| 16 | Macroeconomics of Keynesian and Marxian inspirations |
| Toward a synthesis | |
| Gérard Duménil and Dominique Lévy |
In the wake of World War II, Keynes’ analysis contributed to the definition of a new social compromise (including its macro and welfare components). Within this favorable political context, a “Keynesian school”, in the broad sense, prospered. After the establishment of neoliberalism in the 1980s, despite the overall repression of economists critical of the new social order, the Keynesian perspective is still the object of much interest among the minority of economists who lean politically to the Left. The relationship between Keynesian and Marxian economics has always been ambiguous, but they have a lot in common concerning macroeconomics.
During the last few decades, one of the fields of our research has been the analysis of business-cycle fluctuations (theory and empirics). We understand that Marx’s perspective on this issue was “macroeconomic” as expressed in the phrase “crises of general overproduction” — “general” here being the term to be emphasized as opposed to “disproportions” among industries. On such grounds, an encounter with Keynes is inescapable. This is one of the numerous interests that we believe we share with Duncan Foley, to whom this volume is dedicated.
The object of this study is the investigation of these common Marxian–Keynesian grounds. The “Keynesian inspiration” refers to a broad set of approaches, by major figures of the past such as Michal Kalecki, Joan Robinson, or Hyman Minsky, and the contemporary PostKeynesian school. Conversely, by a “Marxian inspiration”, we mean only our own understanding of Marx’s analysis, to be specified later, not the entire set of readings of Marx’s crisis theory by contemporary or previous Marxist economists. Our final aim is factual analysis: of business-cycle fluctuations within sophisticated capitalist economies after the establishment of central banks and the conduct of macro policies. (This later feature, obviously, creates some distance from Marx’s original approach.)
The purpose of the next section is the introduction of the overall framework of analysis, but separating it from money and finance. A broad typology of “theoretical fields” is established depending on time frames and the choice of a multi-industry or macro perspective. Monetary and financial mechanisms are considered in the following section. We introduce the framework of “co-determination”, in which the behaviors of nonfinancial and financial agents concerning money and credit are jointly considered within single functions. The contrast is sharp between the PostKeynesian view in the fourth section of “accommodative money” and this new perspective, in which the action of central monetary authorities plays a crucial role in the taming of an otherwise unstable macroeconomy. The fifth section harks back to the perspective of a multi-industry economy. The section introduces the important thesis that capitalism is rather efficient in the allocation of capital among industries — and, correspondingly, the production of goods or services in proportions that conform to the pattern of demand — but always on the verge of macro instability (moving toward overheating or recession). These distinct properties provide the theoretical foundations for the adoption of a macro viewpoint in the modeling of business-cycle fluctuations. The perspective in the sixth section is historical. A link is first established between profit rates and macro stability. Then, our thesis concerning the “tendential instability” in capitalism is introduced. The last section discusses the components of such fluctuations in various time frames in the U.S. manufacturing sector.
Due to space limitations, two sections of an earlier version of this study are given in appendices on the Internet. Appendix A is devoted to the modeling of a monetary macroeconomy in the short and long terms.1 Appendix B discusses Minsky’s “financial instability”.2
We first recall our framework of “disequilibrium microeconomics” and “general disequilibrium models”. A typology of alternative theoretical fields is, then, introduced and a link established with the Marxian and (Post)Keynesian perspectives.
Heterodox economists reject mainstream economics on account of their methodology and politics. Optimality properties are used by the mainstream as an alleged justification of “market economies”, another name for capitalism. The problem is not, however, accounting for individual behaviors, but what we call “equilibrium microeconomics”, that is, maximizing under the assumption of ex ante equilibrium. On the contrary, we believe decisions are made in situations of disequilibrium and “radical uncertainty” (as opposed to objective probabilities with known distributions). For example, enterprises are not sure of selling the goods they produce and do not know the probability distribution of demand. They adapt to the observation of disequilibrium, as in the accumulation of inventories of unsold commodities:
This reaction contributes to a correction of the disequilibrium observed, but it does not result in the immediate return to equilibrium. This outcome can only be achieved progressively as a result of a gradual and conditional process of adjustment. Smith’s metaphor of the “invisible hand” points to the gradual collective outcomes of such individual behaviors, not to each movement. This approach to decision making must be extended to all aspects of economic activity — outputs, prices, investments — but also to decisions to borrow and lend, including the actions of lending institutions and the central bank.
