Table Of ContentThe Macrodynamics of Capitalism
Second Revised and Enlarged Edition
Peter Flaschel
The Macrodynamics
of Capitalism
Elements for a Synthesis of Marx,
Keynes and Schumpeter
Second Revised and Enlarged Edition
ABC
Prof.Dr.PeterFlaschel
DepartmentofEconomics
andBusinessAdministration
BielefeldUniversity
Universitaetsstrasse25
33615Bielefeld
Germany
pfl[email protected]
ISBN:978-3-540-87931-2 e-ISBN:978-3-540-87932-9
LibraryofCongressControlNumber:2008937135
FirsteditionpublishedwithPeterLangVerlag,1993
(cid:176)c Springer-VerlagBerlinHeidelberg2009
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Preface
Thisbookprovidesanintroductiontoadvancedmacrodynamics,viewedasadise-
quilibriumtheoryoffluctuatinggrowth.Itbuildsonanearlierattempttoreformulate
thefoundationsofmacroeconomics1 fromtheperspectiveofrealmarketsdisequi-
libriumandtheconflictoverincomedistributionbetweencapitalandlabor.Itdoes
so,notbecauseitwantstosupporttheviewthatthisclassconflictisinevitable,but
with the perspective that an understanding of this conflict may help to formulate
socio-economic principles and policies that can help to overcome class conflict at
least in its cruder forms or that can even lead to rationally understandable proce-
duresandrulesthatturnthisconflictintoaconsensus-driveninteraction2 between
capitalistsortheirrepresentativesandtheemployableworkforce.3
Thebookstartsfromestablishedtheoriesoftemporaryequilibriumpositions,the
forcesofrealgrowth,andtheconflictoverincomedistribution,representedbybasic
modelingapproaches,whichitconsidersindetailinitsPartIinordertopreparethe
groundfortheirintegrationinPartIIofthebook.Inthiswayweinspectwhattypes
of models of disequilibrium, income distribution, and real growth we have at our
disposal,asmodelsthathaveprovedtobeofrealinterestandsoundfromarigorous
modeling perspective. We stress in this regard that the book concentrates on non-
market-clearingapproaches,doesnotassumethatonlymicrofoundedmodelsmake
sensewithregardtoanunderstandingoftherealworld,and–aboveall–doesnot
1 P. Flaschel (1993). Macrodynamics. Income Distribution, Effective Demand and Cyclical
Growth.Frankfurt,M.PeterLang.Thisbookwasthestartingpointforaveryfruitfulcollaboration
withCarlChiarellafromtheUniversityofTechnology,Sydney,inparticular,involvingmanyvisits
andjointprojectsinSydneyaswellasinBielefeld,seeinparticular,Chap.1andthereferences
quotedthere.ThematuredKeynesianAD-ASmodelpresentedinChaps.8and9areanimportant
exampleoftheoutcomeofthiscollaboration.
2 WithrespecttotheoccurrenceanddiscussionofsuchconsensussituationsseeP.Flaschel,R.
Franke,andW.Semmler:Kaleckianinvestmentandemploymentcyclesinpostwarindustrialized
economies.InP.FlaschelandM.Landesmann(Eds.):MathematicalEconomicsandtheDynamics
ofCapitalism.London:Routledge,2008.
3 We here consider only the social structure of such societies in highly stylized form and thus
abstractfromthefactthatanyadultpersoncaninprinciplebeanemployer,beemployedoreven
beself-employedatoneandthesametime.
v
vi Preface
relyonthejump-variabletechniqueoftherationalexpectationsschool,whichturns
saddlepointinstabilityintoalwaysconvergentdynamicsbyassumption.4
InChap.5weprovideinthisrespectafirstexamplehowthesemodelscanhelp
tounderstandcurrenteconomiccontroversies,forexample,aboutinflation,andhow
tobringaboutdisinflation.ItshowsthataMarxianreinterpretationofthebaseline
Monetaristmodelofinflation,stagflation,anddisinflationmaybemoretothepoint
fromafactualviewpointthanFriedman’sinitialandlaterattemptstoexplainthese
phenomenaagainstthebackgroundofaWalrasianunderstandingoftheworkingof
theeconomy.Reinterpretingthemonetaristbaselinemodelinthiswaymayindeed
remove unnecessary detours in the understanding of the occurrence of stagflation
phenomenaandthusprovideargumentsthatbothpartieswhoareinteractinginthis
framework,firms(responsibleforpriceinflation)andworkers(atleastpartiallyre-
sponsibleforwageinflation),canuseintheargumentsexchangedwitheachother.
