A Unified Theory of Capitalist Development

305 Pages·2012·2.186 MB·English

by  Adolfo Figueroa

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A UNIFIED THEORY OF

CAPITALIST DEVELOPMENT:

GROWTH, INEQUALITY, AND THE ENVIRONMENT

Adolfo Figueroa, Ph.D.

Professor Emeritus of Economics

Centrum Business School, Catholic University of Peru

Email: [email protected]

August 2012

Author‘s Note. This is a revised version of my book A Unified Theory of Capitalist
Development (Buenos Aires: Cengage Learning, 2009), ISBN 978-987-1486-20-5. The
conclusions of the book remain, but the scientific rigor has been greatly improved.

Suggested citation:
Figueroa, Adolfo (2009), A Unified Theory of Capitalist Development (Buenos Aires:
Cengage Learning, 2009), revised an enlarged version, August 2012, available on line at
http://www.freescience.info
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Praise to Adolfo Figueroa, A Unified Theory of Capitalist Development (Buenos Aires:
Cengage Learning, 2009):

Adolfo Figueroa, a Peruvian economist …has written a breathtakingly ambitious book.
Physics is still struggling to integrate in a single unified theory the insights of general
relativity and quantum theory. Figueroa aims not only to build partial models capable of
explaining different parts of the capitalist system, but also a unified model from which
each of these special cases can be derived…[T]he reader would have to be very
blinkered not to agree that Figueroa is on to something important. Figueroa deserves to
be read, and in an ideal world this book would become required reading for economics
students throughout the world.

Victor Bulmer-Thomas
Chatham House, The Royal Institute of International Affairs, UK
Book Review Article in Journal of Human Development and Capabilities, Vol. 11, No.2,
May 2010; pp. 359-361.
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CONTENTS

List of Tables 8

List of Figures 8

On Notations 9

Acknowledgments 11

INTRODUCTION 12

1. THE RULES OF SCIENTIFIC KNOWLEDGE 24
1.1 Scientific Rules from Popperian Epistemology 24
1.2 The Economic Process 26
1.3 The Alpha-Beta Method 27
1.4 The Alpha-Beta Method in Economics 32

2. PRODUCTION AND DISTRIBUTION UNDER CAPITALISM: EMPIRICAL
REGULATITIES 41
2.1 Scope of the Book: Capitalist Countries, 1950-2010 41
2.2 A Brief History of Capitalism and Colonialism 42
2.3 Empirical Regularities on Production and Distribution 44
2.4 The Need of theory to Explain the Empirical Regularities 48

3. STANDARD AND CLASSICAL ECONOMICS 52
3.1 The Neoclassical Society 52
3.2 The Keynesian Society 62
3.3 The Classical Society 68
3.4 Empirical Consistency: The First World Countries 75
3.5 Generalizing the Models to Theories 76

PART I Partial Theories 81

4. THE FIRST WORLD 82
4.1 Epsilon: Socially Homogeneous Class Society and Under-populated 82
4.2 The Nature of the Labor Market 84
4.3 A Static Model of the Epsilon Theory: The Short Run 88
4.4 Market General Equilibrium 92
4.5 Empirical Predictions 97
4.6 Empirical Consistency: The First World Countries 101

5. THE THIRD WORLD 105
5.1 Omega: Socially Homogeneous Class Society and Overpopulated 105
5.2 A Static Model of the Omega Theory: The Short Run 106
5.3 Market General Equilibrium 111
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5.4 Empirical Predictions 116
5.5 Empirical Consistency: Third World Countries with Weak Colonial Legacy 119

6. THE THIRD WORLD WITH COLONIAL LEGACY 123
6.1 Sigma: Socially Hierarchical and Overpopulated Society 123
6.2 A Static Model of the Sigma Theory: The Short Run 124
6.3 General Equilibrium 126
6.4 Empirical Predictions 129
6.5 Empirical Consistency 131

PART II Towards a Unified Theory of the Capitalist System 136

7. INEQUALITY AND SOCIAL DISORDER 137
7.1 Limited Tolerance to Inequality 137
7.2 Government Behavior towards Inequality 140
7.3 Social Order as Production Factor 144
7.4 General Equilibrium with Social Disorder 146
7.5 Empirical Predictions 148
7.6 Empirical Consistency: The Capitalist World 152
7.7 Conclusions 154

8. INVESTMENT IN PHYSICAL CAPITAL 159
8.1 Aversion to Risky Games Behavior vs. Risk Aversion Behavior 160
8.2 Aggregate Investment Behavior 163
8.3 Empirical Consistency: The Capitalist World 164
8.4 Inequality and International Competition 166
8.5 The Role of Credit Markets 167
8.6 The Role of Insurance Markets 170
8.7 Basic Markets 175