These processes must be studied within dynamic models. As in other disciplines, such as physics, an equilibrium is the possible outcome of an actual dynamic process, it is the fixed point of such a process. Conversely, within mainstream economics, equilibria are defined independently of any dynamic process. Disequilibrium dynamics are, at best, viewed as inessential developments. When equilibrium is approached as the fixed point of a dynamic process, the issue of (in)stability comes to the fore. Equilibrium can be stable or unstable; stability is always conditional. In our opinion, the consideration of a locally unstable equilibrium can be economically relevant, and the stability conditions are susceptible to economic interpretation.
An institutional framework must be defined in which a list of agents is established, as well as the types of mechanisms through which they interact. Such models can be called general disequilibrium models, though ambition must be limited if an analytical treatment is sought. A common simplifying assumption is the consideration of a single commodity, as in a macro model. Another option, also typical of Keynesian models, is to assume that enterprises produce exactly what is demanded. Such assumptions are very helpful, but their consequences must be carefully assessed, and the investigation of more complex models remains necessary.
Due to the complexity of the mechanisms under investigation, economic analysis is conducted within distinct theoretical fields — sets of notions and mechanisms — defined by implicit or explicit abstraction. It is assumed that the quantitative relationships between a number of variables are weak and can be neglected. Implicitly or explicitly, two basic distinctions play a central role within economic theory:
In the investigation of properties related to the long term, one can assume that the short-term dynamics have converged, that is, one can assume that short-term equilibrium prevails. This is the method of temporary equilibrium. Long-term dynamics are approached as the succession to temporary short-term equilibria. Thus, the dynamic properties of the model can be investigated in two successive steps: (1) short-term equilibrium and its stability; and (2) long-term equilibrium and its stability.
The “historical term” (or “term of historical tendencies”) offers a further time horizon, in which the historical trends of distribution and technology, as well as the historical transformation of institutions, are considered.
The distinctions between, on the one hand, proportions and dimension and, on the other hand, short, long, and historical terms allow for a taxonomy of economic theories (Table 16.1).
Five basic configurations are discussed here:
• Configuration [1] in Table 16.1 defines dimension in the short term. The economy is considered globally, and the stock of capital is constant. Thus, accumulation and growth are set aside. Proportions are also set aside. This is the field of Keynesian macroeconomics and short-term equilibrium can, consequently, be called a “Keynesian equilibrium”. The simplest example is the “multiplier”.
• Configuration [2] refers to proportions in the short term. It can be understood as the extension to various industries of configuration [1]. A given pattern of relative inter-industry capacity utilization rates allows for the equality between outputs and demands.
• Configuration [3], dimension in the long term, is the field of PostKeynesian economics. In a PostKeynesian trajectory (or “traverse”), a sequence of Keynesian short-term equilibria converges toward a steady state in which resources are not fully used (Lavoie and Ramirez-Gaston, 1993; Dutt, 1988).
• Configuration [4], proportions in the long term, defines the Classical–Marxian field of the formation of production prices within competition. Considering the average values of the variables, one can also define a Classical–Marxian long-term macro configuration, as in [3], evocative of the PostKeynesian long-term equilibrium, with the important difference that the Classical economists and Marx assume that capacity utilization rates converge to “normal” (or
| Short term (production) |
Long term (growth) |
Historical term (historical dynamics) |
|
| Dimension (macro) | [1] | [3] | [5] |
| Proportions (relative values) | [2] | [4] |
“target”) values. (More rigorously, they “abstract” from business-cycle fluctuations.)
• In the third column, only problems of dimension [5] remain, as proportions have been determined within shorter terms. In this context, dimension refers to the historical tendencies of the growth rate and the profit rate, and the trajectory of technical change (notably, the ratios between inputs such as the capital–labor ratio, or ratios between outputs and inputs such as productivities).
A given school may refer to one particular or to various configurations. The field of Marx’s analysis of competition is [4]. Only the relative values of prices, capital stocks, and outputs are involved. The problem of dimension — the mechanisms by which the rate at which productive capacities are used converge to “normal” values — is assumed away, and the business cycle is not discussed. Marx’s analysis of the business cycle and crisis of general overproduction is clearly “macro” as in [1], that is, setting aside proportions. Although Marx refers to “partial crises” within specific industries (Marx, 1862, pp. 620–1), he strongly rejects analyses of capitalist crises in terms of disproportions. Marx’s study of historical tendencies belongs to [5]. Keynes’ work belongs to [1], dimension in the short term. PostKeynesian economists do not distinguish between the long term and the historical term, and proportions are set aside. Thus, only cases [1] and [3] are considered. Temporary equilibria are defined in [1] and the sequence of such equilibria in the long term belongs to [3].