Coherent and rigorous models and their factual explanations, stating the variables
theyseektoexplainandtheequilibriumconditionsandlawsofmotionusedforthis
purposeinasystematicway,areanimportanttool,quiteindependentfromthecur-
rentbeliefthatonlymodelsthataremicrofounded(withintherepresentativeagent
framework)areacceptableastoolsofanalysis.5
InPartII,weproceedtointegratedmodelsofeffectivedemand,incomedistribu-
tiondynamics,andmonetarygrowth.Weshowtherethatthetextbookneoclassical
modelofAD-ASgrowth(basedontheoldneoclassicalsynthesis)islogicallyincon-
sistent,basicallysinceitmarriesKeynesianandWalrasianconceptsinacontradic-
toryway.TheneoclassicalsynthesisofPatinkinetal.,extendedandreformulatedas
ageneralAS-ADmodelofbusinessfluctuationsandeconomicgrowth,istherefore
no solid basis for a Keynesian theory of the macroeconomic working of capitalist
economies, basically since there is a logical contradiction between its Keynesian
theoryofeffectivedemandandtheNeoclassicalpostulatethatassumesthatprices
areequaltomarginalwagecosts(duetoperfectcompetition).PartIIthereforeends
with a negative conclusion concerning an integration of the baseline models dis-
cussedinPartI.
InPartIII,startingwithChap.8andconcludingthisdiscussion,alsofromtheem-
piricalpointofview,inChap.9,wethenprovideasolutiontotheseinconsistencies
byassumingthatgradualadjustmentprocessesdonotonlycharacterizewagelevel
formation, but also price level formation and also quantity adjustment processes.
InthiswayweshowthatamaturedandcoherentlyformulateddisequilibriumAD-
AS monetary growth model can be obtained from the old neoclassical synthesis,
which can serve as a baseline model of the interaction of the trade cycle with the
distributivecycleinagrowingmonetaryeconomy.Thismodeltypeis–fromafor-
malperspective,asweshow–verysimilartothenowfashionableNewKeynesian
model of the business cycle (the new neoclassical synthesis), but differs radically
fromitinitsimplicationsandtheexplanationoftheoccurrenceofcyclicalgrowth.
4ThistechniqueisinvestigatedandcriticizedindetailinChap.7ofthebook.
5WeknowfromWalrasiantheorythatnearlyeverythingcanbemicrofoundedfromfirstprinciples
ifasufficientdegreeofheterogeneityamongtheinteractingeconomicagentsisassumed.
Preface vii
Our matured AD-AS monetary growth model has interesting dynamic implica-
tions and stability features (intuitively understandable from the feedback mecha-
nisms that characterize the model’s dynamics), can be applied successfully to the
observedmacrobehaviorofactualeconomiesandalsogivesrisetointerestingsim-
ulationstudies.ItrevealsinthisrespectthatapropersynthesisoftheMarxiandis-
tributivecyclewiththeKeynesiantheoryofthebusinesscycleleadstoamodelof
theinteractionof“short-phased”Keynesianbusinessfluctuationswithlong-phased
fluctuations in inflation and income distribution that can explain factual observa-
tions,butthatalsoneedsfurtherthoroughinvestigationtoreallydetermineitspoten-
tialasatheoryoftheshort-,themedium-,andthelong-runevolutionofcapitalism.
TheintegrationwithSchumpeterianmicroprocessesofcreativedestruction,andthe
long-wave theories that are associated with this view of the working of capitalist
economies, is also of high desirability here, but must be left for future research in
thisbook.
In Chap.10, we focus instead on another aspect of Schumpeter’s research, his
seminal work on “Capitalism, Socialism and Democracy”6 and use its theory of a
competitively organized (Western) socialism as starting point and foundation for
a modeling attempt of the current politico–economic discussion of a new concept
for the working of capitalism, the debate on so-called flexicurity systems and the
combinationofeconomicflexibilityandsocialsecuritytheyintendtoestablish.This
approachprovidesanalternativemodelforourunderstandingofmoderncapitalist
economiescomparedtotheChaps.8and9whereweconsideredtheactualworking
oforthodoxtypesofcapitalisteconomies.
