Tuesday, May 26, 2020

'Green snow' to become a more regular occurrence in Antarctica

Algae blooms turn the snow bright green in warmer areas of Antarctica during the summer, and scientists found it will likely spread due to rising temperatures.
By Brooks Hays, UPI,
Updated May. 25, 2020 

May 20 (UPI) -- Green snow algae is likely to become more abundant across Antarctica's coast as global temperatures continue to rise, according to research by a team of scientists from the University of Cambridge and the British Antarctic Survey.

To better understand the effects of climate conditions on algae growth patterns, researchers constructed a large-scale map of green snow blooms.

Each individual algae is microscopic, but when they grow en mass, they stain the snow green. The blooms can be mapped using aerial surveys and satellite images.


Ocean scientist Norman Kuring of NASA’s Goddard Space Flight Center photographed green algae covering snow and ice in Antarctica in February 2013. (NASA Earth Observatory / Norman Kuring)

By tracking links between local weather conditions and green snow growth patterns, scientists say they can predict how climate change will influence future blooms.

"This is a significant advance in our understanding of land-based life on Antarctica, and how it might change in the coming years as the climate warms," lead researcher Matt Davey, a plant physiologist and chemical ecologist at Cambridge, said in a news release. "Snow algae are a key component of the continent's ability to capture carbon dioxide from the atmosphere through photosynthesis."

The latest mapping effort, detailed Wednesday in the journal Nature Communications, confirmed green snow algae blooms are most frequently found when temperatures hover above zero degrees Celsius.

Researchers created their map using images captured between 2017 and 2019 by the European Space Agency's Sentinel 2 satellite. Scientists supplemented the satellite data with on-the-ground field observations. Some of the largest splotches of green were found on islands along the west coast of the Antarctica Peninsula, where warming has been most pronounced over the last several decades.

In addition to the correlation between green snow blooms and warmer temperatures, researchers also found a link between coastal algae blooms and the presence of marine birds and mammals -- bird excrement is rich in nutrients that fuel algae growth.

More than 60 percent of the green snow blooms analyzed by scientists were found within a few miles of penguin colonies, and many other large blooms were identified near the nesting sites of other bird species.

While warming temperatures are likely to encourage larger green snow algae blooms across most of the Antarctic, climate change is likely to leave at least some low-lying islands without summertime snow cover, robbing the islands of their green snow blooms.

"As Antarctica warms, we predict the overall mass of snow algae will increase, as the spread to higher ground will significantly outweigh the loss of small island patches of algae," said Cambridge researcher Andrew Gray, lead author of the new paper.

Larger green snow algae blooms could help pull carbon dioxide from the air. Like plants, microscopic algae capture CO2 and emit oxygen as part of the photosynthesis process.
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Keynes and the European economy

Peter Temin and David Vines

Keywords: Keynes; international; The Economic Consequences of the Peace; Macmillan Committee; Bretton Woods

Published in print:Jan 2016

Category:Research Article




Pages:36–49

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We argue in this paper that Keynes was interested primarily in the world economy. We do not seek to diminish the innovative advances Keynes made in The General Theory; we instead want to expand the perceived scope of Keynesian economics. We make this argument by analysing Keynes's contributions at three points during his career: writing The Economic Consequences of the Peace just after the First World War, testifying before the Macmillan Committee at the outset of the Great Depression, and negotiating at Bretton Woods during and after the Second World War. We then show how international Keynesian analysis clarifies the economic problems of Europe today.

Full Text

1 INTRODUCTION

We argue in this paper that Keynes was interested primarily in the world economy. He wrote The General Theory (1936) as a necessary part of this grand design, and then he died prematurely just after the Second World War. The success of The General Theory overshadowed Keynes's research design, and he is best known today as an analyst of a closed economy. To expand Keynesian analysis to the world economy, we survey Keynes's thought process through his active career and use his framework to analyse current European conditions.

 How Keynes came to Britain

Robert Skidelsky

Keywords: Keynes; Keynesian economics; the Great Depression; economic thought; history of economic thought; macroeconomics; monetary policy; fiscal policy; economic history; the Keynesian revolution

Published in print:Jan 2016
Category:Research Article


Pages:4–19

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I explore how Keynesian ideas made their way into British public policy. I argue that the breakdown of pre-First World War macroeconomic conditions led to a ‘blocked’ system, where the adjustment mechanisms presupposed by classical economics were jammed, and that Keynesian economics offered an escape from this system. I explain the Keynesian response to the new problems in monetary and fiscal policy: the gold standard impeding credit control, and the tenacity of the balanced budget rule, respectively. Finally, I outline how Keynes's ideas took hold after the Great Depression via the events at the Macmillan Committee, and their policy implications.

