Political Business Cycle

Abstract

Marx (1867) argued that conflict between labour and capital over the distribution of national income leads to cyclical booms and slumps. In the expansionary phase of the cycle, the reserve army of unemployed diminishes and workers bargain more successfully for a higher share in income which eventually leads to a profit squeeze. To end this decline in profits, capitalists slow down the rate of capital accumulation in order to reduce labour’s bargaining strength and thus bring the expansionary phase to a halt. The business cycle is, according to Marx, mainly dependent on the power of the capitalist class rather than on government actions. The advent of Keynesian demand management promised the achievement of full employment and thus the elimination of any form of business cycle. However, in the pioneering paper on the political business cycle Kalecki (1943) argued that the class instinct of business leaders tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the capitalist system. Kalecki argued that the capitalists will convince the incumbent government of the need for policies to arrest the rise in strength of the working classes whereas Marx argued that the capitalists achieve this themselves with the aid of an ‘investment strike’. Also, Kalecki stressed that with lasting full employment the self-assurance of the working classes will grow with a consequent undermining of the social position of the bosses even though the economic position of the bosses need not be undermined. (Kalecki’s theory of monopoly pricing meant that firms could maintain profit margins under full-employment conditions.) Boddy and Crotty (1975) show, on the basis of post-World War II evidence, that macroeconomic policy has served the capitalist class in their aim of profit maximization while organized labour has served as a constraint on the economic interests of capitalists. Political business cycles are thus generated by the twin phenomena of macroeconomic policy serving capitalists and organized labour seeking to constrain this service. The development of the capitalist economies over the years 1979–85 suggests casual evidence for the Kaleckian view of the political business cycle. During the late 1960s and 1970s most of these economies, due to lasting high levels of employment, experienced a wages explosion, the strength of trade unions increased considerably and the share of profits was squeezed. This led to rampant inflation and large public sector deficits, which strengthened the plea of business corporations to deflate the economy and reduce the strength of the workers’ movement. Most Western governments (e.g. US, UK, West Germany, Holland) responded with a severe tightening of demand and acted in the interests of capitalists, in certain cases even at the expense of political popularity.