9. EDUCATION AND INVESTMENT IN HUMAN CAPITAL 178
9.1 Static Models with Exogenous Human Capital 178
9.2 Process Analysis of Education 179
9.3 The Role of the Initial Inequality 181
9.4 Transforming Education into Human Capital 183
9.5 Exclusion vs. Wage Discrimination in Labor Markets 185
9.6 Empirical Predictions 186
9.7 Empirical Consistency: The Capitalist World 187
9.8 Conclusions 188

PART III A Unified Theory of the Capitalist System 192

10. PRODUCTION AND DISTRIBUTION IN THE CAPITALIST SYSTEM
193
10.1 Foundations of the Unified Theory 193
10.2 A Static Model: Explaining Income Level Differences 195
10.3 Within-country Inequalities 198
10.4 The Question of Short Run Changes 198
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10.5 The Question of International Trade 200
10.6 Additional Empirical Evidence 201

11. GROWTH AND INEQUALITY IN THE CAPITALIST SYSTEM 205
11.1 A Dynamic Model of the Unified Theory 205
11.2 A Dynamic Epsilon Model 207
11.3 A Dynamic Omega Model 210
11.4 A Dynamic Sigma Model 213
11.5 Dynamic Equilibrium of Growth and Distribution 216
11.6 Empirical Evidence 221
11.7 Conclusions 224

12. GROWTH AND INEQUALITY UNDER ENVIRONMENTAL DISTRESS
232
12.1 Towards an Evolutionary Model of the Unified Theory 232
12.2 Model A: Economic Process with Non-renewable Natural Resources 233
12.3 The Intergenerational Consumption Frontier 235
12.4 Model B: Introducing the Laws of Thermodynamics 238
12.5 Model C: Introducing Substitutability between Funds and Flows 243
12.6 Changes in the Intergenerational Consumption Frontier 244
12.7 Economic Growth as Evolutionary Process 246
12.8 Growth and Quality of Life 250
12.9 Empirical Evidence 251
12.10 Conclusions 253

13. A UNIFIED THEORY OF THE CAPITALIST SYSTEM 260
13.1 A New Economic Theory of Capitalism 260
13.2 The Structure of the Unified Theory 261
13.3 Differences between Unified Theory and Standard Economics 262
13.4 Explaining Overall Inequality in the Capitalist System 264
13.5 Comparisons with Other Theories 266
13.6 The Capitalist System as Sigma Society 270

14. SCIENCE-BASED PUBLIC POLICIES 274
14.1 Growth versus Quality of Life: Today´s Big Trade Off 274
14.2 Market or Democracy Failures? 275
14.3 Current Public Polices 279
14.4 Alternative Public Polices 280
14.5 Breaking with History 285
14.6 Conclusions 289

Appendix A 290

Appendix B 293

BIBLIOGRAPHY 296
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List of Tables

Table 2.1 Evolution of Countries to Capitalism, 1500-2010 ..….…….….….…..……50
Table 2.2 Income Level and Income Inequality in Capitalist Countries ..……..……..51
Table 6.1 Social Structure of Sigma Society: Race, Class, and Citizenship ……....... 134