Full Text

‘[I]t would promote confidence and furnish an objective standard of value, if … the authorities would employ all their resources to prevent a movement of [the price level] by more than a certain percentage in either direction away from the normal.’John Maynard Keynes (1923 [1978], p. 148)


‘Very little additional employment and no permanent employment can in fact and as a general rule be created by State borrowing and State expenditure.’Winston Churchill (HC Deb 15 April 1929, vol. 227, col. 54)


‘When every country turned to protect its national private interest, the world public interest went down the drain.’Charles P. Kindleberger (1973, pp. 290–291)

1 THE BLOCKED SOCIETY

After the First World War, the macroeconomic policy rules of the previous half-century broke down. This was because the conditions making it possible to keep them disappeared. The old macro-economy (in the days before macroeconomic policy) was framed by three connected rules: adherence to the gold standard, balanced budgets, free trade. All three were unhinged by the war. Quite simply, the gold standard became the transmitter, rather than the dampener, of external shocks, while domestic adjustment to them became more costly.

Because of increased union control over wages, increased working-class influence on politics, and the shutting-off of emigration outlets, domestic economies had become more rigid. Long before ‘stickiness’ of wages and prices found their way into formal economic models, it was becoming evident that industrial economies had lost their previous ‘elasticity’. The liquid markets praised by economists had morphed into a congealed corporatist mass. Germany was the main example of this (Maier 1975). Fiscal rules based on balanced budgets and free trade became increasingly difficult to maintain.

The nineteenth century gold standard had worked after a fashion owing to special conditions. After the war it became completely dysfunctional. Barry Eichengreen (1985, p. 22) paints a compelling picture of ‘an international monetary system disturbed by misaligned exchange rates, insufficient and unhelpfully distributed reserves … and at the same time incapable of responding to disturbances due to rigidities in wage structure, rising tariffs, and the failure of cooperation’. London was fatally weakened as a ‘conductor of the international orchestra’. The problem of ‘global imbalances’ reared its head for the first time, but by no means the last time, with the USA's permanent export surplus exerting deflationary pressure on much of the rest of the world.

In short, the adjustment mechanisms assumed by classical economics were blocked or jammed. Unemployment became the chief expression of market sclerosis, and the main challenge to economic policy. Unemployment in Germany and Britain averaged about 10 per cent in the 1920s, double what it had been before the First World War. Persisting mass unemployment was also a challenge to theory. There was no theory of output and employment as such, since classical theory assumed – perhaps presupposed would be better – a state of full employment. Experience validated this to some extent. Economies might be knocked over for a short time, but they got up again without government help. Say's law was not mortally challenged. This changed with the Great Depression, which started in 1929 and from which the world did not fully recover until the Second World War.

Theory and policy alike were slow to recognize that conditions had changed. Under the slogan ‘Back to normalcy’, determined attempts were made in the 1920s to restore the prewar system. At their heart was the restoration of the international gold standard. Orthodoxy saw this as the indispensable framework for domestic monetary discipline. A gold anchor was politician-proof. To restore the gold standard, suspended in the war, it was, according to the Financial Resolution of the Genoa Conference of 1922, essential for governments ‘to balance national budgets by contraction of expenses rather than by increase in taxation, to stop inflation by ceasing to cover budget deficits by recourse to paper money, and to cease borrowing for unproductive purposes’ (Brown 1940, p. 343) – in short, to liquidate war finance. The old post-Napoleonic Ricardian programme became the consensual position of all governments.

The Great Depression of 1929–1932 started a period of experiments in macroeconomic policy and theory from which the Keynesian Revolution eventually emerged triumphant.

