Endogenous Cycles and Chaos in a Capitalist Economy: A Circuit of Capital Model

Xiao Jiang

Metroeconomica, 2015, vol. 66, issue 1, 123-157

Abstract: This paper introduces a firm-level simulation model of the circuit of capital with financially extended Harrodian investment behavior. The model demonstrates that capitalist economies with heterogeneous firms can endogenously generate chaotic cycles. Stability and bifurcation analyses show that the (Harrodian) instability of the system is caused by the firm's ‘aggressiveness’ regarding the size of the ‘rent’ between investiments in the financial and the goods markets. Furthermore, the heterogeneity of firms results in a chaotic pattern of capital accumulation. Finally, a set of steady states around which the system fluctuates chaotically is found by solving the balanced growth problem.

Date: 2015
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