List of Figures

Figure 1.1 Diagrammatic Representation of a Process Analysis …....….….….……… 38
Figure 1.2 The Alpha-Beta Method .….….….….….….….….……………………...... 39
Figure 1.3 The Alpha-Beta Method in Economics ………………………...………… 40
Figure 3.1 Neoclassical General Equilibrium …….….….….….……………...……… 78
Figure 3.2 Keynesian General Equilibrium: Labor and Money Markets ...…...……… 79
Figure 3.3 Classical General Equilibrium ……………………………………………. 80
Figure 4.1 Work Effort, Efficiency Unemployment, and Labor Demand Curve ….....
103
Figure 4.2 General Equilibrium in the Open Epsilon Society…………………..….....
104
Figure 5.1 General Equilibrium in the Omega Society …….…………………..……
122
Figure 6.1 General Equilibrium in the Sigma Society …….…………………..…… 135
Figure 7.1 Region of Social Tolerance to Inequality …...….…………………..…… 156
Figure 7.2 General Equilibrium with Social Disorder in the Capitalist Sector ……...
157
Figure 7.3 Relationship between Inequality (D) and Social Disorder (SD) by Types of
Capitalist Societies ……...……………………...................................... 158
Figure 8.1 Credit Market Equilibrium with Rationing .....….…………………..…… 177
Figure 9.1 Theoretical Relations between Education, Human Capital by social Groups
……………………………...…………………….................................. 190
Figure 9.2 Theoretical Relations between Income and Human Capital, by Social Groups
.………………...…..………….……………………………………….. 191
Figure 10.1 Income Levels by Types of Capitalism ………………………...……..... 204
Figure 11.1 Steady State Equilibrium in Epsilon Society ...………………...……..... 226
Figure 11.2 Output per Worker Dynamic Equilibrium in Epsilon Society ....……..... 227
Figure 11.3 Output per Worker Dynamic Equilibrium and Transitional Dynamics in
Epsilon Society ....…………………………………………………...... 228
Figure 11.4 Growth in Omega Society …................………………………...……..... 229
Figure 11.5 Growth in Sigma Society …................………………………....……..... 230
Figure 11.6 Growth and Distribution in the Capitalist System ..…………....……..... 231
Figure 12.1 The intergenerational consumption frontier...………..………....……..... 255
Figure 12.2 Depletion and pollution in the economic process ……………...……..... 256
Figure 12.3 Limits to Growth under Evolutionary Dynamics……….……...……...... 257
Figure 12.4 CO2 concentration levels (part per million) from 1000AD to 1995AD
….…………………..................................................................................................... 258
Figure 12.5 Growth and Quality of Life ..…………………………………………... 259
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On Notations

General Symbols

Set of theoretical propositions, primary assumptions of a theory
Set of refutable empirical propositions, logically derived from
Degree of inequality in individual asset endowments
Epsilon society: Abstract society, socially homogeneous and underpopulated
Sigma society: Abstract society, socially heterogeneous and overpopulated
Omega society: Abstract society, socially homogeneous and overpopulated
Π Pollution
Rate of growth of technological progress (Chapter 12)
μ Quantity of natural resources per unit of net output

A Level of technology in the economy
B Commodity produced domestically
b Set of statistical relations derived from empirical data
C Commodity imported as input of commodity B
c Technological coefficient of input C per unit of commodity B
D Degree of income inequality
D Quantity of good j demanded
j
D Quantity of labor demanded
h
D * Maximum quantity of wage employment
h
D* Effective quantity of credit demanded
r
E Foreign exchange
e Real investment expenditure as proportion of national income
g Rate of growth of technology (Chapter 11)
H Labor services
I Real net investment
K Stock of physical capital of commodity B
b
K * Threshold of physical capital needed to operate as a capitalist firm
b
K Stock of human capital
h
K Stock of physical capital as infrastructure
i
k Capital labor ratio
L Quantity of workers employed, as wage earners and self-employed
M Domestic money
N Quantity of mineral resources utilized as production input
n Rate of population growth
O Degree of social order
P Total real profits
P‘ Total nominal profits
p Premium rate in the wage rate determination
P Nominal price of good B
b
P * International price of good B
b
P Nominal price of good C
c
P * International price of good C
c
P Nominal exchange rate
e
P Nominal wage rate
h
P * Initial nominal wage rate
h
p Premium rate in the market wage rate determination
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Q Quantity of net output of good B produced in the capitalist sector
b
q* Threshold of quantity supplied in the credit and insurance markets
R Bank credit
r Domestic nominal rate of interest
r* International nominal rate of interest
S Standard deviation
S Quantity of workers supplied
h
S Quantity of good or service j supplied
j
S Quantity of money supplied
m
s Insurance premium rate in the insurance market
T Time as historical time
t Time as mechanical time
U Total unemployment
u Unemployment rate
u* Threshold of efficiency unemployment rate
V Total real output in the subsistence sector
v Average labor productivity in the subsistence sector
v‘ Marginal labor productivity in the subsistence sector
W Total real wage bill
w Real wage rate
w* Threshold of efficiency real wage rate
X Quantity of good B exported
b
Y National income or total net output
y Income per capita, or output per worker
Z Stock of public goods as a composite good
z Quantity of mineral resources per unit of gross output
z* Terms of international trade

Note on Equations
Equations that are presented as a system have a unique number. In the case of structural
equations, endogenous and exogenous variables are separated by a semicolon in each
equation. Static equilibrium values of the endogenous variables are marked with zero
superscript and dynamic equilibrium with asterisk superscript.

Note on Figures
Curves show the exogenous variables of the model within a bracket and separated by a
semicolon. Static equilibrium values of the endogenous variables are marked with zero
superscript and dynamic equilibrium with asterisk superscript.