A priori, each configuration in the table can be considered from the viewpoints of equilibrium and disequilibrium dynamics (including stability conditions). Keynes’ analysis in [1] focuses on equilibrium, while Kalecki’s analysis belongs to [1] and [3], with an emphasis on dynamics. Concerning PostKeynesian economists, only equilibrium is considered in the short term, as in [1], while both equilibrium and disequilibrium dynamics are considered in the long term, as in [3].
The interest of the disequilibrium dynamics in short-term equilibrium defines an important difference between our approach and the traditional (Post)Keynesian perspective. This harks back to a basic ambiguity within the Keynesian paradigm, beginning with Keynes himself. It is not clear whether Keynesian equilibria are supposed to explain durable shifts or sudden collapses in the general level of activity (the 1920s in the U.K. or the Great Depression in the U.S., for example). The core Keynesian analytical device seems to account for durable shifts, whereas Keynes’ analysis of the business cycle (Keynes, 1936, ch. 22) emphasizes the extreme volatility of the marginal efficiency of capital, which determines investment and the level of output.
The framework in the previous sections has important implications concerning the analysis of the fluctuations of the general level of activity, approached here as the movements of the capacity utilization rate in the U.S. manufacturing sector in Figure 16.1. The figure distinguishes three components, ū, uLT and uST, which
sum up to u. We interpret the two sequences of equilibria introduced above as follows:
• The continuous line (—) is interpreted as depicting empirically the sequence of long-term equilibria, ū (with a downward trend after 1970, to which we will return below).
•The dashed line (---) is read as the sequence of temporary short-term equilibria.
In 2009, manufacturing industries only accounted for 10 percent of total U.S. income. The fluctuations of the manufacturing capacity utilization rate, u, are, however, tightly correlated to those of the value added of the nonfmancial corporate sector. The purpose of the figure is illustrative. The two lines (— and ---) have been determined using a Whittaker filter. Both have been calculated up to the second quarter of 2007, that is, prior to the current crisis. More time will be necessary to determine new tendencies.
We further define the two fluctuations, which we synthetically denote as “business-cycle fluctuations” (see the last section for factual interpretations):
• The long-term fluctuation, uLT, is the difference between the sequence of short-term equilibria (---) and the sequence of long-term equilibria (—). It reveals broad fluctuations during significant periods of time, about 10 years long.
• The short-term fluctuation is the distance between u (…•…) and the sequence of short-term equilibria (---). The sharp departures typical of this component are the expression of the (in)stability of short-term equilibrium.
The decomposition above is based on the view that the downward trend of u after 1970 is not part of business-cycle fluctuations. In other words, in the downward trend of u, we see a decline of ū (a drifting ū) not a growing gap between a constant ū and the rates actually achieved. We do not believe enterprises went on building capacities for several decades while they were not able to reach their target utilization rates (as would imply reference to a constant ū, as suggested in the figure (….). In particular, the second half of the 1990s was a period of boom, not of stagnating growth, with large growth rates and a dramatic wave of investment. (A more detailed analysis is provided in Duménil and Lévy, 2012b.)
This section considers monetary and credit mechanisms, which were set aside in the previous section. “Financial mechanisms” proper, in a broader sense, are treated in Appendix B on the Internet.
Monetary mechanisms are approached here in a simple framework, in which “banks” make loans to the nonfinancial agents “households, the government and enterprises” from which demand emanates, assuming the traditional confrontation between the lender and the borrower (households and enterprises), as in the past, and still typical of procedures in many countries. (Money and credit must be treated jointly, as the two facets of a same coin, since money is issued when loans are granted and destroyed when loans are paid back.) An important assumption is that demand is financed out of previously garnered income and borrowing:
Other monetary actions are also involved with equivalent impacts on demand. They must be jointly considered with borrowing in the determination of financing:
| Borrowing (1) | Depositing on bank accounts (3) |
| Paying back loans (2) | Using these deposits for demand (4) |
A household, for example, can finance more than its income by drawing on its bank account; it can also use the money deposited at the bank to pay back loans. And the converse will happen if demand is inferior to income. The outcome of such monetary-credit flows is the variation of the net debt (“borrowing” for short).
From the viewpoint of “real” flows, the variation of the net debt of an economic agent is the difference between its total spending (consumption and investment) and its income. Equivalently, the opposite of the variation of the net debt is equal to “financial savings”, as opposed to “savings”, the difference between income and spending.
With the notation D for demand, Y for income, and N for the net debt, one has:
 |
(1) |
This approach to credit mechanisms can be used to account for the formation of the demand of specific agents within models in which several goods are considered, as well as within a macro model in which a single nonfinancial agent is at the origin of demand. We consider this equation to be the cornerstone of the modeling of a monetary economy.
