A stagnationist model of economic growth

Abstract

In an economy subject to persistent excess capacity, demand-related factors will play a key role in determining patterns of secular change. This thesis has a long history in econ omics, sometimes in the underworld and occasionally at the height of fashion. As recounted by Rowthorn (1982), recent manifestations in the First World are the theories of monopoly capitalism of Baran and Sweezy (1966) and Steindl (1952), who in turn follow Kalecki (1971), Hobson (1902), Luxemburg (1951) and the Marx of realisation crises and reproduction schemes in Volume II of Capital. Other radicals such as Boddy and Crotty (1975) add a profit-squeeze explanation of the cycle which underlays the dynamics of the growth model specified here. In developing countries, difficulties in both realisation and sectoral proportions are emphasised as obstacles to growth—witness Lustig's (1980) review of Latin American structuralist theory and Dutt's (1984) model which formalises an ongoing controversy in India about how income redistribution might affect prospects for industrialisation. All these authors are 'stagnationist' in assuming that both the growth rate and the level of capacity utilisation can be different under different conditions of income distribution and/or macroeconomic policy—their preferred policies will presumably lead to greater equality, increase utilisation or step up growth. They typically ask two analytical ques tions: How does output respond in the short run to shifts in the income distribution? How do output adjustments feed back into distributional dynamics, especially under conditions when price and wage inflation rates may be influenced by employment levels, productivity changes, and conflicting income claims? In what follows, we set out a simple model to address these questions and explore the implications for macroeconomic policy of the answers that arise. Since the approach is not familiar to economists with a standard training, a verbal description of the growth model is given first. Those who wish to jump directly into a formal presentation can proceed to section 1. Output X is assumed to meet demand in an 'instantaneous' short run. We measure activity as the ratio of firms' net cash inflow to the value of capital stock, i.e., the rate of profit r. During the short run, the price level P is fixed by a mark-up rule: P= (1 + x)wb, where r is the mark-up rate, w the money wage, and b the labor-output ratio. With this rule, the share of profits (or mark-up income) in the value of output is r/(l +t). Let u stand for the output-capital ratio or 'capacity utilization' XiK. By simple identity