarantelli (1979 [2]).

44

3 Analytical Refinements of the Post Keynesian Model

the marginal labour force from the non marginal one, as it is characterized by a different stability of the post. With reference to the Italian case, the turnover has been [. . .] modified – they explain – in a non negligible way, since the “hot autumn” of 1969, by major conflicts in the industrial relations system (workers statute) and, in particular, by the “block of dismissals” of the trade union and the businesses “block of employment”. It has also been modified because of the reduction of self dismissals in the presence of growing unemployment levels. Both these determinants of social-political origins have been accentuated since the petrol crisis at the end of ‘73 and from the larger unemployment expectations associated (also on an international level) with the OPEC countries embargo.16

There are three reasons which make Tarantelli and Modigliani hypothesize about flow of employment and separations, and so a turnover, growing at the level and rate of variation in labour demand j.17 Remembering (3.6), it can be observed that in the presence of an increase in labour demand, V will begin to increase before U decreases. It is in fact plausible to hypothesize that the stock of unemployed workers can be reduced only after a recovery of vacant job posts. Given the rates of average wage previously demanded, an increase in those offered will have the effect of increasing the probability that the discovery of a vacant job post will end with the acceptance by both parties. The flow of employment will result correspondingly high. This suggests that Pa , in (3.6), should be rewritten as a growing function of the difference between the variation rate of the ˆ o, average monetary wage rate paid to workers and offered to the new applicant w ˆ d. When this is in and the variation rate of the average rate of demanded wage w disequilibrium, it can diverge from the offered wage. ^o  w ^d Þ Pa ¼ pðw

0

p >0

(3.12)

ˆ o will tend to increase, for every given When there is an increase in demand, w number of unemployed U, because V, which is the number of vacant job posts, ˆ d will increase only because, in following increases. The rate of variation of w periods, the number of unemployed and the average time of unemployment both tend to diminish.

16

Tarantelli (1979 [2], p. 448). However, it should be noted, that Holt himself, contemplates the hypothesis that the flow of employment and separations can vary with variations of labour demand (Holt 1971). However, in Tarantelli’s opinion, Holt would not draw “theoretical consequences in spite of the existence of previous discussions regarding this” (Tarantelli 1979 [2], pp. 455–456). Tarantelli refers to the fact that there was not a lack of studies reenforced with econometric esteems from which emerged, with reference to the United States’ system, that in a phase of expansion, more marginal workers, characterized by lower wages, were gradually employed. This would help to keep average wages level. Behman (1964) is a significant example to which Tarantelli refers. 17

3.2 Extensions to Disequilibrium

45

The third reason that Tarantelli and Modigliani point out in order to reject the hypothesis of a constant flow of employment and separations, is represented by the fact that these flows vary, not only when labour demand increases, but also when, in the long term, it remains at a higher level. In correspondence to an increase in demand, quotas of the labour force which are more and more marginal, characterized by higher replacement flows, are inserted in the production process. The highest replacement flow which characterizes them, explain Tarantelli and Modigliani, is due to two factors. They are the first ones to be dismissed in a downswing phase and the last ones to be employed in a phase of expansion. Moreover, the self-dismissal flow which characterizes them is higher due to less career opportunities and likewise limited seniority privileges. The average flow of change will therefore be characterized by a cyclic trend because of cyclic variations in the make up of employment between marginal and non marginal workers.18 Now we are going to examine some suggestions implicated by Tarantelli, in particular referring to Phillips curve, of unemployment and over-employment.19

18

It is interesting to observe how Tarantelli’s propositions are in line with the conclusions reached in Hall (1972). Hall had conducted an analysis about the structural changes of the labour market with respect to the level of activity of the system, showing how, in correspondence to higher levels of aggregate demand, in the production process, shares of marginal workers were introduced. Compared to the non marginal labour force, according to Hall, these were characterized by a higher turnover because of lower job career opportunities, of the missed achievement of seniority and mainly because the marginal labour force, according to that that Tarantelli himself defines “Ricardian principle” of selectivity of labour demand, could be considered the last one to be employed in an expansive phase and the first one to be dismissed when the cycle inverts. Regarding this compare: (Tarantelli 1970 [1]) and (Tarantelli 1974 [2], pp. 148–149). Tarantelli was not the only one, amongst the Italian economists, to welcome the above-mentioned “Ricardian principle”. The case of (De Cecco 1972) can be considered significant. De Cecco subjects to empirical verification the thesis according to which, in case of a demand contraction, the rate of activity of all the workers does not diminish proportionally, but it is primarily the rate of the marginal workers that diminishes, identified by him in women, youngsters up to 25–30 years old and the over 40. On the contrary, he asserts “workers in their prime of life are not interested in the decline of demand if not in situations of real economic depression, because they are to be assimilated to the more productive machines that remain in production even when, in conditions of insufficient demand, the less productive machines are progressively stopped” (De Cecco 1972, p. 76). 19 Tarantelli elaborated the implications of the hypothesis of disequilibrium for the first time in 1974. Compare (Tarantelli 1974 [2], pp. 111–120) (involuntary unemployment) and pp. 120–129 (over-employment). Then he examined these themes again in two following contributions. In the study elaborated with Modigliani 5 years later, Tarantelli, besides a demonstration confirmed by econometric estimations of the invalidity of the stochastic equilibrium a` la Holt in the Italian context, examines the case of over-employment, in particular analysing its implications in Phillips curve terms. Centred on the reinterpretation of Holt’s model in subjective probability terms, are (Tarantelli 1980[2]), speech presented at the XIX reunion of the Italian Society of economists and (Tarantelli 1983 [1]). In these essays, Tarantelli reformulates, in terms of expected variables, the analysis of disequilibrium of which here we intend to take into account. On that occasion, it was reported to who writes by Duccio Cavalieri, who participated in that meeting, that Tarantelli debuted affirming that he had finished writing his speech during the flight that had taken him from the United States to Italy in the hours immediately preceding the beginning of the reunion. For the treatment of the hypothesis of involuntary unemployment the original symbolism is used.

46

3 Analytical Refinements of the Post Keynesian Model

Tarantelli’s expressions of the wage demand (3.13) or rather an offer of work, and of the wage offer (3.14), which represents labour demand are the following: D

^d ¼ Aeu f w

(3.13) R

^o ¼ Beðuþj1Þ f w

(3.14)

The condition of equilibrium is represented by the equality between the rate of variation of the wage rate demanded and offered: ^o ^d ¼ w w

(3.15)

We assume that f, the flow of employment, can be represented by the following expression: f ¼ K þ bj þ cDj with K  0; b > 0; c > 0

(3.16)

We imagine that, in presence of involuntary unemployment, an increase in demand, or rather a short term increase in j, which goes from j1 to j2, with j2 > j1 occurs. In Fig. 3.1, this phenomenon implies a movement of Dj1 towards Dj2. In as much as the increase in j, increases also f, and the movement will end with Dj0 2, with the new point of equilibrium in B, having also moved S1 in S2. Let us imagine, now, that with a new and higher level of j, f gradually lowers, as a consequence of the exhaustion of the expansive phase. In which case, Dj0 2 shifts towards Dj2, whilst S2 shifts towards the starting S1. This phenomenon brings out the existence of anti-cyclic loops around the Phillips curve, explains Tarantelli.20 Let us turn to Tarantelli’s analysis of the over-employment case. Also in this hypothesis, he explains, it is not reasonable to assume the hypothesis of a constant flow of employment and separations. Moreover, certain levels of expansion in

20

ˆ ), and When Phillips curve is identified as a function that interpolates the observed couples (u, w it is possible to evaluate its adaptation to the values registered during the economic cycles in the interval 1861–1957, we can see that the ascending part of each value positions itself above the average relation represented by the interpolating curve, while the descending part positions itself beneath. It can be therefore inferred that the variation rate of the nominal wage increases more than average for the level of unemployment considered in the ascending phase of the cycle, that is when unemployment is decreasing. On the contrary, it is positioned below when the cycle inverts and unemployment starts to increase. With regards to this, Phillips asserts: “there is a clear tendency for the rate of change of money wage rates to be high when unemployment is low and to be low or negative when unemployment is high. There is also a clear tendency for the rate of change of money wage rates, at any given level of unemployment, to be above the average for that level of unemployment when unemployment is decreasing during the upswing of a trade cycle and to be below when unemployment is increasing during the down swing of a trade cycle” (Phillips 1958, p. 290). A more recent analysis, lead by the same theories of Tarantelli, mainly concerning the formation of loops around Phillips curve is Ferri (2007).

3.2 Extensions to Disequilibrium

47

Fig. 3.1 Anti-cyclic loops around the Phillips curve Dj 2

Dj’2 Dj 1

C •

B • A • S1

S2

u

the labour demand can in fact determine a larger flow of separations than the flow of employment. This is because Pa cannot exceed a certain level, nor, on the other hand, can Tu go below a minimum level however positive. In other words, the rate of unemployment cannot be guaranteed below a frictional level u*. Below which level, an increase in the rate of the growth scale is verified collectively to an increase in the rate of unemployment, so Phillips report results inverted. As anticipated, it is sufficient to take into account the extension of disequilibrium which Tarantelli carries out moving from Holt’s analysis. To this end, it can be concluded that he recognized the possibility of describing through a generalized Holtian model, how a labour market works in a situation of involuntary and overemployment. There is no doubt – he affirms – that it is evocative for describing the mechanism of the formation of the money wage and the turnover with regard to a labour market sufficiently competitive for a given framework. Moreover, in a long term perspective and for a framework given by the labour market, the return analysis perspective [in relation to scenes of disequilibrium] can constitute [. . .] a useful referral plan, at least for certain divisions of work [that is the external labour market and the competitive one].21

Nevertheless, he argues, when, in a long term scenery, we admit the structure of the labour market to vary, it is necessary to investigate the theory and policy implications of a market divided into distinct labour groups. The labour groups are composed of a non homogeneous labour force, which interacts with a likewise (non homogeneous) capital stock.22

21 22

Tarantelli (1974 [2], pp. 139–140). Tarantelli (1974 [2], p. 140).

48

3 Analytical Refinements of the Post Keynesian Model

3.3

The Implications of a Non homogeneous Labour Force on Okun’s and Tella’s Equation

In the previous paragraph, the extensions to Holt’s model proposed by Tarantelli about conditions of disequilibrium, i.e. involuntary unemployment and overemployment, were examined. Especially in relation to the second hypothesis it has already been possible in some way, to mention the opportunity to take into account the implications of a non-homogenous labour force on the analytical plan. Tarantelli then focuses on the implications of a stock of non-homogeneous labour force, in Okun’s law and Tella’s equation. On these bases, he suggests a reformulation of Phillips curve. Tarantelli is very skeptical about the replication to Okun’s with regard to the Italian case. First of all, he underlined what in his opinion must be considered the fundamental characteristics of the labour market. [The Italian labour market] has been experimenting a substantial decrease in structural unemployment [this is the reason why it is] characterized by a strong non homogeneous structure of the labour force and of the physical capital.23

Tarantelli continues to analyze the effects of this hypothesis, in particular the cyclic movements of labour demand, resuming and elaborating on the Ricardian selectiveness principle.24 If we suppose [. . .] – he affirms – that individual businesses [having the use of] capital stocks belonging to various technologies [. . .] it seems reasonable to expect that in the short term and in correspondence to low levels of the use of productive capacity, they will tend to use only the most efficient technology. The same principle applies to the work force.25

If undertakers reduce the level of activity and bind themselves to dimensional adaptations, the criteria of rationalization will tend to exclude from the market the least productive workers. This is the reason why Tarantelli supposes that a more efficient technology and manpower is used in the short term when the demand is weaker, and a less efficient one when the demand is bigger. According to the Ricardian principle, the non homogenous capital stock available to firms, along with the introduction into the production process of a labour force which gradually becomes less efficient with increases in demand caused (especially in regard to the years 1950–1968) two effects, one with regards to the short term, the other to the long term.26 In the short term, the acceleration in demand leads to a slowdown in the rate of increase of productivity and an increase in the variation rate of wages

23

Tarantelli (1974 [2], p. 149). The application of the Ricardian setting to the structural analysis of the Italian labour market constitutes a qualifying element of Tarantelli’s analysis since his first works on the productivity of work at the research group of the study service of the Bank of Italy. Compare Tarantelli (1970 [1]). 25 Tarantelli (1974 [2], p. 149). 26 The econometric esteems through which Tarantelli corroborates his own conclusions about the validity of the Ricardian principle can be found in Tarantelli (1970 [1], pp. 49–83). 24

3.3 The Implications of a Non homogeneous Labour Force

49

because of the movement of the system in the higher part of Phillips curve. On the contrary, in the long term, “inflationary wounds of the system” which favoured the capital accumulation and the training of the labour force, made a more favourable substitution between unemployment and inflation possible. Consequently, Phillips curve shifts towards the origin of the axis. In this way, he concluded, “the productive system [would become] adult through inflationary wounds imposed, in the short term, by its own growth”.27 This was an antithetical result in respect to Okun’s, who underlined a positive elasticity, but lower than one, of labour demand to income variations. In this hypothesis, labour productivity which is considered as a relationship between the level of production and the number of employed, would tend to increase in a phase of expansion and to contract when the economic system slows down. It is plausible, notes Okun, that on one hand, the fixed costs per product unit decrease because of the effect of the economies of scale on individual businesses. On the other hand, the volume of occupation can adjust itself with a certain delay in respect to a higher level of activity. This is the reason why, labour productivity increases in correspondence to increases in the level of the economic system activity and decreases in the opposite case. Tarantelli then goes on to assess the compatibility of Tella’s conclusions, regarding the regulating principle of the labour offer, with the results obtained from the analysis of the Italian labour market. Tella suggested that the labour force previously excluded or discouraged from looking for employment, would be available and hoping to find employment in a phase of expansion. This would have implied a containment in the reduction of the unemployment rate and consequently, keeping faith to Phillips curve indications, of inflationary tensions.28 Nevertheless, Tarantelli asserts, the part of discouraged unemployment, that is of the labour force registered but reluctant to declare themselves unemployed in an absence of employment perspective, could be considered, at least in the Italian system, of negligible entity.29 What could be the reasons for which there are parts of discouraged unemployed, even if there are few? And above all, what are the reasons that determine the exclusion in the long term of non primary labour force, that is, youngsters, women and elderly people? These are the questions that Tarantelli asked himself. The main cause, explains Tarantelli, had to be identified in the structural dualism, typical of the Italian system. The internal migration process that accompanied the economic development centred on the industrialized areas of the North of Italy, would make the complete absorption of the entire labour offer which became available in those areas, difficult. This is where the marginalization of the non primary labour force and the arise of the phenomenon of discouraged