In closing, I thank Toichiro Asada, Carl Chiarella, Ekkehardt Ernst, Reiner
Franke, Christian Proan˜o, and Willi Semmler for suggestions and discussions that
helpedtoimprovethecontentsofthisbook.Ialsohavetothankthem,asco-authors,
forallowingmetousejointworkwithsomeoftheminPartIIIofthisbook.Indi-
rectly, the book also owes much to my former colleagues Michael Ambrosi, Jo¨rg
Glombowski,KlausJaeger,MichaelKru¨ger,andElmarWolfstetterduringmytime
attheFreeUniversityofBerlinandtoGangolfGrohduringthetimehewasatBiele-
feldUniversity.IalsothankChristianProan˜oforpolishingtheoutlookofthisbook
in an excellent way. The views expressed in this book are, of course, nevertheless
entirely my own as are all remaining errors and mistaken views of this attempt to
reformulate the foundations of macrodynamics from a Keynes–Marx–Schumpeter
understandingoftheinteractionofeffectivedemandwiththedistributivecycleand
thesocialstructureofaccumulation.7
Bielefeld, PeterFlaschel
August16,2008
6NewYork:Harper&Row,1942.
7 SeeinthisrespectalsotheworkofL.Taylor(2004):ReconstructingMacroeconomics.Struc-
turalistProposalsandCritiqueoftheMainstream.(Cambridge,MA:HarvardUniversityPress)for
acontributionthatinmyviewissimilarinintentionandspirittotheapproachchoseninthisbook.
Contents
1 Goodwin Growth Cycles in a Keynes Trade Cycle Framework
andBeyond.................................................... 1
1.1 Overview ................................................. 1
1.2 MethodologicalConsiderations............................... 10
1.2.1 Microfoundations.................................... 11
1.2.2 MarketClearing ..................................... 12
1.2.3 RationalExpectations ................................ 13
1.2.4 AShortSummary.................................... 15
1.3 ABaselineModelofaCapitalistEconomy ..................... 16
Part I Temporary Equilibrium, Distribution-Driven Demand Cycles,
andUnbalancedGrowth
2 Keynes, the “Classics,” and the “New Classics”: A Simple
PresentationofBasicDifferences................................. 23
2.1 Introduction ............................................... 23
2.2 ClassicalMacroeconomics................................... 27
2.3 A“KeynesRevolution”intheClassicalModel .................. 34
2.4 NewClassicalMacroeconomics .............................. 39
2.5 IS-LM-AnalysisasaGeneralizationoftheNewClassicalModel... 42
2.6 Keynes’NotesontheTradeCycle ............................ 45
2.7 Conclusions ............................................... 49
Appendix: Wicksell’s Cumulative Process. An Intermediate Case
Betweenthe“Classics”and“Keynes” ......................... 51
3 AfterKeynes:RealGrowthand(In-)Stability ..................... 55
3.1 Introduction ............................................... 55
3.2 BasicAssumptionsandTools ................................ 58
3.3 UnstableWarrantedGrowth(Harrod).......................... 64
3.4 StableDepressions(Domar).................................. 69
3.5 StableFullEmploymentGrowth(Solow)....................... 72
ix
x Contents
3.6 HarrodianInstabilityintheNeoclassicalGrowthModel(Nikaido).. 76
3.7 TheKeynesianTradeCycleModel(Hicks) ..................... 80
3.8 ThreeTypesofEconomicRegulation(Phillips) ................. 86
3.9 Conclusions ............................................... 93
Appendix:NonlinearApproachestoMultiplier–AcceleratorAnalysis.... 94
4 DistributiveStabilitybytheReserveArmyMechanism:Marx’s
Contribution ..................................................107
4.1 Marx’s Point of Departure: The Classical Theory of Capital
Accumulation..............................................107
4.2 Marx’sCritiqueoftheClassicalTheoryofAccumulation .........110
4.3 Goodwin’sDistributiveGrowthCycleModel ...................114
4.3.1 ASimpleSynthesisoftheGoodwin–SolowType .........118
4.3.2 ASimpleGoodwin–HarrodSynthesis...................121
4.4 ASimpleCompletionoftheGoodwinGrowthCycleModel.......124
4.5 GovernmentStabilizationPolicies.............................130
4.6 IndependentInvestmentBehaviorandStabilizationProblems......134
4.7 The Nonequivalence of Classical and Keynesian
StabilizationPolicies........................................140