A remark must be made concerning the aggregate net debt. If nonfinancial and financial agents are simultaneously considered, the variation of the aggregate net debt is null, since the loans of financial agents are identically equal to the borrowing of nonfinancial agents, and the deposits of nonfinancial agents are held by financial agents. Conversely, considering only nonfinancial agents, the variation of their aggregate net debt is a priori different from zero.
A second remark concerns the distinction between various nonfinancial agents. Borrowing (the variation of the net debt) may affect to different degrees the demands of distinct agents. For example, the demand of capitalist investors could be larger than their income, while wage-earners would consume less than their income. We call “credit macro demand channel” the overall impact of credit mechanisms on aggregate demand, independent of its distribution among agents.
The financing of demand via the credit channel opens a field of analysis of major importance. Like Marx and Kalecki, we believe that the propensity of economic agents to borrow in a capitalist economy is procyclical. When the economy is booming, economic agents are prone to borrow more, and conversely when the economy is depressed they are prone to borrow less.
If the aggregate net borrowing of nonfinancial agents is procyclical, short-term equilibrium is necessarily unstable, with cumulative movements upward or downward. Notably, the tendency on the part of enterprises to borrow when the economy is growing comparatively fast, in order to expand their investment, has destabilizing effects. The same is true of households borrowing for residential investment.4 The converse is true in a recession, with cumulative movements downward. Thus, the unrestrained propensity to borrow (or the unchecked propensity to diminish expenses and pay back debts) would result in a “built-in instability” inherent in capitalism (Duménil and Lévy, 2012a).
This built-in instability renders necessary a stabilizing countercyclical action by a segment of financial institutions beyond the narrow profit motive. Private or government central institutions are involved in such practices. In the U.S., under the national banking system, such functions were performed by the large banks of New York in the context of the gold standard (Duménil and Lévy, 2004, Box 18.1). Since the creation of the Federal Reserve in 1913, and its more active actions after World War II, this management of the macroeconomy is the object of monetary policy, supplemented by fiscal policy.
A central aspect of the PostKeynesian analysis is the “endogenous” or “accommodative” character of the issuance of money. Lenders (“commercial banks” for short) and central banks can only accommodate the demands for loans. Symmetrically, the opposite assumption concerning the “exogenous” character of money, in which monetary authorities determine the amount of credit and money, is harshly criticized. We reject this dilemma. Money is neither endogenous nor exogenous, but is co-determined — a third viewpoint.
We call “co-determination” the general twofold principle stating that: (1) in the analysis of the formation of demand, real and monetary variables must be simultaneously determined; and (2), less trivially, the actions of nonfinancial and financial agents are jointly involved. The behavior of households responds to their eagerness to buy, the level of their income, their monetary holdings, and the cost at which funds can be borrowed. Lenders typically assess risks; they can set an upper limit to the amounts borrowed or straightforwardly deny lending; they also take account of their own capability to lend and obtain refinancing on the interbank market, given the policies of the central bank and the opportunity to refinance opened by the securitization of loans; they are constrained by existing regulations; but the profit motive stimulates their propensity to lend. The central bank has multiple objectives such as managing the macroeconomy, in particular taming inflationary pressures, ensuring the smooth functioning of financial institutions, and limiting the degrees of indebtedness and the risks of financial crisis. One lever in the conduct of such policies is the modification of the interest rate at which banks are refinanced, but various balance-sheet ratios and regulations are also involved. The variations of net debts are the outcomes of such mechanisms.
The determination of the flows of new loans is traditionally approached as the confrontation of two functions, a (potentially vertical) supply curve for loans, and a demand curve for borrowing. Conversely, we model the variation of the net debt as in equations (1) or (3, below) by a single function accounting for all aspects of monetary and credit mechanisms, the “co-determined monetary function”, ΔN=F. A simple expression for F is, for example:
 |
(2) |
Besides the constant α, the term β Y simultaneously accounts for the determination of borrowers, given their income and the tendency of commercial banks to accommodate this demand when the economy is booming (and symmetrically within opposite situations). The term −γ N accounts for the concerns vis-a-vis levels of indebtedness on the part of both borrowers and lenders. The last term, −δj, describes the aversion of the central bank to inflation, and the consequences of its policy concerning the refinancing of banks. A similar function can be written making explicit the role of the interest rate, in turn manipulated by the central bank.
To the countercyclical action of central monetary authorities, one must add fiscal policy on the part of the government. As with any other agent, the government may borrow to spend more than its revenue (and symmetrically, may pay back its debt if its revenue is larger than its spending). Unlike other agents, however, this behavior can be countercyclical, as part of a deliberate action to stabilize the macroeconomy, or due to the stickiness of expenses (as in built-in stabilizers).