27

Tarantelli (1970 [1], p. 119). Tella (1964). 29 For the empirical verification, which Tarantelli carries out according to a plan already tested by Filosa in the sphere of studies service of the Bank of Italy, see Tarantelli (1974 [2], pp. 154–158). (Filosa 1971). 28

50

3 Analytical Refinements of the Post Keynesian Model

unemployment come from, according to the Ricardian principle. An economic policy that, on the contrary, would have favoured the development of southern Italy by re-launching tourism and complementarity policies of the primary sector with the industrial transformation firms, would have contributed proactively, in his opinion, to limit the process of internal migration, and likewise also “the destitution of a few million of the labour force”.30 This is what concerns the analysis plan. From the point of view of the policies, there were two alternative strategies considered as suitable to face marginalization of the labour force and discouraged unemployed in that period. In the first one, which has monetarist roots, it could have been possible to observe a reduction in discouraged unemployment and a consequent return to the market of marginalized workers, only if the inflationary process had been left to go ahead long enough. However, these results could have been as incompatible with the condition of monetary stability. It would have been possible, on the other hand, to reach some positive results through a combination of fiscal policies and monetary expansive policies of the Keynesian type; but also in this way it would not have been possible to achieve appreciable results in the long term. As will become clearer later, Tarantelli’s proposals would have been finalized to indicate to the policy maker an alternative route through a co-operative relationship between unions and Government.

3.4

The Analysis of the Phillips Curve in the Short Term

Now let us look at the implications of the previous considerations for the analytical in-depth examination which Tarantelli led regarding Phillips curve. Tarantelli, also thanks to Modigliani’s contribution, proposed a generalization regarding the developing Italian situation.31 The procedure of extension and adaptation of Phillips curve suggested by them starts from the observation of a stock of heterogeneous labour force, a typical element, they state, of a developing reality. On this basis, they propose to distinguish, within the labour force, part of the employed from part of the skilled unemployed (the labour force previously absorbed in the production process) and the unemployed without previous experience. The relationship a` la Phillips when subjected to generalization is expressed like this, where k is a positive constant, u the unemployment rate and f/u the inverse of the average unemployment time, from (3.7a)     k f ^ ¼AþB þC w u u

30

(3.17)

(Tarantelli 1974 [2], p. 161). Compare Tarantelli (1972 [1]), Tarantelli (1972 [2]), Tarantelli (1972 [3]) and Tarantelli (1972 [4]).

31

3.4 The Analysis of the Phillips Curve in the Short Term

51

First of all, Tarantelli and Modigliani concentrate on the second term of (3.17), observing that the presence of the non skilled unemployed creates further elements of distinction in the business criteria for employment. Because of this emerges the necessity to reformulate the reserve of labour force in terms of units of efficiency 0 (u ). This is the variable that allows them to take into account the presence of skilled and non skilled unemployment. Maintaining the original symbolism, the proposed 0 expression of u , results32:  0 0
 u  b um  g u ¼ ½1  b0 ðum  g0 Þ 0

(3.18)

Next we continue the procedure examining the third term of (3.17) which is the element that reflects downwards pressure exerted by the time of unemployment on the wage. Also in this case, Tarantelli and Modigliani distinguish the different pressure with respect to the level of the unemployed introduced into the labour market. In particular, every given level of unemployment will tend to produce a lower downwards pressure on the wages the higher the part of unemployed without previous experience, i.e. the higher is the portion of U belonging to Un. The result of the formulation is33: 

00 0
 u  b um  g u ¼ ½1  b00 ðum  g0 Þ

00

0

0

(3.19)

They express u0 ¼ ðU  b Un Þ=ðLF  b Un Þ and Un ¼ LF  ð1 þ gÞðLF  Um Þ; with 0 0 0 b ¼ b ð1 þ gÞ and g ¼ g=ð1 þ gÞ. 0  b  1represents the part of non skilled unemployed; Un represents the absolute value of non skilled workers; g represents the frictional level of unemployment and Um represents the lowest level of unemployment reached. Note that, substituting the latter expression in the former and arranging opportunely the terms, we obtain (3.18). The method of construction of the unemployment rate in terms of efficiency units leads Tarantelli and Modigliani to obtain negative values also and not, as it would be right to expect, positive ones. From these results Prosperetti suggests a reformulation of the previous expression. The origin of the problem, in his opinion, should be looked for in the fact that Modigliani and Tarantelli overestimated the part of non skilled workers in a systematic way, in periods when the rate of unemployment decreased. They assume as an approximate measure of non skilled unemployment the difference between the total of unemployed u, and um, which is the lowest level of unemployment reached in the previous period. This procedure, observes Prosperetti, can be considered legitimate when unemployment is increasing, i.e. when part of the present unemployed were previously employed. But when u shows a tendency to diminish, part of the labour force previously unemployed will now be employed, so that the difference between u and um could result negative. The solution proposed consists in employing the current rate of unemployment instead of um, in periods where u is positioned at a lower level than um (Prosperetti 1981). As regards an application of such a model, see Ghezzi (1986). 00 00 33 Even in this case we follow an analogous procedure. Formulated u ¼ ðU  b Un Þ= 00 00 ðLF  b Un Þ, with 1  b  0, remembering the expression of Un and suitably arranging the terms, (3.19) can be obtained. 32 0

52

3 Analytical Refinements of the Post Keynesian Model

Now, keeping in mind the expressions (3.18) and (3.19), we can re-formulate (3.17) assuming that B0 ¼ Bk and C0 ¼ Cf and adding a regressor so we can keep into account the inflationary expectations. The result is:     0 0 00 0 0 1  b ðum  g Þ 0 1  b ðum  g Þ ^ ¼AþB þC þ Dp0c w (3.20) u  b0 ðum  g0 Þ u  b00 ðum  g0 Þ It represents the equation of Phillips curve in the short period which from 1952 to 1968 is subjected to econometric examination with the least squares method.34 Tarantelli and Modigliani argue that in a developing country, with part of skilled labour that gradually expands in the total labour force, there does not exist a unique relation between rate of wages increase and the level of unemployment, as postulates the original Phillips curve. The pressure exerted on the wages by a given level of unemployment rate depends on the composition of unemployment of skilled and non skilled labour force, that is variable in the development process. So we can obtain, rather than one single curve, a family of curves in the parameter um, that represents the previous lowest level of unemployment. With increasing pressure on demand and with the approach of the effective unemployment rate to um, they explain, if on one hand the average duration of skilled unemployed decreases, the average time of the vacancy of the posts increases. So there will be a growing upwards pressure of the wage rate, because the businesses will tend to compete for the remaining reserve of skilled workers. In the meantime, the higher costs of employing new workers and for maintaining the already employed, the growing difficulties and the more time needed to cover vacant posts, will induct firms to lower the requested level of professional qualification. What happens is that the unemployed without previous experience are trained on the job and they consequently pass into the group of skilled labour force. This process determines a permanent improvement of the labour force, inside of which, the reserve of skilled workers increases. This is the reason why, every given level of unemployment, up to the newly reached value um, will be accompanied by less pressure on rising salaries. In Phillips curve terms, this result is represented, in Fig. 3.2, by the displacement of the system on a new short term curve characterized by a lower value of um compared to the initial one. In this way, in the development process, the short term curve translates towards the origin of the axis until um reaches the level of frictional unemployment g (2.5% in Tarantelli and Modigliani’s case), that represents the absolute minimum. On the basis of Tarantelli and Modigliani’s analysis, we can affirm that when the aggregate demand exceeds the limits previously reached, pressure on resources is generated, in particular on the reserve of the skilled labour force. If, on one hand, an inflationary phenomenon takes place, the inflationary barrier represented by the  ^ ¼AþB The expression of the estimating equation is: w

0

½1bðum g Þ



0

þ Dpc ½ugbðum g Þ A more detailed illustration of the method of empirical verify and of the achieved results can be found in Tarantelli (1972 [4], pp. 345–377).

34

0

3.4 The Analysis of the Phillips Curve in the Short Term

53

Fig. 3.2 The shifting of the Phillips curve

um = 9

um = 4 um = 3 um = g = 2.5

u

reserve of skilled workers and situated at the edge of the previously reached development, can be reduced. The rising tension of prices which accompanies every given level of demand will tend to progressively attenuate. “The inflationary stimulus – explain Tarantelli and Modigliani – is similar to “growth evils” that the economic system has to experiment as a price of maturity”.35 These are the conclusions reached by Tarantelli and Modigliani. Spinelli and Zis brought forward some reserves regarding the validity of Tarantelli and Modigliani’s conclusions. Spinelli and Zis’s main surveys, regarding the formulation of Phillips curve for a developing country, are articulated on an empirical and a methodological level. From the point of view of the econometric adaptation, they demonstrated that a traditional equation a` la Phillips increased by the expectations, would have interpolated more correctly the values compared to (3.20). On a methodological level, they revealed that the introduction of the parameter g0 , would generate incorrect esteems of the regressors. It would artificially reduce, with regards to (3.17), the value of B and it would determine a displacement on the right of the interpolation curve, that would also be able to distort even the esteem of the constant term A. A traditional Phillips curve, they conclude, would adapt closer to the data analyzed by Tarantelli and Modigliani. In particular, they demonstrate that, the higher the g0 is, the lower is the coefficient of inflationary expectations. In other words, introducing the parameter of frictional unemployment would give rise to an arbitrary under-estimation of the explicative capacity of the “price” regressor, as it would for the unemployment regressor. In Spinelli and Zis’s plan, we can conclude that the variation rate of nominal wages would be at a higher inverse proportion than the unemployment rate, as suggested by Tarantelli and Modigliani, because it measures the labour offer excess on the market. It would also be directly in proportion to price variations, as indicated in monetarist thesis. This is the reason for which Spinelli and Zis are in favour of the

35

Tarantelli (1974 [4], p. 376).

54

3 Analytical Refinements of the Post Keynesian Model

in-existence of a long term trade off between the variation rate of nominal salaries and of unemployment.36 Valcamonici’s survey is more circumscribed. He asserts, with regards to the formulation suggested by Tarantelli and Modigliani, that it was possible to observe a shift towards the bottom of Phillips curve whilst the development process moved on, but contextually, there would have been an increase in its slope. Because of this the trade off between inflation and unemployment would have been more unfavourable. Synthetically, Valcamonici objects to Tarantelli and Modigliani’s thesis of economic development through inflationary wounds of the system, that if the natural rate of unemployment progressively lowers, at the same time, the system is subjected to structural modifications that determine a rise of the curve’s slope. The progressive tightening of the curve could be justified when the unemployment rate nears the minimum frictional level g.37

3.5

The Long Term Generalization

Now we will examine the generalization proposed for the long term.38 Expression (3.20) must be considered a valid expression only in a limited time horizon: the relationship has significance for a unique value of um and the inflation rate is treated 36

Spinelli and Zis (1979). Even though well known, it is useful to remember that the econometric analysis carried out in those years were essentially based on the method of ordinary least squares (OLS) and, in some cases, of generalized least squares (GLS). This, in the best of cases, permitted to keep into account the presence of autocorrelation of the residuals and of heteroscedasticity. More refined methods of analysis of time series, such as ARIMA models and the more recent ECM, allow us today to obtain qualitative better adaptations to data. 37 Valcamonici (1973). 38 The position taken by Salvatore Vinci is particularly critical about Tarantelli and Modigliani’s formulation. He points out that substantially they carry out a study on the formation of industrial wages to analyze the price trend with regard to the whole economic system. Tarantelli and Modigliani, points out Vinci, include amongst the regressors of the Phillips equation an index of the price level calculated, as we said, in the constant mark up hypothesis. Starting with these considerations, Vinci asks himself about the following subjects: the possibility to employ “a price based on the constant mark up of the entire economy” and about the legitimacy to estimate “the parameters of the equation of relative wages in a reduced form relative to all the economy using the estimates of single industrial wages” (Vinci 1974, pp. 52–53). Moreover, Vinci does not agree with the segmentation of the labour market which was adopted by Tarantelli and Modigliani. Using a distinction between skilled and un-skilled, can make sense, he explains, in sectors such as agriculture and craftsmanship, and for some non mass industrial production. “But [assumes significance] – he asks himself – in the case of mass production where the work of each worker is reduced to some simple acts for which is not requested any particular training but only a certain level of instruction [. . .] and a certain physical and psychic resistance?” (Vinci 1974, pp. 54–55). Tarantelli and Modigliani reply strongly to what Vinci asserts, and he asserts that both of them would lean towards the “quantitativist” thesis, whose main proposition would consist in denying the stability of Phillips curve in the long term. (Vinci 1974, p. 51). Tarantelli e Modigliani answer

3.5 The Long Term Generalization

55

as external. It is therefore reasonable to assume that in the long term this depends on ^ Re-formulating (3.20) in general terms with Tarantelli and Modigliani, we w obtain: ^ ¼ ’ðuÞ þ dp w

