Abstract
Building on ideas of Joseph Schumpeter, this paper constructs and compares a real and a monetary model of capitalism. The paper’s thesis is that real and monetary analysis are both necessary for describing the capitalist cycle. The real model is in four parts. The first part is a simplified static Walrasian exchange. The second part uses a time dynamic to show price and productivity equilibrium over time. The third part defines surplus-value, capital, accumulation, profit and producer’s surplus. The fourth part defines economic evolution and long-term analysis. Each of the four parts has a corresponding Mathematica program and a table of sample data. The real model shows a relationship between long term average profit, GDP and capitalization. A monetary model is then constructed which empirically defines monetary and real products, the capital-market, the real economy and investment. The monetary model is first described under conditions of laissez-faire. The concepts of appreciation, overinvestment and the capitalist cycle are defined with the aid of the real model. Finally, the post laissez-faire capitalist cycle is described with an emphasis on the government policies of post 1980 capitalism. The conclusion of the paper—based on the real and monetary models—is that post 1980 capitalism changes but does not eliminate the capitalist cycle because government policies do not address over-investment, rather these policies abet over-investment.
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Notes
Walras is credited by Schumpeter as one of the ‘discoverers’ of marginal utility and therefore a founder of neo-classical economics. The neo-classical theory of value is also called the marginal utility theory of value. But, “So soon as we realize that it is the general equilibrium system which is the really important thing, we discover that, in itself, the principle of marginal utility is not so important after all. . .” (Schumpeter 1954. 918). For a time Walras believed utility was measurable (Schumpeter 1954. 1055). Utility is neither measurable nor necessary.
Schumpeter has a clear exposition of Walras’ exchange that uses very little mathematical symbolism (Schumpeter 1954. 1003–1009); Walras’ mathematical symbolism is (to me) all but incomprehensible.
The demand coefficients of all but one persons i for a specific product j (call j labor) can be zero as a special case; this would describe a laborer j who sells all q j to a single person i.
The time subscript can be left off of the individual set members (q i and x i ) if the time is otherwise stated.
Sraffa’s system is a real model in which prices are determined through simultaneous solution but without resorting to demand functions. Neither my real model nor Sraffa’s are amenable to marginal technique.
Parameters and sample data are shown in ESM 1, “DynamicExchange.”
“… it is not immediately evident either how capital should be defined or how the quantity of capital should be measured.” (Steedman 1988. 1). However defined, the function and purpose of capital must be the production of surplus value. In my real model a bank loans capital as price-value to producers who use it to produce surplus-value which becomes the property of the bank as capital in the form of physical product. In Karl Marx’s model, the capitalist hires labor and “…the labourer works under the control of the capitalist…the capitalist taking good care that the work is done in a proper manner…” (Marx 1906. 206). Marxian surplus-value is created through wage laborer hired by the capitalist/business-owner. It is safe to say that the economics of David Ricardo, J. M. Keynes and Piero Sraffa are also modeled on business-owner and wage labor. Schumpeter notes that under Roman law capital was defined as “…the principal of a loan…” (Schumpeter 1954. 322)
Both Schumpeter and Walras modeled the entrepreneur as distinct from laborer and capitalist. Schumpeter saw the capitalist as the lender of capital (Schumpeter 1934. 69) and the entrepreneur as its borrower (Schumpeter 1934. 74). “Walras blamed English economists for confusing the entrepreneurial function with that of the capitalist and French economists for confusing it with labor. . .” (Schumpeter 1954. 1000n). My real model makes no distinction between producer as laborer or entrepreneur because my real modeled surplus-value does not require this distinction.
Parameters and data for various economies and capitalizations are in the ESM 1, “Capital”.
This data is in 3.3 of the Tables.
Parameters and data from “Evolution” are in ESM 1.
Hitchless means no endogenous flaw.
This data is in 4.2 of the Tables. Both Schumpeter’s and my real model see change as non-incremental, discrete rather than continuous. Change is essential to his conception of the capitalist cycle in The Theory of Economic Development where he writes that economic development is defined by “discontinuous change” and that disequilibrium is the norm (Schumpeter 1934. 64). The “perennial gale of creative destruction” is Schumpeter’s argument against “the theory of vanishing investment opportunity” (Schumpeter 1947. 112). To Schumpeter “. . . Creative Destruction is the essential fact about capitalism.” (Schumpeter 1947. 83). However, evolution mostly harms “investment opportunity” in my real model (without becoming an endogenous flaw). The essential thing about evolution in my model is for it to allow for general analysis, change through a full range of economic behavior, and understand the effect of this change on growth in GDP, accumulation and profit, as well as to determine whether and under what circumstances it can cause the model to crash. Surplus-value rather than evolution is the essential fact of my real model.
This data is in 4.1 of the tables.
“. . . any economic theory which separates what economists are wont to call the real economy from the financial system can only mislead and bear false witness.” (Minsky 1982. vii). I believe this is extreme.
A monetary product is either potentially eternal (e.g., publicly traded equity in a joint-stock corporation, bank account, gold) or else matures at a legally defined time at which it is redeemed for money-value denominated in a specific currency (e.g., bond, mortgage, commodity futures contract). Monetary products are limited to financial paper (equities, securities, currencies, etc.) and bullion. The monetary model does not distinguish between different types of monetary products.
John Maynard Keynes use of the term savings is not identical to my term investment; The General Theory does not, for example, consider a share of stock to be savings nor does it consider holding cash as investment. Keynes uses the word investment to mean either the purchase of real productive capacity or the purchase of an exchange traded monetary product such as a bond or a share of stock (sometimes he refers to this as “speculative investment”) (Keynes 1936. 75, 320). My investment equals Keynes’ savings plus his monetary investment. My consumption equals Keynes’ consumption plus his real product investment.