Concerning the capability of central monetary institutions and the government to influence money, credit, and spending, two aspects must be combined: (1) These institutions strongly impact the macroeconomy and, in the absence of this action, the macroeconomy would be unstable; (2) The efficacy of these actions is conditional, not always and unambiguously ensured. Government demand policy is specifically important when the channels of monetary policy become inefficient (for example, in a credit crunch during a crisis of financial institutions).
Appendix A introduces a number of models of a monetary macroeconomy, built along the lines introduced in the previous sections. The main results are as follows:
• Concerning short-term equilibria, we believe that their stability is always subject to conditions and that these conditions are susceptible to economic interpretation. As no decentralized mechanisms account for the stability of the macroeconomy, which is otherwise autonomously unstable, the action of the central bank is crucial. But this action is also subject to significant limitations. Notably, perturbations of financial markets may recurrently destabilize the macroeconomy. Overheating and recession are always around the corner. Overall, the stabilizing action of the central bank confines the deviations of the general levels of activity within certain limits. More than constantly maintained, stability is recurrently restored.
• Concerning long-term equilibria, assuming the preservation of the stability of short-term equilibria, long-term equilibria remain attractors around which the rather hectic short-term oscillations are observed. The problem concerning long-term equilibrium is the management of its level. It is a slow process, in which institutional transformations are implied. Thus, the gravitation of short-term equilibria around a normal value of the capacity utilization rate is constantly “shifted”, as the macroeconomy is involved in slow long-term fluctuations.
We first briefly recall Kalecki’s emphasis on the use of borrowing to finance investment, to which we devoted a specific study (Duménil and Lévy, 2012a). We next compare our views to the PostKeynesian approach to money as “endogenous”.
The financing of spending by borrowing, as introduced above, is reminiscent of Kalecki’s statements concerning financing. The view that the expansion of loans (“credit inflation”) can be used to finance investment is repeatedly stated by Kalecki. Loans are made to capitalists and finance their investment beyond their savings:5
How can capitalists invest more than remains from their current profits after spending part of them for personal consumption? This is made possible by the banking system in various forms of credit inflation.
Kalecki (1990, p. 148)
Thus, within Kalecki’s perspective, our equation (1) translates into:
 |
(3) |
To the eyes of most PostKeynesian economists, money is endogenously determined, meaning that the financial system always provides the loans demanded by nonfinancial agents. Thus, the absence of monetary variables within models is, sometimes, presented as a deliberate option. In the words of Basil Moore: “The financial system has no choice but to accommodate” (Moore, 1979, p. 58). Moore bases his assessment on the observation that commercial banks are enterprises, similar to other enterprises, responding to the demand of their customers. They are “price setters” and “quantity takers” (Moore, 1988, p. 381). By lack of capability or willingness, central banks accommodate the demands for refinancing.
A few PostKeynesian economists contend that, as in our co-determination approach, power is shared between nonfinancial and financial agents. In Mark Lavoie’s formulation: “Other post Keynesians6 prefer to recognize that the stock of money has endogenous as well as exogenous aspects” (Lavoie, 1984, p. 776).
Money endogeneity can also be questioned in reference to a Keynesian “liquidity constraint”. Foley emphasizes this mechanism in relation to the interconnectedness of transactions inherent in market economies, described in terms of “externalities”:
Keynes insisted by contrast that in real-world monetary economies many households and firms are’ liquidity-constrained’, that is, unable to finance spending beyond their immediate cash inflows by borrowing. In this more realistic world, spending itself has an important externality. Each household or firm that spends money not only accomplishes its own ends (consumption or production), but also relieves the liquidity constraint of other spending units.
Foley (2009, p. 15)
The treatment of financing channels is complex, as stocks and flows must be carefully articulated within accounting frameworks. This is manifest in the works of Marxist economists concerning Marx’s analysis of the circulation of capital in Volume II of Capital.7 A number of PostKeynesian economists use “transactions flow matrices” and “balance sheet matrices” (Godley and Lavoie, 2007).
The approach of PostKeynesian economists is quite distinct from ours (as introduced in the previous sections):
Note that we do not question the importance of financing procedures distinct from the credit channel. Their potential destabilizing impact is obvious. Within sophisticated monetary and financial economies, the multiplicity of financing channels renders the action of the central bank even more difficult.