0

(3.21)

Let us concentrate now on the second addend. If we hypothesize a constant mark up of prices a` la Friedman, it can be easily shown that the resulting expression is the following: 0

^p p ¼w

(3.22)

0

where p represents the variation rate of prices and p the variation rate of productivity. Substituting (3.22) within (3.21) we obtain the long term curve: ^¼ w

’ðuÞ  dp ð1  dÞ

(3.23)

It can be now noted that (3.23) is more inclined than (3.20) the more d  1, that is the more rational are the operators expectations.39 It is also possible to note that 0 ^ Then, substituting in (3.23), the the two meet when ’ðuÞ ¼ p, that is when p ¼ w. expression in efficiency unit derived previously for u, we reach the analytical expression of the long term Phillips curve proposed by Tarantelli and Modigliani. While continuing the extensions to the long period, they took the opportunity to put forward some critical comments on the monetarist thesis. As is well known, Friedman and the Monetarists, as well as some Post Keynesians such as Phelps, affirm the in-existence of a long period trade off between unemployment and inflation. In the above-mentioned Friedmanian hypothesis of constant distributive shares, it is possible to demonstrate that the rate of increase of the price level results equal to the variation rate minus the rate of productivity variation. The unemployment rate compatible with a void growth rate of price levels is defined as the natural rate of unemployment.

affirming that “Vinci labels us as quantitativist based on the fact that in our scheme Phillips curve is not stable. This is wrong because: a. according to quantitativists – e.g. Friedman et al. – The shift of the curve is due only to the wage-price spiral, for a framework suitable and constant of the labour market; b. but in our scheme, the shift is due only to the variations in the framework of the labour market, regardless of the wage-price spiral (or the prevailing mark up). For this reason, Modigliani and Tarantelli’s work not only falls within the quantitativist idea, but also criticizes the base hypothesis of a constant structure of the labour market”. See Vinci (1974, p. 80). 39 The reader interested in a strict treatment on a formal level of the problem linked to the formation of inflationary expectations can compare (Tarantelli 1974 [2], pp. 62–65). Chiarini (1995) proposes some interesting considerations regarding the role of expectations in Tarantelli’s economic analysis.

56

3 Analytical Refinements of the Post Keynesian Model

But in which sense could a long term trade off between inflation and unemployment not be registered? Given a system in long term equilibrium conditions, with constant distributive shares and a natural unemployment rate, let’s suppose that it occurs a decrease of the natural rate which cause a wage variation one point higher than the productivity increase. As a hypothesis, the prices will also increase by one point, determining an analogous decrease in the purchasing power of salaries. Initially, explains Friedman, workers will not be able to completely compensate the price increase, because it was not predictable. Gradually, however, the predictive ability of workers and their realization of being victims of a monetary phenomenon illusion grow. As a consequence, an increase in wages will be demanded, and this will push prices up. This will induce workers to look again at the increase in inflationary expectations because of the further increase of the coefficient with which nominal wages compensate the expected increase in prices. In the hypothesis that it reaches the unit, the monetary illusion fails and every price increase is passed to the wages, whose increase is again shifted to prices. In this way the inflationary process becomes never ending. This is Friedman’s theory synthetically explained. According to this approach there are not – concludes Tarantelli – possibilities of substitution between unemployment and inflation in the long period. The economic policy can, at the most, reduce the unemployment rate in the short period – so that workers do not learn to completely compensate for future price variations (and businesses for wages) – but with the risk of facing in following periods growing inflation at an accelerated rhythm.40

One of Tarantelli and Modigliani’s first remarks regarding Friedman’s theory consists in the rejection of the uniqueness of the natural rate of unemployment.41 As we have seen, in a developing country, Phillips curve can be intended as a border that translates progressively towards the left and the bottom as the system grows; translation that also determines a shift of the long period relationship. This shift determines that, the short term curve and the correspondent long term curve, meet exactly at the point where the former is intersected by the constant represented by the rate of average development of the productivity. Since we can obtain endless short and long term Phillips curves, one for every value of um , we obtain endless values of the natural rate of unemployment, at least until um < g. They also underline that it is not very plausible, referring in some way to Solow’s stance, to assume perfect rationality of the worker’s expectations, as monetarists suggest.42 They seem to suggest that the necessary time needed for

40

Tarantelli (1974 [2], p. 53). Tarantelli (1974 [2], p. 162). It is also appropriate to underline that Tarantelli was not willing to accept the Friedmanian hypothesis of a mark up constancy in the short term. Although this consideration does not emerge from the analysis of Phillips curve, it can be found in Tarantelli (1970 [1], pp. 88–102). In this essay, though testing with a positive result, the hypothesis of a constant long term mark up for Italian industry as a whole, Tarantelli uses a price equation which included, among the regressors, the market conditions and the variations in the income distribution. 42 Solow (1969). 41

References

57

the workers to take the future for granted is such, on the base of previous inflation, to invalidate the applicability of Friedman’s conclusions. In other words, adaptive expectations, that for Tarantelli and Modigliani reflect the worker’s effective predictable capacity, do not necessarily become automatically rational. A dilated period of time was necessary to complete this process, if it was ever possible to complete.

References Acocella, N., & Leoni, R. (Eds.). (2007). Social pacts, employment and growth. Heidelberg: Physica-Verlag. Alchian, A. (1970). Information costs, pricing and resource unemployment. In E. S. Phelps (Ed.), Microeconomic foundations of employment and inflation theory (pp. 27–52). New York: Norton. Archibald, G. (1970). The structure of excess demand for labour. In E. S. Phelps (Ed.), Microeconomic foundations of employment and inflation theory (pp. 212–223). New York: Norton. Behman, S. (1964). Labour mobility, increasing labour demand and money wage rate increases in the U.S. manufacturing. The Review of Economic Studies, 31(4), 253–266. Chiarini, B (1995). Introduction to Tarantelli (1995 [1]), pp. XV–XVIII. De Cecco, M. (1972). Una interpretazione ricardiana della dinamica della forza-lavoro in Italia nel decennio 1959–1969. Note Economiche, 5(1), 76–120. Ferri, P. (2007). Loops learning and the Phillips curve. In N. Acocella & R. Leoni (Eds.), Social pacts, employment and growth (pp. 175–194). Heidelberg: Physica-Verlag. Filosa, R., & Servizio studi della Banca d’Italia. (1971). L’andamento delle forze di lavoro in Italia: analisi teorica e verifica empirica. In Contributi alla ricerca economica (Vol. 1, pp. 111–154). Roma: Banca d’Italia. Fiorito, R. (1985). Il contributo di Ezio Tarantelli agli studi di economia del lavoro. Rivista internazionale di scienze sociali, 93(3–4), 494–519. Ghezzi, S. (1986). Mercato duale e mobilita` del lavoro: un’applicazione del modello ModiglianiTarantelli. Economia e Lavoro, 20(3), 21–37. Hall, R. (1970). Why is the unemployment rate so high at full employment. Brookings papers on economic activity 1(3), (pp. 369–402). Hall, R. (1972). Turnover in the labour force. Brookings papers on economic activity 3(3), (pp. 709–764). Holt, C. (1970). Job search, Phillips wage relation and union influence. In E. S. Phelps (Ed.), Microeconomic foundations of employment and inflation theory (pp. 53–123). New York: Norton. Holt, C. (1971). The unemployment-inflation dilemma: A manpower solution. Washington, DC: Urban Institute. Mortensen, D. T. (1970). A theory of wage and employment dynamics. In E. S. Phelps (Ed.), Microeconomic foundations of employment and inflation theory (pp. 167–211). New York: Norton. Phelps, E. S. (Ed.). (1970). Microeconomic foundations of employment and inflation theory. New York: Norton. Phillips, A. W. (1958). The Relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economica, 25(4), 283–299. Pissarides, C. (2000). Equilibrium unemployment theory. Cambridge: MIT Press.

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Prosperetti, L. (1981). A Phillips curve for the Italian economy: A comment on Modigliani e Tarantelli. BNL Quarterly Review, 34(139), 447–454. Robinson, J. (1962). Essays in the theory of economic growth. London: Macmillan. Solow, R. M. (1969). Price expectations and the behaviour of the price level. Manchester: Manchester University Press. Spinelli, F., & Zis, G. (1979). The wage inflation-unemployment trade-off in Italy: A critique of Modigliani and Tarantelli. Economic Notes, 8(1), 67–80. Stigler, G. J. (1961). The economics of information. Journal of Political Economy, 69(3), 213–225. Tella, A. (1964). The relation of labour force to employment. Industrial and Labour Relations Review, 17(3), 454–469. Valcamonici, R. (1973). Modificazioni strutturali, disoccupazione ed inflazione nell’industria italiana: una analisi empirica. Note Economiche, 6(1), 71–107. Vinci, S. (1974). Il mercato del lavoro in Italia. Milano: Angeli.

Chapter 4

Post Keynesian Model and Industrial Conflict

4.1

The Reformulation in a Conflictual Scenery

What was happening, indeed, seemed to question the validity of Tarantelli’s conclusions, thus enhancing monetarist thesis. From the second half of the 1960s, the contemporaneous presence of a substantially growing trend of the unemployment rate, even if in presence of inflation, seemed able to invalidate Phillips curve’s indications. A higher level of inflation, as Friedman himself claimed, would imply a higher number of unemployed workers.1 But what position does Tarantelli take regarding this in-existence proposition? First of all, he objects strongly to Friedman’s thesis. The empirical observation of a growing relationship between the variation rate of monetary wages and the level of unemployment rate – he asserts – does not constitute necessary and sufficient conditions to support the in-existence of Phillips curve’s thesis. [. . .] At an empirical level, – he continues – who supports the thesis of in-existence cannot invoke stagflation to reinforce their arguments more than he cannot invoke the period that precedes it, which is from the post-war period to the French May and the Italian “hot autumn”. Whoever supports the thesis of invalidation also has the burden of explaining why, even after the “hot autumn”, Phillips curve, particularly in the Italian case, still explains two years out of three: when the effective renewal dates (three-years) of employment contract did not drop.2

To strengthen his position, Tarantelli and Modigliani show that Phillips curve moved higher and its slope significantly increased. These movements began when the effective contract term of the “hot autumn” (1969–1973) came in to being.3 After the adversarial nature of that “hot autumn”, Phillips short term curve, became in place of PCa, PCb (Fig. 4.1).

1

Friedman (1962) and Friedman and Jacobson Schwartz (1963). Tarantelli (1978 [5], pp. 52–53). 3 Tarantelli (1976 [3]). 2

G. Michelagnoli, Ezio Tarantelli - Economic Theory and Industrial Relations, DOI 10.1007/978-3-642-22312-9_4, # Springer-Verlag Berlin Heidelberg 2012

59

60

4 Post Keynesian Model and Industrial Conflict

Fig. 4.1 Shifting of the Phillips curve in consequence of the “hot autumn” wage claims

PC b

PCa u

But such empirical evidence, far from indicating “death”, would have brought about, in their opinion, an extremely unfavourable trade off between inflation and unemployment. In order to demonstrate this, Tarantelli and Modigliani divided the labour market into four segments: workers without a contract, workers with an in force contract, workers with a contract that would be renegotiated in the current period and workers whose contract renewals are postponed. After this ^ ¼ a þ g1 A=u þ g2 B=u þ 1 ACCM þ segmentation, they estimate the equation: w 0 2 BCCM þ d c. Where a is the intercept of the least squares line, A represents a unitary vector for the period 1952–1969 and a void vector for the period 1970–1973, B assumes a value of zero for the first period and a unitary value for the second one and d0 c indicates the variation in the level of consumer prices. Tarantelli and Modigliani assume the variable CCM, which represents the quota of workers whose contract is expiring for which the expiry date is not postponed as an indicator of the unions contractual force. The coefficient of wage reactions to the variation of the consumer price index esteemed by Tarantelli and Modigliani assumes values lower than the unit. Such empirical evidence allows them to reject the hypothesis of rational expectations. As regards the assumption of CCM as a unions bargaining power index, two points can be considered worthy of attention. First of all, having assumed a union force index of this type, it can be considered by Tarantelli, a signal of progressive refinement of the econometric model; this allows him to obtain a better adaptation to the data. If in a first study, Tarantelli uses a dummy variable to take into account the political residue of wage push actions, later he and Modigliani suggest referring to the quota of workers subjected to a contract renewal.4 It is only in Market forces,

4

Tarantelli (1971 [1]) and Tarantelli, (1972 [1]).