An individual purchases (1) a loaf of bread, (2) a factory machine, (3) a share of stock, (4) puts some money in a bank account. Under the definitions of the monetary model, (1) and (2) are consumption, (3) and (4) are investment. It should be noted that all investors are necessarily consumers, but consumers are not necessarily investors. Under the definitions of the monetary model, homes are real products in that any hoped for appreciation and or rent associated with such products usually involves some exertion by the owner, involving some improvement, repair or change to the product; on the other hand, a mortgage or share in a REIT is a monetary product. Of monetary products, bullion alone can count as either a monetary or a real product, depending on whether or not gold, silver, etc. is consumed as an input of real production. All financial services (tellers, brokers, etc.) are defined as real in that all services are necessarily consumed.
Keynes expresses this inversely as “the propensity to consume.” Using Keynes’ terminology with my definitions gives ∆I/∆C>1, where I equals that portion of aggregate income used to buy monetary products and C equals that portion of aggregate income used to buy real products.. Keynes limits his use of the propensity to consume to the proposition that ∆Y/∆C <1, where Y equals aggregate income and C means the consumption of consumer goods (Hansen 1953. 10).
“Empirical data appear to show conclusively that consumption in fact rises and falls cyclically less than in proportion to the rise and fall in real income.” (Hansen 1953. 79) I assume this is still true, and true under my definition of consumption.
Schumpeter accepts this definition, Ricardo’s ‘fictitious capital’ (Schumpeter 1954. 724), but a capital-market in the narrower sense of ‘money-market’ (Schumpeter 1934. 124). “… fictitious wealth, represented by public debt and other forms of capital without intrinsic value…” (Einzig 1935. 67). The definition of a monetary product says nothing about a monetary products ‘agency’ in the creation of surplus-value.
Schumpeter says the first observable capitalist cycle was in England in 1821 (Schumpeter 1934. 215).
The best minds work night and day towards that end.
The monetary model does not say that the money-value of the products and services of real GDP and the payments to the producers of real products and services for the same given year are necessarily equivalent.
Q t has empirical, measureable meaning in the actual economy. Q t * does not.
“. . . one may think it more useful to build a hitchless model first and then superimpose the stress. . .” (Schumpeter 1954. 566). This paper superimposes a monetary stress on a hitchless real model.
This is not the same as the monetarists’ over-investment theories, where investment is not defined as the purchase of monetary product; over-investment in such theories is equivalent to over-capacity. Keynes’ theory is an under-consumption theory.
“Progress and prosperity require a certain minimum amount of fictitious capital, without which even the most highly developed industrial system becomes paralyzed. On the other hand, if the fictitious capital exceeds the proportions required, it may become a dead-weight burden which will handicap progress and interfere with prosperity. This is all the more so because fictitious capital has to be fed [dividends, interest] at the expense of income derived from production.” (Einzig 1935. 67)
“Even though Keynesians and monetarists differ in their policy proposals, they use a common economic theory; they are branches of a common economic theory, which is usually called the neo-classical synthesis. Instability… is foreign to the economic theory of the neoclassical synthesis; it cannot happen as a normal result of the economic process. It is self-evident that if a theory is to explain an event, the event must be possible within the theory.” (Minsky 1982. 16).
The 1980’s saw applied macro-economic science pass from the authority of John Maynard Keynes to that of President Ronald Reagan: the Reagan Revolution. “[Professor Morris Lee] was speaking about the Reagan economic program and Reaganomics and he said, “It is indeed a revolutionary program. It represents the first time any administration has assumed responsibility for an economic stabilization program without resorting to known economic theory or evidence.”” (Federal Reserve Bank of Atlanta Conference Proceedings 1982. 235). Today Reaganomics is a broad rubric which encompasses deregulation, supply-side economics (in which “deficits don’t matter” because “… it is clear that reducing the marginal tax rate on capital actually raises tax revenues” (Canto et al. 1983. 221)), and austerity. Austerity means that, on the other hand, if deficits were to matter, budgets should be balanced by reducing government funded programs that primarily benefit the lower classes.
My real and monetary models define a narrow vision of actual capitalism, chosen solely to describe the cycle. Other models can also show an increasing inequality of wealth. Ricardo wrote, in 1817, “…I am convinced that the substitution of machinery for human labor is often very injurious to the interest of the class of laborers.” (Ricardo 2005. 293). A real model composed of employer-owners and employees in an economy that produces consumer and producer goods can easily show that as automation continues, the owners must either consume a greater proportion of the consumer goods, reduce employment, or lower the prices of the goods they sell. Malthusian considerations in a private ownership economy with both population growth and automation can show an increasing inequality in ownership of land and mineral resources. Many different economic models can be simultaneously correct, each describing a particular economic aspect using a particular set of definitions.
A 2009 advertisement for the Charles Schwab brokerage states that, “Investors rule” and, “Without investors there are no jobs.” Unfortunately, as Chancellor Angela Merkle has informed us, “The investors are not happy.”
Perhaps an example will be instructive. Before the crisis of 2008, Iceland had a GDP of approximately 15 billion Kronur, while its three largest banks had assets totaling approximately 14.5 trillion Kronur (Wall Street Journal June 9th, 2015.).
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Kitchel, D. A real and monetary analysis of capitalism. J Evol Econ 26, 443–464 (2016). https://doi.org/10.1007/s00191-015-0440-6
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DOI: https://doi.org/10.1007/s00191-015-0440-6