This section focuses on general disequilibrium models, in which several industries are considered and other assumptions lifted. Only general principles are introduced, and the emphasis is on the main results. The objective is to show how the four first theoretical fields in Table 16.1 (short and long terms, and proportions and dimension) can be articulated within a unique coherent framework. Important conclusions follow, notably capitalist economies are stable in proportions, and at the limit of (in)stability in dimension, a thesis to be made explicit in the second subsection below. The third subsection briefly opens the broad field of the relationship between the historical term (the term of tendencies) and the business cycle.
This section introduces the main mechanisms typical of a general disequilibrium model:
St+1 = St + Yt − Dt
, the values of such ratios, as targeted by enterprises.
, they increase their capacity utilization rate. To a smaller extent, they also raise prices. When capacity utilization rates are large (u > ū), enterprises slowly increase their prices. They also tend to invest more (that is, ρ = I / K rises). When the profit rate in one enterprise or industry is larger than the average, the difference stimulates investment in that enterprise or industry. Since enterprises increase their investment when capacity utilization rates are large, they simultaneously initiate a return toward the normal use of productive capacities. (This twofold behavior aims at the adjustment of productive capacities in line with demand.) For example, the decision to produce (the determination of the capacity utilization rate) can be modeled as the adjustment of ut in reaction to two disequilibria: |
(4) |
Other behaviors must be modeled in a similar manner.
To obtain a full-fledged general disequilibrium model, the consumption and investment functions must be expressed, in conformity with the principle of co-determination, also accounting for the central role of monetary and credit mechanisms.
We have presented such general disequilibrium models in various earlier works (Duménil and Lévy, 1993, 1996). For each enterprise or industry, four variables must be considered: u, s, K, and p. To this first set of variables, one must add money stocks (deposits) and debts for all agents.
Usually, the determination of equilibria is rather easy, while the study of the stability of equilibrium is difficult. The distinction between various theoretical fields as above points, however, to two possible ways out, that may render the treatment of stability manageable. First, under the assumption that it is possible to sort out variables whose variations are judged to be rapid, and others to be slow, the distinction between time frames, short term and long term, suggests the use of the methodology of temporary equilibria. Second, the distinction between proportions and dimension allows for the factorization of the model. New “centered” or relative variables are defined. For example, for profit rates in each enterprise or industry, one can substitute the differences between these rates and an average profit rate; the same can be done for capacity utilization rates and prices (distinguishing between the “general level of prices” and “relative prices”). The average profit rate, the average capacity utilization rate, and the general level of prices account for dimension, and the centered (and relative) variables, for proportions. The main results are as follows:
• “Stable in proportions” refers to the capability of capitalist markets to allocate capital in the long term, and determine outputs in the short term, in various industries, in line with demand patterns. Potential buyers generally find what they seek in markets.
• “Instability in dimension” or, more rigorously, “at the limit of stability in dimension”, points to a twofold propensity of capitalist macroeconomies to deviate from normal levels. This is, first, manifest in the recurrence of overheating and recession (the expression of the instability of short-term equilibrium). Second, for longer periods of time, the average levels of output around which short-term fluctuations are observed may stray at a distance from normal levels (as defined by the sequence of long-term equilibria).
These findings straightforwardly echo Marx’s analysis in Capital. In the theory of competition in Volume III, Marx (1894) accounts for the mechanisms leading to the allocation of capital among industries and the prevalence of prices ensuring in each industry an equalized average profit rate, with corresponding prices and outputs. (Actually, a gravitation process because of recurrent shocks of variegated nature is involved.) Marx believed this mechanism to be efficient in capitalism (that is, stability in proportions). Conversely, the general level of output follows the characteristic pattern of the cycle of industry (the business cycle), with recurrent departures into overheating and recession (instability in dimension).
This section is devoted to the analysis of the historical transformations of stability conditions. A first aspect is the impact of declining profit rates. A second aspect is the effect of the progress of management and the development of monetary mechanisms on macro stability.
An interesting hypothesis proper to Marx’s analysis is the view that profit rates — their values and trends — impact macroeconomic stability. Recurrent downward fluctuations of profit rates may cause recessions. For example, in the short term, as in Marx’s analysis of overaccumulation, the growth of employment during a phase of expansion may push wages upward and temporarily diminish profits, and provoke a recession (Marx, 1894, ch. 15).
This impact may be felt in the longer term, and this suggests an interesting link between the historical and shorter terms. If the profit rate declines and remains low for more durable periods of time, a “structural” propensity to instability prevails, with more frequent and deeper recessions, as during the 1970s.