4.1 The Reformulation in a Conflictual Scenery

61

union actions and the curve of Phillips in Italy, that we can find the quota of workers whose contracts are running out and for whom the expiry date is not postponed, as an indicator of union strength. It is also useful to remember, and now we will look at the second aspect, that amongst the economists, in that period, there was not a unanimous agreement regarding this. Particularly significant is the case of Sylos Labini, who proposed to use the number of hours lost because of strikes as an indicator of union strength and, more generally, as an indicator of the level of conflict within the relational system.5 Modigliani and Tarantelli, however, underlined that such a modus operandi could have determined results not wholly satisfactory. On one hand, because the number of hours lost because of strikes could have also been considered an index of the capacity of firms to resist union claims through lock out. On the other hand, because a pronounced statistic collinearity between this indicator and the unemployment rate emerged, that would have made the econometric procedure even more labourious.6 On a theoretical level, Tarantelli’s motivation through which he rejects Friedman’s propositions becomes more articulated. Supposing a world in which – he explains – the economic structure contemplates a Phillips curve, if unions ask and obtains a wage increase higher than the one allowed by the market forces (Phillips curve) and if, in reply to the price push, policy makers aim at deflation and manage to achieve it, it is perfectly possible to observe an increasing relation (stagflation), rather than a decreasing one, between the inflation rate (and monetary wage increase rate) and the unemployment level; even though, in absence of the unions’ action and of deflationistic economic policies, the structural market relation remains decreasing.7

If faced with a wage claim, policy makers could have practised restrictive policies to maintain monetary stability, where the effectiveness of the deflationary action could be assumed as a decreasing function of the initial wage push. In such a situation, an increase in the unemployment rate, even in the presence of a wage push, could have been shown. If the wage push had exceeded certain limits, price levels could have grown indefinitely. But even such empirical evidence should not have been considered a necessary and sufficient condition to accept the in-existence proposition. It can be useful to examine the main points which Tarantelli uses to support his thesis.8 Remembering from the preceding chapter the expression (3.22), it is possible to observe that the rate of wage variations can be written like this: ^ ¼ wes þ wen w

5

(4.1)

Sylos Labini (1970). Tarantelli (1976 [3], p. 416). 7 Modigliani-Tarantelli (1976 [3], p. 416). 8 Tarantelli (1978 [5], pp. 159–163). An analogous demonstration, but at a deeper level of formalization can be found in Tarantelli (1974 [2], pp. 92–104). Tarantelli also analyzes the case of an open system. Compare Tarantelli (1978 [5], pp. 162–163). 6

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4 Post Keynesian Model and Industrial Conflict

where wes represents the wage push due to an external shock and wen the one due to internal forces such as wage claims. We hypothesize for the second addend an expectations-augmented Phillips relation, with c as coefficient of adaptation of nominal wages to price variations: b wen ¼ a þ þ cp0 u

(4.2)

Substituting (4.2) in (4.1) and the expression obtained in (3.22), (4.3) can be obtained: p0 ¼

ða þ b=u þ wes  pÞ with g ¼ ð1  cÞ g

(4.3)

Tarantelli now observes that the value of c which he obtained from (0.8) is not compatible with Friedman’s hypothesis of rational expectations, comparable to the case of a unitary coefficient.9 As Tarantelli underlines, in the case of the unification of the sliding scale to the superior unique point, (4.3) becomes indeterminate and the inflation spiral becomes dynamically unstable. He explains that this should be considered the unique eventuality in which the thesis of in-existence of Phillips curve in the long term could be verified, as trade offs between relevant variables did not exist anymore. In every other case, Phillips curve could have still been considered a valid interpretative instrument. Rejecting it would have prevented, on one hand, from attributing to the economic deflation policies the effects of inversion in answer to the price pushes originating from industrial conflict. On the other hand, it would have favoured the optical illusion of who still believed that more refined economic analysis instruments [essentially those of monetarist matrix] could explain an inflation whose origins were to be researched in the reasons at the base of industrial conflict and in the exogenous increase in the price of petroleum.10

4.2

Indefiniteness of the Post Keynesian Model

It can be useful to concentrate, from now on, on those which Tarantelli recognized as harmful effects of the industrial conflict on the distributive level. On one hand, he seemed to be persuaded that, in a conflictual context the policy indications obtainable from the Post Keynesian model, resulted indeterminate. The breakdown of the western system of industrial relations – he affirms – [. . .] [shows] that the solutions of equilibrium of the dominant block – the [Post] Keynesian model – [result] indeterminate until the system of industrial relations subordinated to it is not determinate.11

9

Tarantelli (1972 [1]). Tarantelli (1978 [5], p. 57). 11 Tarantelli (1978 [5], p. 51). 10

4.2 Indefiniteness of the Post Keynesian Model

63

On the other hand, because of this indeterminateness, he was convinced that the dominant block could not be considered able to “supply a reference frame for the action [different to] that of deflation, which found its fundamental instrument in controlling the monetary base of the monetarist school”.12 Let us formulate, with Tarantelli, the stylized model of a closed economy, with the aim of focusing opportunely on these problems. Y ¼CþI

(4.4)

C ¼ aw W þ ap P ¼ aw Y þ ðap  aw ÞP

(4.5)

I ¼ Iðr; PÞ with Ir < 0 and Ip > 0

(4.6)

Y, C, I, r, indicate respectively: the level of income, consumer expenditure, investments in real terms and the nominal interest rate. W represents the wage fund and P ¼ ðY  WÞ what defines “other incomes”, i.e. profits, informal transfers to the unemployed and capital income for workers. aw and ap represent the marginal and average propensity to consume linked to wages and “other incomes” respectively. Tarantelli also assumes ap  aw < 0, which is translated in the short period, in agreement with the life cycle theory of consumption formulated by Modigliani, in justifying the less propensity to consume profits with their higher volatility compared to other incomes. It can in fact happen, Tarantelli explains, that a “short term income increase of a freelance (“other incomes”) tends to be used only partly for spending, because the earner tends to compensate lean years with fat years”.13 The contrary would happen, according to Tarantelli and Modigliani’s results, in the long term. In such a context, the propensity to consume profits and other incomes result higher than the wage propensity. This thesis is antithetical to Kaldor’s. In his approach, the marginal and average propensities to consume wages and wages are higher than the one credited to “other incomes”.14 Tarantelli then proceeds to a short term analysis, so that he can reach comparable results, with regards to the temporal horizon, both with the life cycle theory and with Kaldor’s propositions.

12

Tarantelli (1978 [5], p. 62). Tarantelli (1986 [1], p. 386). 14 By Tarantelli’s explicit admission, such a modus operandi represents a generalization of the consume model that emerges from the research lines of Marx. The presence, in Marx analysis, of an industrial reserve army, composed by structural unemployed, who receive “incomes from dependent and independent work for occasional remunerated jobs and from marginal activities not declared and from transfers of various nature such as family ties” legitimizes, somehow, the hypothesis of a marginal and average unitary propensity to consume for a group such as this. The extension, as it can be deduced, consists of the fact that Kaldor generalizes such an approach to the complex of workers. Tarantelli (1973 [2], p. 816). 13

64

4 Post Keynesian Model and Industrial Conflict

Substituting the last two equations in the first one, totally differentiating and supposing dr ¼ 0 the resulting expression is15:   ðap  aw Þ þ @I=@P dY=dP ¼ ð1  aw Þ

(4.7)

This expression has generally an uncertain sign because it is dependent on the numerator’s sign. When cost-push inflation occurs, in fact, as prices are not able to keep up with their variations, the aggregate demand’s response to decreasing profits, will be positive if the increase of the propensity to consume for the system as a whole, ðap  aw Þ, more than compensates the decrease in the investment propensity @I=@P. On the contrary, if the latter is bigger than the former, a decrease of the aggregate demand can be observed. On this base, Tarantelli concludes The traditional IS curve assumes a third dimension, not crushed anymore on the plan (Y, r), but on a plan that adds to these two variables the dimension “profits”(or “wages”), whose variations reflect more directly the object of the cyclic effects of the class conflict. But on this third and politically more relevant dimension, the traditional uniqueness of the solutions of equilibrium of the curve IS-LM, fails. The Post Keynesian model provides for a paradigm of theoretical reference, but its solution is indeterminate. Unless the quantities relative to the model’s parameters are not specified, they are uncertain in conflictual situations.16

To such an uncertainty, Tarantelli responded, on a theoretical level, by formulating a neoresidual distributive model where an active role in determining the distributive quotas was recognized for the players of the industrial relations’ system. On an economic policy level, instead, he proposed carrying out neocorporatist policies. Before reaching the formulation of the neoresidual model, anyway, Tarantelli highlighted the opportunity of rejecting Kaldor’s scheme. According to Kaldor, as it is known, wage earners save a less proportional part of their income compared to entrepreneurs; therefore there exists a unique level of profits able to finance full employment investments. In this hypothesis, the quota of profits would not depend on the bargaining power of the two classes, but on the volume of savings necessary to finance them. This is the reason why Tarantelli argues that, in Kaldor’s approach, no role for the working class or their representatives is specified. The distributive quotas are determinable only on the base of strictly economic parameters: the natural rate of development and the propensity to consume of the two classes. Kaldor’s propositions, according to Tarantelli, would not adapt well to the Italian context, because no empirical

The traditional IS curve can be obtained through an analogous procedure supposing dP ¼ 0. In such a case, it can be obtained: dY/dr ¼ ∂I/∂r/ (1 – aw). Also regarding this expression, it is possible to observe that it results indeterminate, being ∂I/∂r < 0 as a hypothesis, but also being: 0 < aw < 1. 16 Tarantelli (1978 [5], p. 171). An analogous demonstration can be found in Tarantelli (1986 [1], pp. 386–389) and Tarantelli (1974 [2], pp. 95–104). 15

4.2 Indefiniteness of the Post Keynesian Model

65

evidence capable of supporting their validity would emerge.17 In other words, the parable of the two classes would not be applicable in Italy, the two classes being the class of “opulent capitalists”, who are able to save a good part of their earnings, and the class of wage earners, who spend almost their whole income. From the econometric point of view, the argument thanks to which Tarantelli was able to reject Kaldor’s conclusions consisted in having obtained, in the estimation of the aggregate consumption function, a coefficient of the variable of the expected profits not only bigger than the coefficient of the expected wage, but also bigger than one. This empirical result was accompanied by a more relevant theoretical subject. In fact, the above mentioned Kaldorian parable could not be applied, so to take into account the trend of consumer spending. This is the reason why Tarantelli involves the life cycle theory of consumption.18 In this model – Tarantelli asserts – every typical family receives income from work and capital income, at least during a certain phase of their life cycle, and we can expect that the family reacts [concerning consumer expenses] in a different way in respect to the two sources of income.19

These were the fundamental theories on the base of which a value of the expected profits coefficient exceeding the unit could be acknowledged. According to this approach, the consumption of a representative family reflected the attempt to reach their favourite resources allocation during their life cycle. At every given age, the resources are made up of earned income, the present value of expected earned income and the market value of the accumulated capital. Given the available resources, all the possible alternative ways of consumption depend on the rate of return of patrimonial assets. Introducing some further specifications about the nature of the utility function and hypothesizing the stability of tastes and of the relative distribution of income according to age, Modigliani introduces a linear function of aggregate consumption using, as arguments, the current and expected income and the net wealth.20

17

It is also useful to take into account that Tarantelli’s analysis of the labour market tends to collocate at a methodological level on a different plan compared to the approach of partial equilibrium, widely adopted in the seventies. It is not about individualizing a wage and an employment level able to lead to a market clearing regardless of distributive mechanism and more generally regardless of the level of activity in the system. On the contrary, Tarantelli proposes to investigate the labour market’s structure in conjunction with the quantities relevant to the goods market and to distributive aspects. Fiorito (1985, p. 498). As regards the partial equilibrium approach see Lucas and Rapping (1969) and Black and Kelejian (1970). 18 It is Tarantelli himself who proposes, in some contributions, a close examination of the consumption theories in the history of economic analysis. Compare Tarantelli (1973 [2]) and Tarantelli (1979 [4]), Tarantelli (1979 [5]) and Tarantelli (1979 [6]). 19 Tarantelli (1979 [4], p. 863). For an indepth examination of the construction of the regression function and of the econometric method compare Tarantelli (1974 [3] 841–862). 20 The main assumption adopted by Modigliani is that the favourite allocation during our lives, is independent by the volume of available resources. If an individual finds himself a beneficiary of

66

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4 Post Keynesian Model and Industrial Conflict

A Neoresidual Distributive Model

Now let us demonstrate the distributive model elaborated by Tarantelli. Its reformulation can be interpreted as an extension and an indepth examination of the residual Sraffian model regarding the case of a non homogenous labour force.21 In Sraffa’s approach, as is well known, the quota of social product of which the entrepreneurs take into possession does not mirror the contribution to production, but has a residual nature. This means that the profit rate depends inversely on the bargaining power which is available to the workers, i.e. the higher the wage rate, the more contained the level of profit margin.22 The same happens in the neoresidual model proposed by Tarantelli to generalize the Sraffian approach to a non homogenous labour force and to take into account the role of policy makers in determining the distributive quotas. The model of two commodities and two sectors proposed by Sraffa can be represented, as usual, through the following equations: ðb1 þ w1 l1 Þð1 þ rÞ ¼ p1

(4.8)

ðb2 þ w2 l2 Þð1 þ rÞ ¼ p2

(4.9)

where b1, b2, l1 and l2 indicate, respectively, the inputs of the only basic commodity and the quantity of labour which intervenes in the production of the two commodities. Equation 4.8 represents the production price of the basic commodity, while Eq. 4.9 expresses the price of the consumer goods. Using as numerary commodity one, with p = p2/p1 it can be obtained: ðb1 þ w1 l1 Þð1 þ rÞ ¼ 1

(4.10)

ðb2 þ w2 l2 Þð1 þ rÞ ¼ p

(4.11)

additional resources, he distributes them, in every successive period, in the same proportion in which he allocated the resources previously. 21 Tarantelli offered a first formulation of the distributive theory which here we examine in (Tarantelli 1979 [13]). Then he would have done an indepth examination, as shown in Tarantelli (1986 [1], pp. 405–447). 22 In regard to this, Tarantelli’s words appear significant “The most widely accepted theory of distribution of income, at least in Italy, – he affirms – is without doubt Sraffa’s. This theory affirms that for a technology inherited from the past, the profit rate can be obtained only once that we have the wage rate or vice-versa [. . .]. This theory has constituted a free way for all those economists that believe, and I think they are right, that the distribution of income between wages and profits is a question of relative power between the two (and more) income classes and not a variable only determinable on the basis of technology”. Tarantelli (1979 [4], p. 863).

