Abstract
We study a two-class model of growth and the distribution of income and wealth at the intersection of contemporary work in classical political economy and post-Keynesian economics. The key insight is that aggregate demand is an externality for individual firms: this generates a strategic complementarity in production and results in equilibrium underutilization of the economy’s productive capacity, as well as hysteresis in real output. Underutilization also affects the functional distribution of income and the distribution of wealth: both the wage share and the workers’ wealth share would be higher at full capacity. Consequently, fiscal allocation policy that achieves full utilization also attains a higher labor share and a more equitable distribution of wealth; while demand shocks have permanent level effects. Extensions look at hysteresis in the employment rate and growth. These findings are useful as an organizing framework for thinking through the lackluster economic record of the so-called Neoliberal era, the sluggish recovery of most advanced economies following the Great Recession, and the importance of fiscal policy in countering large shocks such as the Covid-19 pandemic.
Highlights
From 1980 onward the so-called “Neoliberal era” in the United States has been characterized by a slow but persistent atrophy of federal government economic activity
We study a two-class model of growth and the distribution of income and wealth at the intersection of contemporary work in classical political economy and the post-Keynesian tradition
We study a growth and distribution model at the intersection of contemporary work in classical political economy and post-Keynesian economics
Summary
From 1980 onward the so-called “Neoliberal era” in the United States has been characterized by a slow but persistent atrophy of federal government economic activity. A key feature of our model is the elimination of the “efficiency-equity trade-off” that affects classical-Marxian growth models, where the main engine of accumulation and growth is the capitalist profit motive This result highlights some important political economy implications: while we show that firms’ profits at full utilization are higher in levels, both the share of profits in total income and the capitalist share in total wealth are lower: this finding may help shed some light on the aversion to activist fiscal policy to achieve full-employment by upper-income classes and businesses, which has been a constant in the US political arena at least since the reaction to the New Deal in the 1940s (Kalecki, 1943; Carter, 2020, Ch. 13).
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