Classical Political Economy and Secular Stagnation

Abstract

This paper presents a model of secular stagnation, income and wealth distribution, and employment in the Classical Political Economy tradition, that can be contrasted with the accounts by Piketty (2014) and Gordon (2015). In these explanations, an exogenous reduction in the growth rate g -because of declining fertility or the exhaustion of path-breaking scientific discoveries-increases the difference with the rate of return to capital r. The capital-income ratio rises, and if the elasticity of substitution is above one, the wage share falls. Both Piketty and Gordon assume full employment at all times. In our explanation, which does not presuppose full employment, the key tension is between profit-driven capital accumulation and wage-driven labor-augmenting technical change: both are defining for Classical Political Economy, and have been emphasized in recent heterodox macro literature. Laborcrushing institutional or technological shocks initially foster capital accumulation -which is profitdriven-and increase wealth inequality. However, the effect on long-run growth is negative, because of the reduced incentives by firms to introduce labor-saving innovation, which is wage-driven. The capital/income ratio must rise in order to restore balanced growth in the long run; and the increase in wealth inequality is permanent. The ultimate effect on long-run employment depends on the strength of the response of labor-augmenting technical change vs. the response of real wage growth to labor market institutions: accordingly, long-run employment can either be wage-led or profit-led. We then test the model using time-series data for the US (1990US ( -2019: the test offers support to the main predictions of our model, and to the employment-population ratio being wage-led.

Post-Keynesian growth theory and the supply side: a feminist approach

“…As was demonstrated in subsection 2.2, technical change can connect distribution to the determinants of the potential rate of growth. Although this does not automatically solve the first Harrod problem, if y p is affected by distribution and g ¼ y p is observed in the steady state, then distribution can be said to affect the actual (equilibrium) rate of growthbut through supply-side channels, rather than the demand-side channels traditionally emphasized in PK macrodynamics (Petach/Tavani 2020;Luzuriaga/Tavani 2021;Rada et al 2021Rada et al , 2022Michl/Tavani 2021). Further to all this, as is demonstrated by Rada et al (2021), in a model in which distribution affects both the actual and (via technical change) potential rates of growth, redistribution of income may provide a mechanism capable of reconciling the equilibrium and potential rates of growth and thus solving the first Harrod problem.…”