4.3 A Neoresidual Distributive Model

67

It can be now noted that (4.10) and (4.11) make up a model which determines the equilibrium values of the profit rate and of the price level, respectively p* and r*, once that w1 and w2 are assumed as external, as suggested by Sraffa.23 Tarantelli warns that this approach must not be considered legitimate in the presence of a non homogenous labour force, which perceives different rates of wage. Our re-interpretation of Saffra’s model implies that any wage framework, initially given, can result unfeasible because of the role played by the waste coefficients, transfer wages [and] barriers to entry, that in our matrix are representable as “zeros of segmentation”.24

Let us introduce, with regards to a system where the sectors I and j exist, the following wage matrix. Worker i Worker j

Employment i wii wji

Employment j wij wjj

With regards to this matrix, we define transfer wage as every wage rate situated outside the main diagonal and waste coefficient as the difference between every element of the matrix and every wage rate referring to a same line. We assume, in fact, that the elements of the main diagonal represent the wages of specialized workers. Given any previous wage framework, Tarantelli shows us, it is possible to observe even a substantial modification when the competitive process between wages makes variations in them beyond the limits of determined “wage intervals”. The new wage framework can be substituted in Sraffa’s equations to determinate the new price levels and the new profit rate compatible with it. Given the waste coefficients, we can therefore calculate the new transfer wages. When this process is finished, it will be possible to obtain a different wage framework which will depend on the inherited one and on the competitive tendencies amongst the various sectors. As we have just mentioned, the wage framework represented in the neoresidual model, cannot be considered completely external. In particular, explains Tarantelli, the level of externality allowed by the model is limited in the sphere of determined wage intervals. These are determined by the fact that an external variation (l) of any element of the main diagonal implies that, given the waste coefficients for the various occupations, we obtain a corresponding increase in the transfer wages in all the other kinds of work in the considered employment. This can be translated with regards to every line lwii > maxwij This is because, in a contrary situation, any worker tends to move to j-th employment upsetting the initial situation. Analogously, considering the j-th line, we obtain the condition:

23

Tarantelli demonstrates also that once we have assumed such quantities externally the transfer wages result internal to the model. 24 Tarantelli (1986 [1], p. 430).

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lwji < minwjj In fact, in the opposite case, an increase in wji would make any worker move to employment i-th. Combining the two conditions, it can be therefore obtained: maxwij =wii < l < minwjj =wji The previously introduced element l gives us the measurement of the maximum level of the external variation wage allowed so that the wage framework as a whole does not change because of the increasing or the lowering of competitive pressures. These are the reasons why Tarantelli concludes given any equilibrium of our wage matrix, a precise interval exists in which every wage rate can vary externally. But outside that interval, the wage equilibrium framework is completely internal in the neoresidual model. Given the barriers to entry and the waste coefficients, it depends on the labour market, that is our competitive process (upturn or downturn). In conclusion, the neoresidual theory of income distribution explicitly recognizes an active role of regulation to the main players of an industrial relations system.25

If until now we have concentrated on the determination of the wage framework according to the neoresidual approach; we now need to analyze with Tarantelli the implications on the profit rate. In general terms, it is possible to observe that, according to Tarantelli’s approach, if the average wage increases, the profit rate shows a downturn tendency. There will be a level that Tarantelli proposes to determine, under which it cannot attest without invalidating the employment level. Let us now express I, the investment expenditure, in the following way: I ¼ aP þ D

(4.12)

With P as the volume of total profits, D as total leverage of firms and a as selffinancing rate, that is profits which are not distributed. Relativizing in regard to the volume of invested capital to derive the expression of the profit rate r (P/K), we obtain:   P I D 1 r¼ ¼  (4.13) K K K a Tarantelli then assumes that the system grows at a natural rate, g, as in the Harrod-Domar approach. In equilibrium, the growth rate of capital must equalize the growth rate of the economic system:   D 1 (4.14) r ¼ g K a

25

Tarantelli (1986 [1], p. 434).

4.4 The Theory of Conflict

69

Equation 4.14 represents a system potentially able to accumulate capital at any rate g for different values of a, D/K and r. So there exists a limit under which the profit rate cannot fall: given D/K, he observes that we obtain a single value of r which allows full employment at a natural growth rate. Obtaining higher wages through negotiations, the unions can push r below that value, being the values of D/K and a in the best of cases, characterised by limited degrees of freedom; and in the worst case they are given and constant.26 Limits can in fact emerge, identified by Tarantelli in the framework of the financial system and in the usual procedure in earnings distribution, that slow down the growth of D/K and a in the long term. The possibility of regulation of wage share in regard to the profits – he concludes –, depends on the possibility that the union [. . .] has to influence, in the long term, institutional mechanisms which guarantee the umbilical cord between formation centres of savings and investments. If the real wage goes beyond the recycling possibilities consented by this “umbilical cord”, the investment falls below the development rate of full employment g. Consequently sooner or later employment has to fall.27

4.4

The Theory of Conflict

In the previous paragraphs, we examined the indeterminateness which Tarantelli retained to invalidate the Post Keynesian model in a conflictual scenery. He intended to answer such an indeterminateness both on a theoretical and on a policy plan through the neocorporatism. Without anticipating considerations which will become clearer afterwards, it is enough to say that Tarantelli felt the necessity to channel industrial relations towards a “neocorporative filter”.28

26

Tarantelli offers an alternative formulation to the model presented here, starting from the expression of the balanced growth rate, g, in the Harrod-Domar’s meaning. He expresses, in particular, g ¼ (aP + D) / K ¼ aY/K (m – 1)/m + D/K ¼ I/K. Where m is a measure of the inverse of the wage share and (m – 1)/m ¼ P/Y represent the share of profits. We can observe that, given the leverage (D/K) and the parameter a, the mark-up m results univocally determined by the growth rate g. Tarantelli (1978 [5], pp. 155–156). According to this approach, as in the one above we have examined, Tarantelli admits that he substitutes in the expression of the growth rate of equilibrium the Kaldorian assumption “of two given different marginal propensities (and average) to consume for the two income classes (wages and profits) with that of a and D/K, they are also given and constant (but non immutable)”. Tarantelli (1978 [5], p. 156). As regards the notion of m as the inverse of the wage share, corrected to take into account the variations in the composition of the employed labour force, distinguishing the share of wage and wage earners (LD) on the total of the employed (L), we can show, with Tarantelli, that we obtain w/p ¼ (W/LD)/(LD/L). Remembering the full cost principle: p ¼ m(w/p) and resolving for m, we immediately obtain that m ¼ pp/w. Compare Tarantelli (1974, p. 58n). Regarding the hypothesis of limited variability of the values of D/K and a, it is interesting to observe how Tarantelli accepts the conclusions reached in Modigliani-Miller (1961). 27 Tarantelli (1986, pp. 436–437). 28 Tarantelli’s analysis of neocorporatism is assigned to some essays such as Tarantelli (1984 [12]), Tarantelli (1986 [1]), Tarantelli (1986 [2]), Tarantelli (1986 [3]), Tarantelli (1986 [4]),

70

4 Post Keynesian Model and Industrial Conflict [Such a tool, he affirmed, would have shown itself] capable of eliminating or, at least, attenuating the economic effects of a wage push that can implicate the indeterminateness of the Post Keynesian model, as regards the trade off between inflation and unemployment, and the relation between income and distributive quotas. [. . .] These two effects can be seen as an application of a more fundamental afterthought of the traditional Keynesian paradigm, that is at the basis of the neocorporatism economics.29

Before concentrating on Tarantelli’s neocorporatism theory, it is necessary, however, to illustrate the conflict theory proposed by him. His analysis begins with the notion of an industrial relations system as “a system of rules, of remuneration rules, of behaviour, of procedure, demanded and offered”.30 Referring to events capable of determining modifications to the relational system, he suggests distinguishing the strictly economic ones, the “primary effects”, from those that primarily affect the relation system, the “secondary effects”. The latter, in Tarantelli’s opinion, should be considered more harmful because they are able to determine a disaggregation of the social framework.31 In this system, – he explains – a group of demanded and offered rules which are interdependent, the main principle of an industrial relations system is that the secondary effects of certain modifications of the system’s rules can be a lot more important than the primary effects of the same modifications.32

The break-up of the social framework which emerged at the end of the 1960s can be interpreted, according to Tarantelli, as due to the systematic difference between rules demanded by the trade union and the base (represented by the labour force), on one hand, and the rules offered by the State (dominant block) on the other hand. These are rules that can be measured in terms of current and expected wage and also

Tarantelli (1988 [1]), and also to an extensive monograph published posthumous in the eighth series, sixth section of the “Biblioteca dell’economista” (Economist’s Library), directed by Federico Caffe`, Siro Lombardini and Paolo Sylos Labini. Tarantelli (1986 [1]). The term “neocorporatism” is mentioned in place of “neocorporativism”. Tarantelli’s option for the former (neocorporatism) is to be traced to a suggestion from Caffe` during the first episode of the radio broadcast Il mondo dell’economia. Tarantelli invited Caffe` to express his opinion about the feasibility and the possible efficacy of “neocorporativism” in Italy. Caffe` replied: “I would have preferred to have spoken about “neocorporatism” in order to avoid a word which to me isn’t very nice having lived through that time”. The original interview is registered on DVD n. 1 enclosed to Amari and Rocchi (2007). 29 Tarantelli (1984 [12], p. 735). 30 Tarantelli (1978 [5], p. 38). 31 It is Tarantelli himself who offers an exemplification of events able to generate secondary effects. He argues that “the discharge of a high ranking civil servant with a “gold pension”, the verification of consistent tax evasion, the coming into effect of a law concerning seniority of state servicemen [. . .] could, of course, cause economic consequences, even of a certain relevance, but they would contribute even more (and this is what is worse) to make the absence of “right” rules of the relational system emerge”. Compare Tarantelli (1978 [5], p. 38) and Tarantelli (1976 [1], p. 89). 32 Tarantelli (1978 [5], p. 38).

4.4 The Theory of Conflict

71

in terms of social reforms and offer of public services.33 In Tarantelli’s opinion, this mismatch should be considered the last cause of the trade union’s intervention as proponent, to the dominant block, of the motions expressed by labour force. It is here that we can find the “conflictual triangulation” of the Post Keynesian paradigm, which the trade union initiated, making use of its main instrument, “the weapon of labour cost”.34 On the political level, through higher monetary wages, the trade union proposed to “get rid of the system on an economic level because of the signals of demand which the dominant block did not acknowledge”.35 From this point of view, the last objective became the modification of the repartition of power at a system level, until reaching, if possible, the “substitution of the dominant block”.36 On an economic level, in the case of higher monetary wages appearing, Tarantelli continues, the trade union would have obtained a short term redistribution in favour of monetary wages, whose result on the level of aggregate demand, would have however resulted indeterminate. At the same time, Tarantelli underlined the undesirable social outcome of the economic policies which the state of art made available to policy makers to face such a wage push.37 In this case, firms would have had the possibility to charge the prices

33

As regards the wage expectations, Tarantelli proposed to distinguish a variable dependent wage, conceived as “labour cost after productivity variations”, from a variable independent wage. Where it indicated the disposable labour income, that is the labour cost after the various types of tax distinguished by income classes and before the transfers of families of workers plus public expenses and investments which are also distinguished by destination to the different levels of income and social classes”. The “independency” of the wage came from “the difference between the social-political demand of the workers [. . .] and the total lack of the social-political reply to those same needs by the side of the social and political groups which have managed Italian politics since the war”. Tarantelli (1978 [9], pp. 8 and 9). On the other hand, he observed, “if we build schools, hospitals or council houses with the major income which could come from an attack on fiscal evasion, if we re-qualify the composition of public expense and reduce waste, the workers available wage rises to the same level as the cost associated to the wage given by firms”. The delay “with which the contractual platforms found it hard to articulate themselves in a picture of credible compensation to be thrown on the negotiation table” was due to the lack of perception of a similar qualification. Tarantelli (1978 [1], p. 98). 34 Tarantelli (1978 [5], pp. 133–134). 35 Tarantelli (1978 [5], p. 67). 36 Tarantelli (1978 [5], p. 134). 37 Modigliani and Tarantelli, analyzing the dynamics of aggregate expenses in Italy in the period 1951–1971, concluded that, in the long term, a redistribution of income in favour of workers, even if it had not been welcomed favourably by businessmen, could have favoured the accumulation instead of being against it. “A suggestive implication of this conclusion – they write – should be that of alleviating the schizophrenia of many economists and other social science scholars who in the past were tormented between the support of the redistribution of income in favour of workers for equity reasons and the reluctant acceptance of a redistribution in favour of profits, with the justification that it would have provoked an increase in savings and the formation of capital and therefore of the potential economic rate development. Our verifications suggest that a simple redistribution of a set income in favour of profits would increase savings only in the short term, while it would provoke a decrease in the long term [. . .]. Also, a reduction in return rate or the profit rate, deriving from a lower productivity of capital or from fiscal impositions on capital income, can also increase savings, even if inference is not certain”. Tarantelli (1974 [3], p. 862).