4.8 Conclusions ...............................................143
Appendix:StabilityAnalysis......................................145
5 Inflation,Stagflation,andDisinflation:Friedman–orMarx? .......149
5.1 Introduction ...............................................149
5.2 A“MonetaristBaselineModel”...............................152
5.3 Conflict About Income Distribution and the “Natural”
UnemploymentRate ........................................161
5.4 AClassicalModificationofthe“BaselineModel” ...............166
Appendix:ANeo-KeynesianAnalysisofEconomicDepressions .......173
PartII ConventionalAD-ASAnalysis:AReconsideration
6 KeynesianMonetaryGrowthUnderAdaptiveExpectations.........187
6.1 Introduction ...............................................187
6.2 WalrasianPriceAdjustmentinKeynesianMacrodynamics? .......189
6.3 EffectiveDemandasaDeviceforSimplifyingProperlySpecified
KeynesianDynamics........................................193
6.4 OntheShort-RunInstabilityofFullEmploymentPositions .......197
6.5 OntheInstabilityofLong-RunFullEmploymentEquilibrium .....206
6.6 Conclusions ...............................................221
Appendix:WageDynamicsinaDepressedEconomy .................223
7 AClassicalRevolutioninKeynesianMacrodynamics?..............229
7.1 Introduction ...............................................229
7.2 KeynesianMonetaryGrowthUnderMyopicPerfectForesight .....231
7.3 AD-ASandMacroeconomicPerformanceUnderMyopicPerfect
Foresight..................................................236
Contents xi
7.4 OntheRelevanceoftheAD-ASRationalExpectationsModel .....241
7.5 A“Classical”VillainintheKeynesianSpectacle? ...............244
Appendix:OntheStabilityofModelsofMoneyandGrowth...........254
PartIII MaturedKeynesianAD-ASAnalysisandBeyond
8 KeynesianAD-AS,QuoVadis? ..................................267
8.1 Introduction ...............................................267
8.2 KeynesianAD-AS:NeworMatured?..........................268
8.3 TheDeterministic“Skeleton”ofNewKeynesian
AD-ASModeling ..........................................270
8.4 Keynesian AD-AS Dynamics with Sluggish Price-Quantity
AdjustmentProcesses.......................................277
8.5 The3DCoreDynamics:SomeStabilityResults .................285
8.6 EstimationandSimulationoftheModel .......................289
8.7 NumericalInvestigationoftheModel..........................294
8.8 ConclusionsandOutlook:Epursimuove ......................299
Appendix:StabilityProofsandtheOccurrenceofHopfBifurcations ....301
9 KeynesianDAD-DASModeling:BaselineStructureandEstimation..305
9.1 Introduction ...............................................305
9.2 ContemporaneousKeynesianAD-ASModeling .................306
9.3 A Baseline Keynesian D(isequilibrium)AD-D(isequilibrium)
ASModel.................................................307
9.3.1 TheGoodsandLaborMarkets .........................307
9.3.2 TheWage-PriceDynamics ............................308
9.3.3 MonetaryPolicy.....................................312
9.4 EconometricAnalysisandEvaluationoftheModel ..............314
9.4.1 DataDescription:TheUSEconomyandtheEurozone .....315
9.4.2 EstimationoftheFeedbackChannelsoftheModel ........319
9.5 ConclusionsandOutlook ....................................323
AppendixA:4DFeedback-GuidedStabilityAnalysis .................324
AppendixB:WageDynamics:TheoreticalFoundation ................327
AppendixC:PriceDynamics:TheoreticalFoundation ................328
AppendixD:BusinessandLongPhaseCyclesinInflationandIncome
Distribution ...............................................329
10 ModelingOurFuture:FlexicurityCapitalism .....................335
10.1 FromMarx’sLawofCapitalistAccumulationtoSchumpeter’s
CompetitiveSocialismandBeyond............................335
10.2 Flexicurity:ASpectreisHauntingEurope......................341
10.3 Dynamics:StableBalancedReproduction ......................346
10.4 EducationalSystems:BasicStructuresandImplications ..........349
10.5 Education,EqualOpportunities,andLife-LongLearning .........352
10.5.1 TheSchoolSystem...................................353
10.5.2 Tertiary Education, Lifelong Learning,
andEqualOpportunities ..............................355
