Class conflict, fiscal policy, and wage-led demand: A model of Kalecki’s Political Business Cycle

Abstract

This paper provides a demand-driven growth model of Kalecki’s (1943) political business cycle. It incorporates the three fundamental assumptions that govern Kalecki’s model: wage-led demand, the reserve army of labour effect, and the capitalists’ disproportionate power over fiscal policy. In our model, endogenous cycles are the outcome of the capitalists’ changing preferences over fiscal policy. The decreasing opposition to fiscal expansion by capitalists triggers the boom phase of the cycle, lest demand deficiency leads to a slowdown in accumulation. The downturn of the cycle is induced by the capitalists’ rising opposition to government spending, lest the workers’ growing political power at the peak of the cycle undermine their influence. This is unlike Goodwin and neoclassical PBC models, where a profit squeeze and the timing of elections or political ideologies determine cycles.