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with the higher costs. From this, would come an inflationary spiral wages-prices that would have been faced, at first, through repeated devaluations of the exchange rate. Successively, in the absence of alternative means, policy makers would have turned themselves to restrictive monetary policies, whose carrying out, in countries such as Italy, seemed necessary also to face the surplus of OPEC countries.38 [Beside] this crisis, which started with the “French May” and continued with the “hot Italian autumn” and then continued with the strikes in 1969 and 1970, – Tarantelli explains – [. . .] there was also the petrol crisis which came about by a different attitude from some underdeveloped countries when exchanging their petroleum with goods from industrialized countries. A political change was determined by a group of countries up till then taken advantage of, and which then were able to form a cartel imposing “sheik tax”.39

Because of this, the shortcomings of a dominant block, not only on the reform level, would have emerged, and also on the strictly political-economic level. In a background without pressure or constraints, the dominant block could have reestablished the consent (or even better, as Tarantelli suggests, the latent conflict) amplifying the basis of public intervention in economics.40 But this could not have happened, neither against a trade union that uses labour cost as an instrument of pressure, nor against the renewed self importance of the OPEC countries. In a background like this, stagflation, whose origin was attributed by Tarantelli mainly to an inversion of the Phillips curve, would have found fertile ground. This inversion, due to the indeterminateness of the Post Keynesian paradigm, gave rise to a “boomerang curve” able to fall on the shoulders of the labour force. In a presence of cost inflation faced through a policy of monetary stability, it would have been possible to observe an increase of unemployment beside an increase in the prices level, contrary to the indications of Phillips. The conflictual triangulation of industrial relations, even if conceived as an expression of reform and renovation motions, would have been against general interest (Fig. 4.2).41

4.5

The Generation Leap Hypothesis

Having clarified the genesis of the conflict as generated by a substantial discrepancy between demand and offer of social-political rules, Tarantelli goes on to take into account the substantial contemporaneity of the industrial conflict in the main

38

Tarantelli (1978 [4]). Tarantelli (1984 [12], p. 738). 40 Accornero (1978, pp. 39–41). 41 Compare Tarantelli (1974 [2], pp. 190–193), Tarantelli (1977 [1], pp. 103–104), Tarantelli (1978 [5], pp. 52–54) and Tarantelli (1984 [2], pp. 729–733). Fig. 4.2 represents the outline which the author made, inspired by Dunlop’s taxonomy classification. See Tarantelli (1978 [5], p. 66), Tarantelli (1986 [1], p. 38) and Dunlop (1958). The graphical difference between the two arrows aims at underlining the spread between demanded and offered rules, that is the determining element of the conflictual triangulation of the system of industrial relations. 39

4.5 The Generation Leap Hypothesis

Management of the conflict

73

Government (dominant block)

Rules offered

Rules demanded

Economy (production relations)

Trade union/ Workers Conflict triangulation

Fig. 4.2 The conflictual paradigm

industrialized countries.42 In his opinion, it would have been determined by the contextual re-pouring, at the end of the 1960s on different domestic work markets, of an abundant scholarly labour force flow, equipped with qualifications to enter the best posts against a limited amount of these same posts and non competitive selective mechanisms.43 In this set up, it was easy to see the reflections of the approach suggested by Doeringer and Piore in the structural analysis of the labour market.44 They proposed

42

For an indepth examination of the conflict theory proposed by Tarantelli and the analysis it unleashed see Baglioni (1985). 43 In the school boom thesis, a determinant role is also played by the demographic element, that is the determining in the first years of the 1950s of a substantial increase in births. The hypothesis of school boom and of the generational leap are widely discussed in Tarantelli (1980 [6]). 44 Compare Doeringer and Piore (1971). The dual labour market, suggested by Doeringer and Piore, forms an approach whose origin in the history of economic thought, can be traced back to the American institutionalism school, of which T.B. Veblen, J.R. Commons, and R.T. Ely are considered the main proponents. But mainly J.R. Commons and his pupil S. Perlman dedicated particular attention to the study of the labour market and the institutional mechanisms that ruled its working. Particularly referring to Doeringer and Piore’s analysis, it is possible to observe that the idea of internal labour market was already in some measure prefigured by Kerr (1950) through the notion of institutional labour market, i.e. a type of market where the competitive mechanisms were substituted by institutional rules. Compare also Kerr (1954). Conversely, Fisher (1951), when presenting an empirical study on the agricultural labour force in California, underlined the peculiarity of that which he defined a structureless market, listing the following five points: (1) absence of seniority rules, that is rules coded through union negotiation on the basis of which workers privileges were agreed on the base of their seniority in the business, (2) relationship of temporary and impersonal work between employer and workers, (3) absence of professional qualifications, (4) definite wages for product unit, (5) scarce capital intensive technology. In 1954, deepening his studies, Kerr reached a more complete formulation of the concept of institutional labour markets. The notion of internal labour market can be traced back to Dunlop, who

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4 Post Keynesian Model and Industrial Conflict

a dual labour market theory centred on the idea of “internal labour market”. This internal labour market was defined as an administrative unit in which wage fixing, access and allocation of the labour force were regulated by institutional rules and habitual procedures which replaced the working of the market. The workers who referred to it found themselves sheltered from those competitive mechanisms which were operating in the “external market”, without entry barriers and on which pays and mobility were determined on the basis of convenience calculations. The characterizing element of the internal markets was the rigidity of procedures and habits inherited from the past, which regulated every aspect of work relations. The system of allocation, defining the possibility of careers for different types of employed, identified in an unambiguous way the mobility of workers. On the contrary, in the external market, according to Doeringer and Piore, it was not possible to register analogous ties between the different posts, moving the employed workers from one job to another in a casual manner. The decisions about wages, allocations and training of the labour force were also assumed on the basis of economic valuation.45 In order to explain the contemporaneity of conflict in different industrialized countries, Tarantelli formulated the generation leap hypothesis.46 [The contemporary emergency of the conflict] – Tarantelli explains – can be [. . .] traced back, beyond single and inescapable motivations and historical national circumstances [. . .] [to the] input on the labour market “in1968”of the “eighteen year olds” born “in 1950” who had started junior school during the school-boom in the mid fifties.47

As it has been opportunely shown, Tarantelli, at the beginning of the 1980s, was not the only one to conceive the generation leap as a provoking element of the industrial conflict. Phelps Brown also gave importance to the wage explosion, defined by him as the “hinge”, calling in cause the substantial perspective change of wage perceivers. This change was mainly triggered off by the requests of the younger workers.48 Tarantelli essentially recognized four sociological phenomenons which interested the active populations in the main industrialized countries at the beginning of

defined it as a group of rules which determined the movement of workers between internal work posts inside administrative units like businesses, society or hiring halls. Dunlop (1966, p. 32). 45 From this starting point, Doeringer an Piore widened the analysis to take into account the existence of primary and secondary labour markets. The former were defined as a plurality of internal markets and sectors of the external market in which it resulted possible to identify definite career profiles in which the use of the labour force assumes a character of stability that can be assimilated to that of the internal market. The latter were characterized both by the instability of the relation of employment and that on the duty level as regards each worker. 46 It is a theory which Tarantelli elaborated, as he warned, during the course of compared systems of industrial relations, held by him at MIT in the fall term 1979–1980. Tarantelli (1981 [18], p. 22) 47 Tarantelli (1978 [5], pp. 34–35). 48 Compare Phelps Brown (1983). Acocella and Ciccarone proposed a rigorous formal analysis of the theoretical hypothesis beneath some of Tarantelli’s economic policy proposals. Compare Acocella and Ciccarone (1995).

4.5 The Generation Leap Hypothesis

75

the 1960s. These consisted of: (a) a notable increase in the education of the masses, (b) significant advances in communication technology, (c) the vast movement of people from the country to the city (consequence of the structural transformation of the productive framework), (d) the arrival of immigrants in the active populations. He then proposed to distinguish inside latter, three generational units. The first, which welcomed those born before the crisis in 1929, did not feel similar changes. The second, which he defined as intermediate, made up by those born in the years immediately following the crisis, felt only some of the changes. The third, the most numerous, composed of those born after the end of the war, felt every change. On this base, he concludes, it was possible to distinguish inside the active population two “collective brains”: the generation of 40 year olds and over, that had not participated in any of the big transformation processes of active populations and that in some countries was psychologically subdued by the great depression [and that] of 40 year olds and under who had participated fully or in a relevant part [. . .], and that did not carry the psychological stigma of the great depression.49

From what Tarantelli defined a real short circuit between the two collective brains, the contemporaneity of the conflict in the main industrialized countries would be provoked. The second collective brain which is a lot more [. . .] cultured, inherited a hierarchy formed in a period characterized by an objective scarcity of educational credentials [. . .]. It brought with it its exact opposite: a supply excess of these educational credentials on the labour market and, in general, in the active population. This excess does not justify anymore the hierarchic scale, an internal institutional control of firms and universities created in a historical moment [. . .] characterized by an opposite situation [. . .]. With this inversion, from an excess of demand to a supply excess, the educational fetish goes into crisis.50

In other words, those born at the beginning of the 1950s formed a generation no more “psychologically subdued by the great depression”, but a generation “with diplomas and degrees in terms of a status higher than the average”. But these characteristics, reasonably desirable, would have still determined the dissatisfaction, or even frustration, when those pieces of paper, once obtained, would have demonstrated themselves averagely so abundant to allow, for most of them, only a job associated with jobs inferior to their status, even when not considered without sense, alienated, degrading or producing as an alternative the “car park” of intellectual unemployment.51

On one hand, the after war school boom, had greatly contributed to raise the average level of education, contrasting with a widely diffused illiteracy. On the other hand, it had determined a real inflation of qualifications necessary to enter better paid jobs, thus reducing these qualifications to “pieces of paper”.

49

Tarantelli (1980 [6], pp. 663–664). Tarantelli (1980 [6], pp. 666–667). 51 Tarantelli (1978 [5], p. 36). 50

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In Tarantelli’s opinion, the consequence of this phenomenon was that the young, at the end of the 1960s, had the same requirements that about 20 years before allowed the entrance to the more desirable jobs. They found themselves, in the condition of, at the most, aspiring to posts of inferior status, if not even in that of intellectual unemployed. This also thanks to the limited number of jobs and the non competitive mechanisms of admission. The reserve price of this labour force, the minimum wage they would have accepted to be employed, reveals Tarantelli, was to be considered nearer to the remuneration of the employed in the most desired jobs instead of those that characterized the lower level jobs. This is the reason why, he concluded, it was correct to hypothesize a direct proportionality between the dimension of the intellectual unemployed stock and the spread between remunerations offered by the two different types of labour markets. As the “reserve price” [. . .] of these parts of work – Tarantelli stated – was nearer to the privileged zones of the labour market than to the wages associated to posts with an inferior status [. . .], the part in intellectual unemployment was (presumably) a growing function in the various countries even of the width of this gap between maximum and minimum wages points. The width of this gap made the consent in a system of industrial relations, like the Italian one, which was characterized by higher disproportions, more precarious.52

4.6

The Debate on the Conflict Theory

The conflict theory proposed by Tarantelli, along with the explanation of its contemporaneity in the main industrialized countries, represented one amongst the various positions expressed by economists, in some cases very heterogeneous. In particular, he compared his generation leap hypothesis with Parkin and Zis’ monetarist approach, with Perry and Soskice’s conclusions, with the Fua`’s “correct wage relativity” and with the e´lite paradigm formulated by Kerr, Dunlop, Harbyson and Meyer (KDHM). As well known, Monetarists connected the birth and the contemporaneity of the industrial conflict to the growing deficit of the American balance of payment, determined as an effect of the Vietnam war, and to the associated mismanagement of the aggregate demand. That is, if the inflation rate exceeds what is expected, for every nominal wage level established in previous contracts an erosion of the real wage, i.e. of the purchasing power of the workers, will occur. From here the industrial conflict would arise. According to the Monetarists, it can be interpreted as a consequence of inflation rather than being interpreted as a cause of the latter.53 The monetarist approach, explains Tarantelli, is able to take into account the similarity of the inflation rates observed in various countries in the second half of the 1960s as consequence, in a regime of fixed rates, of the rate of expansion of the

52 53

Tarantelli (1978 [5], p. 36). Nordhaus (1972) and Parkin and Zis (1976).

4.6 The Debate on the Conflict Theory

77

dollars supply. But it is also able to take into account a bigger difference of the above registered in 1972, when the fixed rates regime was substituted by fluctuating rates. This monocausal interpretation of the industrial conflict – Tarantelli reveals – is, on the other hand, unacceptable in many countries – including Italy – where the acceleration of the inflation rate [. . .] came about above all as a consequence and certainly not as a cause of the industrial conflict [. . .]. The United States in particular began to show big deficits in the balance of payments only from 1970, while the conflict in France (May ‘68), in Italy (Autumn ‘69) and in Germany (September ‘69) started before that date.54

Tarantelli, however, follows two ulterior surveys. First of all, he points out that supporting this thesis means neglecting that the war in Vietnam was mainly financed by a tax increase. On the sociological level, moreover, he criticizes the single dimension of the monetarist position, that “does not explain the rise of the strikes of the feminist movement, the blacks from the ghettos of Washington, Detroit and also Friedman’s Chicago”.55 Perry and Soskice trace back the genesis of the conflict to the flexion of the quotas of wages in Italy, France and Germany due to the recessive incomes policies and the cooptation of the trade union carried out to face the problems of external equilibrium. The overheating of the American economy starting in the second half of the 1960s, to which the monetarists gave great importance, would have, in this view, made the transfer on prices of the major costs tied to the generalization of the conflict in Europe more tolerable and less noticeable.56 Tarantelli demonstrates that Perry and Soskice, even realizing its importance, do not deepen the analysis of the gap between the political demand of the base and the rules offered by the dominant block. But they do not either identify policies suitable to face it. Yet, he continues, they get to the point when they refer to the causes of frustration of the base (decreasing of the quotas of wages, increase of work rhythms, decrease of real wages in recession) that are submitted to contemporaneity [and the genesis itself] of the industrial conflict.57

Tarantelli identified Fua` as the main interpreter of the “monotonous speech about labour cost in Italy”.58 More than at a complete analysis of the conflict’s