One mechanism accounting for the impacts of profit rates is their potential influence on parameter ε in equation (4) (accounting for the decision by enterprises to increase or diminish production depending on the levels of inventories). As stated in the previous section, if the response to excessive or deficient inventories is too strong, this mechanism may trigger cumulative movements of output, downward or upward. Profit rates command cash flows and liquidities and, thus, affect ε. (The continuation of production at given levels depletes liquidities if sales are diminished.)
It is well-known that the emergence of the modern pattern of business-cycle fluctuations echoed the development of money and finance in capitalism. The built-in instability began to manifest itself when monetary-financial mechanisms reached a sufficient degree of development, as during the first half of the nineteenth century in Europe. In combination with the progress of the management of enterprises, notably since the end of the nineteenth century, the gradual expansion of financial mechanisms fostered a tendency toward increasing macro instability, a “tendential instability”.
To account for such trends, the potential impact of the variations of reaction parameters in the modeling of behaviors can be considered in an historical perspective. The financial system became gradually more inclined to accommodate the demand for loans, a rise of parameter β in equation (2), a tendency in which financial innovation played a prominent role. The progress of the management of enterprises induced a rise in parameters such as ε in equation (4). These historical drifts in the value of parameters rendered the satisfaction of stability conditions more difficult.
The second facet of the tendential instability thesis is, however, that this movement toward increased instability was checked by the historical progress of countercyclical central mechanisms, thus becoming gradually more necessary. The Federal Reserve, created in 1913, was substituted for the national banking system, although the movement toward genuine management of the macroeconomy was only gradual. The corresponding stabilizing mechanisms only reached mature forms after the New Deal and World War II, in the context of the Keynesian revolution. Neoliberalism did not destroy the domestic framework in which monetary policy is conducted, rather the contrary, but altered its objectives.9 The new conditions created by financial globalization during the 2000s finally unsettled the foundations of the policies conducted by the Federal Reserve (Duménil and Lévy, 2011, ch. 14).
Thus, the tendential instability thesis points to an historical process in which resistances and setbacks are recurrently observed. But the pressure of events, as in recurrent crises, finally has the edge, though the costs may be huge, as in structural crises.
This section provides interpretations of the fluctuations of the capacity utilization rate as in Figure 16.1, in line with the analytical framework introduced in the present study:
• The awareness of the partial recovery of output in the recession of the late 1950s induced the bold fiscal policy of the 1960s on the part of President Kennedy’s advisers, aiming at stimulation of the macroeconomy. In combination with the financing of the Vietnam War, this policy contributed to a rise of output to unusual levels.
• Then, the decline of profit rates altered the basic conditions underlying the trade-off between the fight against inflation and the preservation of growth in the direction of increased inflation. In the context of the rather accommodative policy of the central bank after 1973,10 an upward trend of prices was observed, paralleling the decline of the long-term fluctuation in what has been called “stagflation”.
• The shift of the long-term fluctuation to lower levels during the structural crisis of the 1970s was prolonged into the early 1980s, when the sudden rise of interest rates, the “1979 coup”, further bent the long-term fluctuation (and caused the recession of the early 1980s, whose analysis belongs to the short-term fluctuation).
• During the 1980s and 1990s, the preservation of “decent” levels became gradually more problematic in the context of the growing deficits of foreign trade and globalization (Duménil and Lévy, 2011). The severe character of the situation was temporarily hidden by the boom of information technologies during the 1990s, with a significant stimulation of investment. When this unexpected bonanza came to an end around 2000, a new decline in the long-term fluctuation occurred, whose severity was only partially checked by the upward trends in residential investment.
In these movements the recurrent actions of the central bank and government are manifest, in particular in the upward movement from the late 1950s to the 1960s, the fight against inflation culminating in the early 1980s, and the attempt to boost the U.S. macro trajectory by a bold mortgage policy (and deregulation) prior to the current crisis.
• The 1950s and 1960s manifest the typical pattern of the “stop and go”, in the context of still immature stabilizing procedures.
• One can, then, observe the occurrence of sharp departures upward and downward, with rapid — a few quarters long — transitions (for example, the dramatic two-quarter fall in 1974).
• A closer examination reveals clusters of observations, when the capacity utilization rate stabilizes (gravitates in the vicinity of given positions): (1) close to the long-term fluctuation (as in 1963, 1984, and during the long boom); (2) for comparatively higher positions, as in overheating (as in 1979); and (3) for comparatively lower positions as in the lasting recession of 2001–2002.
• The three broad cycles during the 1970s and early 1980s (the period of declining profitability) are spectacular.
