Not “wage-led” versus “profit-led,” but investment-led versus consumption-led growth

Abstract:

This paper offers a critique of the concepts of “wage-led” and “profit-led” growth based on an application of the circuit of capital macroeconomic framework. Wages are shares of capital outlays sustaining production and circulation of goods; profits are shares of sales. This ensures that the functional distribution of income and the level of output are jointly conditioned by the measure of aggregate demand relative to capital outlays. It is spurious to attribute causal significance to associations between functional distribution and output. The paper develops a series of comparative exercises to consider the relationships between the real wage, output, and distribution once functional income flows are understood not as a sharing of output but in relation to the expenditures funding them. This generalizes and challenges neo-Kaleckian appreciations of those relationships. Finally, the paper advances a new analytical and policy taxonomy concerning growth and distribution, centered on the distinction between the consumption-led regimes recently experienced by the United States, Britain, and many middle-income economies, and alternative investment-led growth regimes that may support the high-growth, high-wage-share evolutions sought by adherents of “wage-led” growth.

Key words::

• circuit of capital
• demand regimes
• income distribution

JEL classifications::

• B5
• E11
• E12

Notes

¹“It is purely a tautology to say that crises are caused by the scarcity of solvent consumers. …  If any commodities are unsaleable, it means that no solvent purchasers have been found for them … . But if one were to attempt to clothe this tautology with a semblance of a profounder justification by saying that the working class receive too small a portion of their own product, and the evil would be remedied by giving them a larger share of it, or raising their wages, we should reply that crises are precisely always preceded by a period in which wages rise generally and the working class actually get a larger share of the annual product intended for consumption” (Marx, 1893, pp. 475–476).

²See Stockhammer and Onaran (2012) and Onaran and Galanis (2012) for apt, representative reviews.

³As formally codified by Foley (1982, 1986) on the bases provided by Marx (1885).

⁴The symmetry here between statements of Say’s law and the common, modern form given to its rejection is notable.

⁵The benchmark references on these aspects of “financialization” are Lapavitsas (2009) and dos Santos (2009a).

⁶For an unselfconscious, precrisis account of this broad macroeconomic strategy in the United States, and its relationship to the promotion of real-estate price appreciations and “subprime” lending, see Greenspan (2007).

⁷Savings rates fell from 10 percent to 2 percent in the United States between early 1980 and early 2008. The figures for Britain point to a fall from 14 percent to 0.9 percent. Calculated from the U.S. Federal Reserve and UK Office for National Statistics data.

⁸Calculated from the U.S. Bureau of Economic Analysis and Bank of England Data.

⁹See Mentzer et al. (2001) for a discussion.

¹⁰Throughout, let $${\chi }_{\zeta }^a$$ and $${\chi }_{\zeta }$$ denote the derivatives with respect to a variable ζ of functions $${\chi }^a$$ or χ, respectively.

¹¹Assuming that a > 0 and $$\tau /(1+\tau )(s-b)\ge a_k(c+a)$$, to ensure positive solutions and demand stability.

¹²As noted by Lavoie (1992), Del Monte (1975), and Rowthorn (1981) independently developed the same points.

¹³Nikiforos and Foley (2012), and Palley (2013), and Tavani et al. (2011) present salient discussions in this regard.

¹⁴See Pasinetti (1974) for a discussion of Keynes’s contribution in relation to earlier rejections of the law.

¹⁵This discussion draws extensively on private correspondence with Duncan Foley, and on ongoing work developing models of the circuit of capital with endogenous specifications for sectoral outlays. See Foley (2013).

¹⁶The inclusion of interest payments and spreads between rates paid on gross monetary assets and liabilities would simply broaden this requirement by including the evolution of aggregate bank capital into this accounting identity.

¹⁷While latent in Graziani (2003) and Lavoie (1992), this was first pursued explicitly in dos Santos (2013).

¹⁸Note that in settings of labor-cost markup pricing, this measure will not depend on labor-output ratios.

¹⁹In a broader framework, greater consumption by the state and to net exports will also boost profit shares.

²⁰The parameters λ and υ are added because it will be useful to consider the effect of relative increases in capital outlays and consumption by wage earners. These parameters can be taken as measures of financial or balance-sheet looseness, and are assumed to have positive effects on relevant sectoral outlays.

²¹Throughout, $${\eta }_{\chi }^{f[\chi ]}$$ denotes the χ elasticity of $$f[\chi ]$$.

²²It is left to the reader to verify that if all income elasticities of outlays exceed 1 and the demand regime is unstable, increases in the two shift parameters have the same effects on distribution as in the stable case, but will reduce output. Both parameters will have the same effect on distribution only when the elasticity of capital outlays and the average consumption elasticity are configured so that one of them exceeds while the other falls short of unity.

²³For U.S. data, see http://research.stlouisfed.org/fred2/series/PSAVERT/.

²⁴See Foley (2013), which deliberately uses the circuit of capital framework to develop a model where sectoral outlays are conditioned by sectoral stock-flow targets that are pursued through linear dynamic adjustment processes.

²⁵In a private, closed economy considered here, positive savings by wage earners ensure capitalist net monetary position is negative. Note that this measure will be larger than –1, ensuring a positive overall capitalist net-worth.

²⁶Which follow from the requirement that the three ratios defined above are constant over time.

²⁷See Case et al. (2012) for evidence of “wealth effects” of home-price movements on U.S. consumption.

²⁸For an early discussion of the distinctive obstacles for a market-based recovery from a recession characterized by household overindebtedness, see dos Santos (2009b).

Additional information

Notes on contributors

Paulo L. Dos Santos

Paulo L. Dos Santos is an assistant professor of Economics at the New School for Social Research, in NYC. The discussion offered in this paper arose from an ongoing conversation with Duncan Foley concerning the Circuit of Capital and its distinctive macroeconomic purchase. It draws on lengthy private exchanges, and on the discussion and models developed in Foley (2013). All views and errors below are my sole responsibility. The paper has also benefitted greatly from comments provided by Peter Skott, Jo Michell, Gary Dymski, and the participants of the Post-Keynesian Study Group Annual gathering of June, 2013, in London. I am also indebted to an anonymous referee for prescient comments suggesting improvements to a number of turgid, inscrutable parts of previous versions of this paper.