Kaleckian Investment and Employment Cycles in Postwar Industrialized Economies

Peter Flaschel, Reiner Franke and Willi Semmler
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Reiner Franke: Faculty of Economics, Kiel University. Kiel

No 2103, Working Papers from New School for Social Research, Department of Economics

Abstract: The role of the welfare state in the post-war industrialized economies has recently become a major topic. Using a Kaleckian framework we consider an economy where investment depends positively on the rate of return on capital and negatively on the rate of employment. This allows for a possible integration of Kalecki's (1943) analysis of the political aspects of full employment. We use Okun's law to link the goods market with the labor market. We separate laws of motion for wage and price inflation in order to integrate the role of changing income distribution into this framework of effective demand and employment dynamics. There is a balanced growth path solution for this model which however is likely to be locally unstable. From the global perspective, the turning points in long lasting phases of strong economic growth are given by an increasing reaction of investment, and of fiscal and monetary policy, to the consequences resulting from full employment and the evolving welfare state (represented by generous welfare payments, labor market institutions in favor of labor, and co-determination). In subsequent long-phased depressions profit-led goods demand in combination with declining real wages (enforced by mass unemployment and labor market reforms) may account for lower turning points and for a return to normal and subsequently possibly again excessive economic activity. Such nonlinearities in economic behavior far off the balanced growth path imply the global viability of the economic dynamics. On the other hand, in contrast to such a conflict-driven macro economy, as Kalecki (1943) has perceived it, the business leaders and policy makers could pursue a consensus-driven macro economic dynamics stressing a more collaborative and long term approach which will, as we show, take on a more stable path. Pursuing those two social aspects of macro dynamics the paper lays some foundations for an economic analysis of the role of the welfare state in post-war industrialized economies.

Keywords: Long-phase cycles; income distribution; welfare state; fiscal and monetary policy (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2021-02
New Economics Papers: this item is included in nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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