54

Tarantelli (1978 [5], pp. 33–34) and Tarantelli (1982 [6], pp. 78–79). Tarantelli (1980 [6], p. 658). 56 Perry (1975) and Soskice (1977). 57 Tarantelli (1978 [5], p. 33). 58 Tarantelli intended, anyway, to underline the intellectual value of Fua`’s thesis, even though keeping his distance. He affirmed “The list of who in Italy was spokesperson of the monotonous chorus on labour costs is so long and well known that it would even result boring for the reader. In this list we would risk of naming many examples of economic dilettantism along with a few scientific works. The reference to an economist such as Fua` – whose ideas despite my disapproval on this particular occasion, I have always deeply respected – is made because his work represents without any doubt the best which up to now has been empirically documented and also discussed in favour of this chorus, and because of the success a book like his has had”. Tarantelli (1978 [5], p. 68n). 55

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genesis, anyway, Fua` aimed at describing the main reasons for the decline in the official rate of economic activity in Italy at the beginning of the 1970s.59 It can be synthetically argued that he connected this decline to the ever growing irregular work phenomenon. According to Fua`, a substantial incompatibility of the labour costs level with the firms’ productivity occurred. Such an incompatibility was due to the fact that, in consequence of an imitation process, Italy tried to equip itself with a labour cost structure compatible only with productivity levels higher than the ones effectively reachable. This is the reason why, in Fua`’s opinion, the phenomenon of irregular work found fertile ground. The system of high labour costs that we want to achieve – Fua` explains – receives effective application, but only for the part of the potential labour supply that can be employed by those firms which operate at a corresponding level of productivity. As regards the remaining labour supply, there are two possibilities: giving up work, or to be content working for less remuneration, or for less developed firms. This kind of work often assumes irregular forms that avoid taxation. The latter [. . .] seems to be the prevailing result in Italy.60

The significant increase in costs, as well as the phenomenon of irregular work, would have triggered off a mechanism of wage leap-frogging inspired by the principle of correct relativity between the production sectors, as expounded by Hicks.61 Regarding these conclusions, Tarantelli put forward two critical surveys; the first was on an analytical level, the second more directly connected to the economic policy implications which resulted from Fua`s analysis. The production decentralization, occurred in consequence of the “hot autumn”, could only partly be re-connected to a labour cost problem. The decline in the rate of official activity and its reflux on the black market – Tarantelli explains – was [. . .] the direct result of the industrial conflict’s triangulation. The origin of such a triangulation cannot be traced back to a presumed demand by Italian workers asking for levels of wages which would be compatible only with [. . .] levels of productivity prevailing in countries more industrialized than ours. The break up of our industrial relations’ system [. . .] [has come] from the gap between demanded and offered rules.62

The phenomenon of irregular work takes place if certain conditions of conflict ascribable to this gap (which make it difficult, if not impossible to manage the firm) occur. The same happens even in cases in which the genesis of conflict seemed

59

Fua` (1976). Fua` (1976, p. 42). 61 Hicks affirmed “A system of wages which will satisfy all the demands for fairness that may be made upon it is quite unattainable. No system of wages, when it is called in question, will ever be found to be fair. That has always been true; how is it then that we have got on, in the past, as well as we have? Only because the wage-system has not much been called in question. That can happen; but it is necessary, for it to happen, that the system of wages should be well established, so that it has the sanction of custom. It then becomes what is expected; and (admittedly on a low level of fairness) what is expected is fair”. Hicks (1974, p. 65). 62 Tarantelli (1978 [5], p. 77). 60

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79

that it had to be attributed to a wage leap-frogging triggered off by the Veblen effect. More often than not, – Tarantelli argues – [the wage leap-frogging] resulted triggered off by the bad conscience of a Government which had made the public and half-public sectors those in which the retributive disparities were internally higher in comparison to other sectors.63

Tarantelli’s observations on the economic policy front were even more incisive. The attention focalized on the LCPU (labour costs per product unit) increases, rather than on the spread between demanded and offered rules, could lead to a reduction of real wages through deflationist policies. Interpretating the break-up of our industrial relations system as ascribable to the Veblen effect, rather than to this internal gap between demanded and offered rules, inevitably brings a therapy which is correct on an economical level (real wages reduction) – if the triple objective is (certainly desirable) that of reaching simultaneously the equilibrium of the balance of payments, an increase in employment and price stability – but also unfeasible, as the practical experience has clearly shown.64

Accepting Fua`’s thesis, would not have let him answer that unsolved social question, whose fulfilment would have warded off the repeating of conflictual dynamics, which could not be faced through a simple reduction in real wages.65 KDHM elitist paradigm represents a radically different thesis to that of Tarantelli’s. In Tarantelli’s view, the dominant e´lite did not acknowledge the requests of social reforms of the base. KDHM, on the contrary, formulated a thesis wholly concentrated on the substantial incapacity of the dominant block to acknowledge the social-political demand.66 They stated that the dominant block, i.e. the e´lite, could manage such a demand independently from the role played by unions as proponents of the base requests. KDHM proposed a distinction of five different types of e´lite: a dynastic one, one composed of intellectual revolutionaries (behind which it was not difficult to see Marxian social theories), one typically colonialist, another represented by nationalist leaders and the middle class. Even if with qualifications tied to the different national contexts, KDHM identified in the latter the social e´lite ruling the systems of industrial relations which characterized the main industrialized countries. In this set up, the main actor could not be considered the union anymore, but the ideology of the dominant e´lite. The trade union cooptation process derived directly from the maximization of the middle

63

Tarantelli (1978 [5], p. 73). Compare also Tarantelli (1976 [7]). Tarantelli (1978 [5], p. 77). 65 Although moving from analogous assumptions as those of Fua`’s, Frey reached antithetical conclusions. He suggested two kind of policies to relaunch the activity rate of the system. The first, which should be used in the short period, consisted in an increase of completely protected posts in the tertiary activity. The second, which should be used in the long period, hinged on a restructuring able to permanently widen explicit employment in the industrial sector. Frey (1978), pp. 229–233. 66 Kerr et al. (1960) and Myers et al. (1971). 64

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class’ utility function, subject to economic and political constrains. KDHM based their thesis on the econometric study carried out by Hartman and Ross, who empirically verified the withering away of the strike hypothesis, according to which the rules coded by the e´lite would have ended up being progressively accepted and shared by the union.67 Tarantelli did not take KDHM’s thesis for granted. He explicitly defined it, on the contrary, a reactionary formulation, as it “debits the gap to the incapacity of political and/or social demand to adapt to the offer of the dominant block”.68 As KDHM did, he believed, however, that the genesis of the conflict was ascribable to the spread between demanded rules by the union and those offered, even when not imposed, by the dominant block. This is the reason why he turned himself to elaborate an alternative strategy for a re-absorption of the conflict.69 In, as much as the conditions of consensus (or, better, of latent conflict) which, from the start of the fifties to the beginning of the sixties, were in many countries catalyzed by the high rate of unemployment, by national solidarity and post-war reconstruction programs were re-established, the Keynesian model would still be applicable, as it was in those years [. . .] and as it is also today in many countries were unemployment has been imposed by the necessity of re-absorbing the conflict (and by the OPEC surplus) not from the technical deficiencies of the Keynesian model.70

4.7

Neocorporatism and Centralization of Industrial Relations

In Tarantelli’s opinion, the election tool to recompose the social conflict and to reshape the system of industrial relations, is represented by neocorporatism. Tarantelli’s analysis moves from an empirical observation. Comparing the slowdown of the inflation rate registered in countries such as The United States and Canada with the results obtained in sceneries characterized by more centralized industrial relations, it emerged that the disinflation process had shown more efficiency in this second context. In a decentralized relation system, in fact, every single working team or small union aiming at obtaining a higher remuneration in relative terms, would not have had the incentive to moderate its wage claims.

67 Hartmann and Ross (1960). Tarantelli revealed that Hibbs starting from the same conditions reached an antithetical thesis on the secular decline of strikes Hibbs (1976). According to Tarantelli, the main fragile element of Hartmann and Ross’ theory is that they assumed as an index of conflict the number of hours lost by strikes relativized in regard to the number of people enrolled in the union. The trend of this index showed a significant and progressive decrease from the beginning of 1900’s to the 1950s. Hartmann and Ross ascribed such a phenomenon to a decrease in the number of hours lost by strike. In reality, explains Tarantelli, it was mainly due to the increase of enrolments in the union. Tarantelli (1986 [1], pp. 42–43). 68 Tarantelli (1978 [5], pp. 62–63). 69 Tarantelli (1978 [5], p. 62). 70 Tarantelli (1978 [5], p. 61).

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81

If anything, it would have operated as a free rider. Such a phenomenon, Tarantelli goes on, would have been of higher intensity as the starting inflation level would have been higher. In a situation of high current and expected inflation, the operators would have ended up being animated by the conviction that the price level would have remained high because of a spiral fed by continuous wage claims. In a similar scenery, they would have been perceived with less facility and the free riding could have happened without any disincentive. The opposite would have happened if the starting level of inflation had been contained. The potential free riders, in this case, would have perceived that their action could have been easily identified and limited through consequent measures.71 In a sufficiently centralized system, binding agreements reciprocally credible, between the players of the relation system could be concluded in a relatively easy way. This is because through the centralization process it was possible to minimize that uncertainty that rendered the refusal of the wage policy a dominant strategy. In particular, on the level of the efficiency of disinflation policies, Tarantelli points out the role played by the trade union and the central bank.72 A sufficiently centralized industrial relation system – he affirmed – can reduce the inflationist expectations through a combined effect of announcement of both the union and the central bank. The central bank announces a policy of monetary restriction. But the announcement on its own would not be sufficient. It becomes concrete and credible with the contemporary announcement of a moderate wage policy by the trade unions. [. . .] The monetary restriction does not pass, or does not pass only, through the labour and goods market, provoking higher unemployment. It acts only, or mainly, on the nominal quantities, that is monetary wages and prices, reducing their velocity.73

Moving from these considerations, Tarantelli theorized a decreasing relation between the poverty index proposed by Okun, resulting in the sum of the inflation and unemployment rates and the grade of neocorporatism, as shown in Fig. 4.3 To support such a proposition, he carried out a wide econometric study which involved the 16 main industrialized countries. The policy implications that Tarantelli derived consisted in the fact that to decrease Okun’s index as calculated for Italy, it was necessary to centralize the system of industrial relations. If, achieving the centralization of the relational system was impossible, a restrictive monetary policy would be the only applicable alternative. This is what the empirical evidence showed. The Neo Keynesian medicine of incomes policy – Tarantelli asserted – can be prescribed only in presence of a sufficiently high grade of neocorporatism. Here, the collective bargaining institutions are able to substitute the Walrasian auctioneer of the economic

71

Tarantelli (1986 [1], pp. 83–84) and Tarantelli (1986 [3], p. 790). De Stefanis and Rizza point out also that, to the extent that it represents the degree of social participation and consensus on income distribution and its determination, corporatism can make central bank independence epiphenomenal in determining inflation. Indeed, high social agreement can bring about both low inflation and high central bank independence. De Stefanis-Rizza (2007). 73 Tarantelli (1984 [12], pp. 727–728). 72

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Fig. 4.3 Neocorporatism and Okun’s index

Log Okun’s Index

Log NC

legend. As a consequence, the equilibrium vector of monetary wages, prices and real wages can be found more promptly. Unemployment is not anymore the indispensable instrument of stabilization. If the grade of neocorporatism is not high enough, the only administrable recipe is the Monetarist one. But it constitutes a sub optimal choice if the aim is to recover from an inflation already rooted in the expectations and/or avoiding the harmful effects of a cost push on income and employment.74

Amongst the economists who thought that these conclusions should be more deeply analyzed is Caffe`, who believed he could identify in them that what could be defined as a sort of schizophrenia. In other words, how could it be intellectually licit that an economist could pronounce himself in favour of policies of monetarist matrix in a decentralized relational context and Post Keynesian in a centralized one? This was the question that he potentially asked Tarantelli. In which measure – Caffe´ argues – can the position, in a certain way neutral, of the economist himself be Monetarist in a decentralized industrial relation system and Neo Keynesian in a centralized industrial relation system75?

Beyond Caffe´’s observations, amongst the economists there was not unanimous agreement on the opportunity of centralizing the industrial relation system, not even for jointly reaching two objectives apparently contrasting (on the basis of the indications offered by Phillips curve) such as deflation and the maintaining of a level of activity of the system. This is the case of the new classical macroeconomists and of the theorists of the rational expectations, who used Muth’s intuitions.76 According to this set up, the simple announcement of a restrictive monetary policy would have constituted a condition sufficient to reduce the inflationist expectations and consequently inflation, without having to resort to the restrictive policies announced. Regarding this, Tarantelli did not put forward any objections to the method. He just observed that if we accepted the perspective of the theorists of the rational expectations, the threat of a restrictive monetary policy by the central bank could be made more credible if announced along with a moderate wage policy by the unions.

74

Tarantelli (1986 [1], pp. 393–394). Caffe` (1990 [1986], p. 16). 76 Lucas (1973) and Muth (1961). For a survey about the school of rational expectations Visco (1985). 75

4.7 Neocorporatism and Centralization of Industrial Relations

83

Unemployment

Centralization degree

Fig. 4.4 Unemployment and centralization degree

Calmorfs and Driffil reached conclusions partially different to those of Tarantelli’s.77 As it is shown in Fig. 4.4, they concluded that satisfactory macroeconomic performances on a level of unemployment rate containment, could be achieved both by decentralized and centralized relational systems. Calmorfs and Driffil worked from two base hypotheses. The first was that the utility function of the trade union was positively linked to the employment level and to the real wage of the workers. The second was that all the workers are enrolled in the trade union and that the nominal wage is fixed externally by the trade union, while the firms determine the labour demand, based on the given wage. CalmorfsDriffil’s thesis derives from two effects generated by the wage claims. The first depends on the elasticity of labour demand to nominal wage. When it is high, a given increase of the monetary wage induces a strong reduction in labour demand by increasing the real wage. The opposite happens if there is a low level of elasticity. In the first case the wage claims are limited by the threat of unemployment. This happens when company bargaining is conducted by small trade unions. The single firm, counterpart of the bargaining can be considered as a price taker, and so it cannot modify the sale price to absorb the wage increase, but can react only on the labour demand front. On the other hand, a big trade union has as counterpart a complete industrial sector and so the wage claims do not have significant consequences on labour demand. In fact, when wage increases hit a considerable number of firms, they can deduct cost increase from the prices: the consequent general price increase maintains the competitive position of each firm unvaried. The second effect is the one identified by Tarantelli: small trade unions are not subjected to any inflationist consequence of their wage claims. This is the reason why a monetary wage increase does not imply an equivalent real wage increase.