This essay will consider the way in which macro policy adapted, or failed to adapt, to the new conditions, with the Great Depression as the traumatic break in trend.
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Unravelling the New Classical Counter Revolution

Simon Wren-Lewis

Keywords: New Classical Counter Revolution; microfoundations

Published in print:Jan 2016 

Category:Research Article


Pages:20–35

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To understand the position of Keynes's The General Theory today, and why so many policy-makers felt they had to go back to it to understand the Great Recession, we need to understand the New Classical Counter Revolution (NCCR), and why it was so successful. This revolution can be seen as having two strands. The first, which attempted to replace Keynesian policy, failed. The second, which was to change the way academic macroeconomics was done, was successful. Before the NCCR, macroeconomics was an intensely empirical discipline: something made possible by the developments in statistics and econometrics inspired by The General Theory. After the NCCR and its emphasis on microfoundations, it became much more deductive.

As a result, most academic macroeconomists today would see the foundation of their discipline as not coming from The General Theory, but as coming from basic microeconomic theory – arguably the ‘classical theory’ that Keynes was so keen to cast aside. Students are also taught that pre-NCCR methods of analysing the economy are fatally flawed, and that simulating DSGE models is the only proper way of doing policy analysis. This is simply wrong. The problem with the NCCR was not the emergence of microfoundations modelling, which is a progressive research programme, but that it discouraged the methods of analysis that had flourished after The General Theory. I argue that, had there been more academic interest in these alternative forms of analysis, the discipline would have been better prepared ahead of the financial crisis.



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1 INTRODUCTION

The General Theory of Employment, Interest and Money (Keynes 1936) is sometimes credited with creating modern macroeconomics. Today that observation appears highly questionable for two reasons. The first relates to policy. We have once again found ourselves in a global liquidity trap of just the kind that The General Theory was designed to explain and avoid. Yet policy-makers have prolonged that liquidity trap by doing precisely the opposite of what The General Theory recommended. Can anyone doubt that Keynes would be turning in his grave seeing the current obsession with fiscal austerity?

There is of course nothing that compels policy-makers to base their decisions on macroeconomic theory, and a large part of what is currently going on may just be politicians using populist analogies between state and household budgets to achieve goals to do with the size of the state. Yet we have to ask whether they would be able to get away with that if macroeconomists were united in their opposition to fiscal austerity. Instead, the economics profession appears much more divided. This in turn reflects the second reason why the importance of The General Theory to modern macroeconomics might be questioned. The reality is that most academic macroeconomists no longer regard The General Theory as the defining text of their discipline. If they had to name one, they might be more likely to choose one of the seminal texts of the New Classical revolution: Lucas and Sargent (1979), which is aptly titled ‘After Keynesian Macroeconomics’.

Much discussion of current divisions within macroeconomics focuses on the ‘saltwater/freshwater’ divide. This understates the importance of the New Classical Counter Revolution (hereafter NCCR). It may be more helpful to think about the NCCR as involving two strands. The one most commonly talked about involves Keynesian monetary and fiscal policy. That is of course very important, and plays a role in the policy reaction to the recent Great Recession. However I want to suggest that in some ways the second strand, which was methodological, is more important. The NCCR helped completely change the way academic macroeconomics is done.

Before the NCCR, macroeconomics was an intensely empirical discipline: something made possible by the developments in statistics and econometrics inspired by The General Theory. After the NCCR and its emphasis on microfoundations, it became much more deductive. As Hoover (2001, p. 72) writes, ‘[t]he conviction that macroeconomics must possess microfoundations has changed the face of the discipline in the last quarter century’. In terms of this second strand, the NCCR was triumphant and remains largely unchallenged within mainstream academic macroeconomics.

To understand the position of The General Theory today, and why so many policy-makers felt they had to go back to it to understand the Great Recession, we need to understand the NCCR, and why it was so successful.

One explanation, which I consider in Section 2, could be summed up in Harold Macmillan‘s phrase ‘events, dear boy, events’. Just as the inability of economists to understand the Great Depression gave rise to The General Theory and the Keynesian consensus that followed, the Great Inflation of the 1960s and 1970s undermined that Keynesian consensus. The suggestion is that the NCCR was a response to the empirical failure of the Keynesian consensus. I will argue instead that the NCCR was primarily driven by ideas rather than events.

Section 3 considers the methodological revolution brought about by the NCCR and the microfoundations research strategy that it championed. Section 4 argues that this research methodology weakened the ability of macroeconomics to respond to the financial crisis and the Great Recession that followed. Although microfounded macroeconomic models are quite capable of examining financial and real economy interactions, and there is a huge amount of recent work, it is important to ask why so little was done before the crisis. I will suggest that a focus on explaining only partial properties of the data and an obsession with internal consistency are partly to blame, and this focus comes straight from the methodology.