1 http://www.jourdan.ens.fr/levy/dle2011gA.pdf
2 http://www.jourdan.ens.fr/levy/dle2011gB.pdf
3 Keynes is very conscious of this distinction and criticizes the almost exclusive emphasis on proportions in what he calls “classical economics”: “Most treatises on the theory of Value and Production are primarily concerned with the distribution of a given volume of employed resources between various uses and with the conditions which, assuming the employment of this quantity of resources, determine their relative rewards and the relative values of their products.” (Keynes, 1936, p. 4).
4 Consumption might increase less than output, with stabilizing effects. Empirical investigation is required here.
5 The quotation is found in Malcom Sawyer (2001).
6 With reference to Weintraub (1978) and Davidson (1980).
7 Duménil (1977), ch. II, L’élaboration des schémas: Flux et stocks, and ch. III, L’élaboration des schémas : Les mécanismes du crédit. Foley (1986), ch. 5, The reproduction of capital.
8 The case of services requires a specific treatment which we do not consider here.
9 As in the Deregulation and Monetary Control Act of 1980. See Duménil and Lévy (2000, box 18.5).
10 The fact that the theory of accommodative money was developed during those years is certainly not coincidental.
Davidson, P. (1980) ‘The Dual-Faceted Keynesian Revolution’, Journal of Post Keynesian Economics, 2: 291–307.
Duménil, G. (1977) Marx et Keynes face à la crise, Paris: Économica.
Duménil, G., and Lévy, D. (1993) The Economics of the Profit Rate: Competition, Crises, and Historical Tendencies in Capitalism, Aldershot, UK: Edward Elgar.
Duménil, G., and Lévy, D. (1996) La dynamique du capital. Un siècle d’économie américaine, Paris: Presses Universitaires de France.
Duménil, G., and Lévy, D. (2000) Crise et sortie de crise. Ordre et désordres néolibéraux, Paris: Presses Universitaires de France.
Duménil, G., and Lévy, D. (2004) Capital Resurgent. Roots of the Neoliberal Revolution, Cambridge, Massachusetts: Harvard University Press.
Duménil, G., and Lévy, D. (2011) The Crisis of Neoliberalism, Cambridge, Massachusetts: Harvard University Press.
Duménil, G., and Lévy, D. (2012a) ‘Modeling Monetary Macroeconomics: Kalecki Reconsidered’, Metroeconomica, 63: 170–199.
Duménil, G., and Lévy D. (2012b) ‘A Reply to Amitava Dutt’, http://www.jourdan.ens.fr/levy/dle2012h.pdf
Dutt, A. (1988) ‘Convergence and Equilibrium in Two-Sector Models of Growth, Distribution and Prices’, Zeitschrift für Nationalökonomie, Journal of Economics, 48: 135–158.
Foley, D. (1986) Understanding Capital, Marx’s Economic Theory, Cambridge, MA and London: Harvard University Press.
Foley, D. (2009) The Anatomy of Financial and Economic Crisis, New York: New School University.
Godley, W., and Lavoie, M. (2007) Monetary Economics. An Integrated Approach to Credit, Money, Income, Production and Wealth, London and Basingstoke: Palgrave.
Kalecki, M. (1990) Capitalism: Business Cycles and Full Employment, Collected Works of Michal Kalecki, I (Edited by J. Osiatynski), Oxford, UK: Clarendon Press.
Keynes, J.M. (1936; 2nd edn 1967) The General Theory of Employment, Interest and Money, London, Melbourne, and Toronto: Macmillan.
Lavoie, M. (1984) ‘The Endogenous Flow of Credit and the Post Keynesian Theory of Money’, Journal of Economic Issues, 18: 771–797.
Lavoie, M., and Ramirez-Gaston, P. (1993) Traverse in a Two-Sector Kaleckian Model of Growth with Target Return Pricing, Ottawa: University of Ottawa.
Marx, K. (1862; edn 1971) Theories of Surplus Value, Moscow: Progress Publisher.
Marx, K. (1894; edn 1981) Capital, Volume III New York: First Vintage Book Edition.
Minsky, H. (1994) ‘Financial Instability Hypothesis’, in P. Arestis and M. Sawyer (Eds.) The Elgar Companion to Radical Political Economy, Aldershot, UK: Edward Elgar, pp.153–157.
Moore, B.J. (1979) ‘The Endogenous Money Stock’, Journal of Post Keynesian Economics, 2: 49–70.
Moore, B.J. (1988) ‘The Endogenous Money Supply’, Journal of Post Keynesian Economics, 10: 372–385.
Sawyer, M. (2001) ‘Kalecki and Finance’, European Journal of the History of Economic Thought, 8: 487–508.
Weintraub, S. (1978) Capitalism’s Inflation and Unemployment Crisis, Reading, MA: Addison-Wesley.