77

Calmorfs et al. (1988).

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The big trade union, on the contrary, sees the nominal wage increase eroded by an equivalent price increase. Considering conjointly these two effects we obtain the already mentioned thesis of Calmorfs-Driffil. As we have seen, according to Tarantelli’s analysis the centralization assumed a crucial importance. What was the meaning that it had to be attributed to the term and what relation existed between it and neocorporatism? He explains that an industrial relation system is centralized “if it can transfer the place of the collective bargaining from the market to the “political arena”, that is if the industrial relation system’s structure “allows an exchange [political] between wage control and macro-goods”.78 The notion of centralization, Tarantelli notes, “is equivalent to the definition of the neo-corporatism grade”.79 This is the reason why Carniti, general secretary of CISL, suggested to use the term of “neo-contractualism”, or “decentralized contractualism”.80 Amongst social scientists who studied neocorporatism from the end of the 1970s to the beginning of the 1980s, there were not many who shared Tarantelli’s set-up. Amongst these there was who kept the analysis on a methodological level. It is the case, for example, of Schmitter, who defined neocorporatism as a tool to link the organized interests of the civil society with the decisional structures of the State in a modern configuration of interests’ representation.81 But there were also sociologists like Winkler, who conceived neocorporatism in an oligarchic way that reminded us of the KDHM elitist paradigm. In Winkler’s opinion, neocorporatism was to be understood as the cooptation of various interest groups in the decisional process of the Government and the institutionalization of their role.82 The notion of neocorporatism nearest to that of Tarantelli’s can be considered the one proposed by Lehmbruch. According to him, neocorporatism should be considered as a policies formation model in which big interests organizations cooperate together with public powers, not only in the articulation of the interests but in the implementation of policies.83 Tarantelli identified seven elements characterizing a system of centralized industrial relations and so “neocorporative”. One of the first aspects on which he focused on is the grade of neocooptation of the union representatives and the confederation of business men. It could be considered directly proportional to the ideological and political consensus within the industrial relations system.84 This dimension of neocorporatism, explained

78

Tarantelli (1981 [9], p. 193). Tarantelli (1986 [1], p. 101). 80 Carniti (1983). 81 Schmitter (1974, p. 86). 82 Winkler (1976, p. 101). 83 Lehmbruch (1977, p. 94). 84 Tarantelli (1986 [3], p. 778). 79

References

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Tarantelli, depended on the grade of union involvement in the political exchange perspective within the economic policy of the Government and the institutions. In particular, in exchange of the co-responsibility of the unions’ acceptance of a predeterminate inflation rate, the Government should have intervened in significant items of public expenditure, tributary revenues and structural reforms. Tarantelli underlined also both the importance of the centralization of collective bargaining – in particular of those contracts whose result could influence the others – and the percentage of labour force involved jointly with the possibility of applicating of the contractual clauses to the non unionized. Even in this case, the more the collective bargaining had been centralized and was possible to apply its results also to the non unionized workers, the higher grade of neocorporatism would have been. On the contrary, the contractual centralization was to be considered as a decreasing function of the length of the in-force period and of the coverage grade of the sliding scale. In a restricted period of time, let us say a year, the incoherency problem of economic or union policy would have reasonably found less space. This is the same reason why Tarantelli was also in favour of the coordination of contractual renewals. Another instrument to raise the neocorporatism grade was the possibility of implementing the conflict’s neoregulation process as regards both interest controversies (linked to renewals) and law controversies (regarding the application of signed rules in already in-force contracts). Last but not least, Tarantelli underlined the importance that a relational neocorporative system contemplated a particular indexation mechanism of wage contracts to prices. That is an indexation to a future in which all the players (the central bank, the union, the Government and firms), would have to cooperate to reduce the inflation expectations. On the contrary, if the wages had remained indexed to an inflation rate relative to a previous period, it would not have been possible to annul them in any way. In this case, the increase of prices level would have ended up feeding itself. That proposed by Tarantelli was a mechanism of indexation defined as predetermination or as inflation programming; that is in fact focused on the predetermination, carried out with consent by the social partners, of the growth rate of price levels. Once the rate of inflation objective was agreed upon, the above would have behaved consequently.

References Accornero, A. (1978). Crisi e trasformazione del blocco dominante. In A. Becchi Collida` (Ed.), Le relazioni industriali fra sviluppo e sussistenza (pp. 33–45). Milano: Angeli. Acocella, N., & Ciccarone, G. (1995). Il sindacato da Tarantelli ai modelli, microfondati: rappresentanza o ruolo istituzionale? Quaderni di economia del lavoro, 52, 235–260. Amari, G., & Rocchi, N. (Eds.). (2007). Federico Caffe`. Ediesse, Roma: Un economista per gli uomini comuni.

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Baglioni, M. (1985). Le relazioni industriali fra consenso e scambio politico. Una personale rivisitazione del lavoro di Ezio Tarantelli. Rivista internazionale di scienze sociali, 93(3–4), 361–368. Black, S., & Kelejian, H. (1970). A macro model of the US labour market. Econometrica, 38(5), 712–741. Caffe`, F. (1990 [1986]). Per una sintesi dei paradigmi economici. In N. Acocella & M. Franzini (Eds.), La solitudine del riformista (pp. 9–16). Torino: Boringhieri. Calmorfs, L., Driffil, J., Honkapohja, S., & Giavazzi, F. (1988). Bargaining structure, corporatism and macroeconomic performance. Economic Policy, 6, 14–61. Carniti, P. (1983), Le prospettive strategiche del sindacato. Conquiste del lavoro, 7th March. De Stefanis Sergio, P., & Rizza Olivella, M. (2007). Central bank independence and democracy: does corporatism matter? Rivista internazionale di scienze sociali, 115(4), 477–498. Doeringer, P., & Piore, M. (1971). Internal labour markets and manpower analysis. Lexington: Heath Lexington Books. Dunlop, J. (1958). Industrial relations systems. Carbondale: Southern Illinois University Press. Dunlop, J. (1966). Job vacancy measures and economic analysis. In N.B.E.R (Ed.), The measurement and interpretation of job vacancies (pp. 27–48). New York: Columbia University Press. Fiorito, R. (1985). Il contributo di Ezio Tarantelli agli studi di economia del lavoro. Rivista internazionale di scienze sociali, 93(3–4), 494–519. Fisher, L. H. (1951). The harvest labour market in California. Quarterly Journal of Economics, 65(4), 463–491. Frey, L. (1978). Le prospettive dell’offerta di lavoro in Italia e il “lavoro nero”. In A. Becchi Collida` (Ed.), Le relazioni industriali fra sviluppo e sussistenza (pp. 217–233). Milano: Angeli. Friedman, M. (1962). Capitalism and freedom. Chicago: University of Chicago Press. Friedman, M., & Jacobson Schwartz, A. (1963). A monetary history of the United States (1867–1960). Princeton: Princeton University Press. Fua`, G. (1976). Occupazione e capacita` produttive: la realta` italiana. Bologna: Il Mulino. Hartmann, P., & Ross, A. (1960). Changing patterns of industrial conflict. New York: Wiley. Hibbs, D. (1976). Long run trends in strike activity in comparative perspective. Cambridge: MIT Press. Hicks, J. R. (1974). The crisis in Keynesian economics. New York: Basic Books Publishers. Kerr, C. (1950). Labour markets: their characters and consequences. American Economic Review, 40(2), 278–291. Kerr, C. (1954). The balkanization of labour markets. In E. W. Bakke (Ed.), Labour mobility and economic opportunity (pp. 92–110). Cambridge: MIT Press. Kerr, C., Dunlop, J., Harbison, F., & Myers, C. (1960). Industrialism and industrial man: the problems of labour and management in economic growth. Cambridge: Harvard University Press. Kerr, C., Dunlop, J., Harbison, F., & Myers, C. (1971). Postscript to Industrialism and industrial man. International Labour Review, 103(6), 519–540. Lehmbruch, G. (1977). Liberal corporatism and party government. Comparative Political Studies, 10(1), 91–126. Lucas, R. (1973). Some international evidence on output-inflation trade off. American Economic Review, 63(3), 326–334. Lucas, R., & Rapping, L. (1969). Real wages, employment and inflation. Journal of Political Economy, 77(5), 721–754. Modigliani, F., & Miller, M. (1961). Dividend policy, growth and the valuation of shares. Journal of Business, 34(4), 235–264. Muth, J. F. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315–335. Nordhaus, W. (1972). The worldwide wage explosion. Brookings Papers on Economic Activity, 3(2), 431–465.

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Parkin, M., & Zis, G. (1976). Inflation in open economies. Manchester: Manchester University Press. Perry, G. L. (1975). Determinants of wage inflation around the world. Brookings Papers on Economic Activity, 6(2), 403–435. Phelps Brown H. (1983). The origins of trade union power. Oxford: Clarendon. Schmitter, P. (1974). Still the century of corporatism? Review of Politics, 36(1), 85–131. Soskice, D. (1977). Le relazioni industriali nelle societa` occidentali. In C. Crouch & A. Pizzorno (Eds.), Conflitti in Europa: lotte di classe, sindacati e Stato dopo il ‘68 (pp. 377–406). Milano: ETAS. Sylos, L. P. (1970). Forme di mercato, sindacati e inflazione. Rassegna Economica, 16(6), 1339–1394. Visco, I. (1985). Le aspettative nell’analisi economica. Bologna: Il Mulino. Winkler, J. (1976). Corporatism. European Journal of Sociology, 17(1), 100–136.

.

Chapter 5

Tarantelli’s Economic Policy Proposals

5.1

The OPEC Surplus Recycling

This proposal represented a tool that even without reforming the industrial relations system, was meant to be an alternative to the monetarist policies to face the OPEC surplus. Deflation, and more importantly youth unemployment, through which the industrialized countries starting with the United States [. . .] and Germany had to a great extent absorbed the internal industrial conflict, (also forcing their debtors in the more developed countries – like Italy – to try to re-absorb it through the “Damocles’ sword” of the withdrawal of foreign currency loans) was in fact often justified by the conditions of force majeure imposed by the surplus of OPEC.1

Based on these considerations, the necessity emerged to identify alternative forms of recycling, as also Tarantelli and Carli suggested. Its empirical foundation was represented by the observation that, since 1973 the group of countries with a high structural surplus of current part was no longer composed of industrialized countries (which boasted credits towards developing countries), but by petroleum exporters (who boasted credits towards industrialized countries). Parallel to this modification, Tarantelli observed that also the international surplus recycling system was significantly transformed after 1973. Before that date, the privileged forms were those of the direct bilateral loan, defined as “exchange of external money” from the creditor to the debtor. Through a similar recycling mechanism, Tarantelli and Carli explained that creditor countries could reach a double objective. On one hand, “this was the most direct way (and the credits bound to its most explicit manifestation) to support their exports”.2 On the other hand, and this is the main reason which gave importance to such a recycling mechanism, because in this

1 2

Tarantelli (1978 [5], p. 56). Tarantelli (1978 [4], p. 527).

G. Michelagnoli, Ezio Tarantelli - Economic Theory and Industrial Relations, DOI 10.1007/978-3-642-22312-9_5, # Springer-Verlag Berlin Heidelberg 2012

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5 Tarantelli’s Economic Policy Proposals

way the industrialized countries could import raw materials from developing countries without going towards imbalances in the current account. After 1973, the recycling system took the form of the “exchange of international money”, that is the purchasing of financial activities on the international capital market by OPEC. Tarantelli and Carli offer three explanations of a similar phenomenon. First of all, they revealed that the direct loan could no longer be considered a practicable way because of the risk-country connected to the growing indebtedness of some countries already characterized by a significant structural deficit. Secondly, they took into account the lesser financial experience of OPEC especially regarding the concession of bilateral loans. But the decisive reason of the change, had to be looked for in OPEC’s intention to obtain a cash elasticity which allowed them to “choose from which country and at which price to import goods and services in the group of industrialized countries”.3 Concisely, it can be said that Tarantelli and Carli’s proposal consisted of returning to the recycling mechanism pre 1973, that is to a direct mechanism. A further element on which this rested was represented by the concept of OPEC surplus as forced saving. This led them to hypothesize a form of debt remuneration different from the usual rate of interest. In as much as the financial excess accumulated by OPEC countries – they observe – is determined by an amount of petroleum which exceeds their capacity of internal absorption, it can be technically considered as an imposed forced saving, at the new price, to the exporting countries from those who import. 4

They continued that the highest share of investments derived from the petroleum excesses was remunerated on the base of the market interest rate. As if the excesses of the petroleum producing countries came from voluntary saving. 5 A similar result, however, could not be held legitimate on the theoretical level, and neither on the level of economic policies to be carried out in the debtor countries to face the debts. The accumulated saving from the exporting countries could not be interpreted as the result of a voluntary abstinence from spending. It should be ascribed, on the contrary, to their consumption inability. In Tarantelli and Carli’s opinion, such a qualification should correspond to a different type of compensation for the debt’s service. A price which took into account the forced nature which financed the loan. On the basis of these considerations, they concluded that the ability to impose a higher price on petroleum