Many economists involved with policy have commented that they found texts written prior to the NCCR, like The General Theory, or texts written by those outside the post-NCCR mainstream, more helpful during the crisis than mainstream macroeconomics based on microfounded models. Does that mean that macroeconomics needs to discard the innovations brought about by the NCCR, just as that revolution wanted to discard so much of Keynesian economics? In Section 5 I argue that that would make exactly the same mistake as the NCCR made. We do not need a discipline punctuated by periodic revolutions. The mistake that the discipline made in the 1980s and 1990s was to cast aside, rather than supplement, older ways of doing things. As experience in the UK shows, it is quite possible for microfounded modelling to coexist with other ways of modelling and estimation, and furthermore that different approaches can learn from each other.

2 IDEAS, NOT EVENTS

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Growth and distribution after the 2007–2008 US financial crisis: who shouldered the burden of the crisis?

Mathieu Dufour and Özgür Orhangazi

Keywords: financial crisis; Great Recession; 2008 crisis

Published in print:Apr 2016


Category:Research Article



Pages:151–174

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The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe, the majority of which took place in low- and middle-income countries. Studies of the impacts of these crises have identified three broad sets of consequences. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase. Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of large masses. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well. Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows may increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets. The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle- income countries, we study the consequences of the 2007–2008 US financial crisis and complement the budding literature on the ‘Great Recession.’ In particular, we examine the impacts of the crisis on labor and capital, with a focus on distributional effects of the crisis such as changes in income shares of labor and capital, and the evolution of inequality and poverty. We also analyse the role of government policies through a study of government taxation and spending policies, and examine capital flow patterns.



Full Text

1 INTRODUCTION

The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe (Eichengreen 2001; Reinhart and Rogoff 2011). Apart from the large amount of literature that examines the causes of these crises, another line of research has concerned itself with the consequences of financial crises. Three broad findings emerge from the latter, which focuses on low- and middle-income country experiences, as this is where most of the major financial crises have taken place in the last couple of decades. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase (Diwan 2000; 2001; Jayadev 2005; Onaran 2007). Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of the rest of society. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well (Crotty and Lee 2001; Harvey 2003; Duménil and Lévy 2006; Dufour and Orhangazi 2007; 2009). Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows often increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets (Wade and Veneroso 1998; Dufour and Orhangazi 2007; 2009).

The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle-income countries as an entry point to look at the experience of the US economy in the aftermath of the 2007–2008 financial crisis provides a fresh perspective on that crisis and allows for an original contribution to the gradually emerging literature on the consequences of the US financial crisis and the ‘Great Recession’ (for example, Oleinik 2013; Wolff 2013). In this paper, we empirically investigate the outcome using broad indicators such as changes in inequality and poverty, and then compare the fortunes of labor and capital after the crisis. We find that unemployment has substantially increased and labor incomes have fallen, but the income share of capital and profitability continued to increase after the crisis. While the US did not need an external bailout, such as those the IMF provided during earlier financial crises in less-developed countries, the US government and the Federal Reserve (FED) provided unprecedented amounts of support to the economy. Since they were not constrained by an external structural adjustment program and since the FED has the power to issue an international reserve currency, the outcomes of the crisis in this regard differed from other experiences. However, capital inflows peaked during the crisis, suggesting that it opened business opportunities for international capital in similar ways as previous crises did.

The rest of the paper is organized as follows. In Section 2 we look at the emergence of the 2007–2008 US financial crisis and the path of some important macroeconomic indicators before and after the crisis. In Section 3 we turn our attention to the distributional effects of the US financial crisis and then compare this with the impacts of the crisis on capital. We compare the changes in income shares of labor and capital before shifting our attention to changes in inequality and poverty. Section 4 focuses on the role of government policies through an analysis of government taxation and spending policies. After discussing the change in capital flows in Section 5, we conclude in Section 6 with a discussion of our overall findings and further research areas.
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Macroeconomic effects of household debt: an empirical analysis

Yun K. Kim

Keywords: household debt; business cycles; financial instability hypothesis; cointegration; VAR; VECM

Published in print:Apr 2016

Category:Research Article


Pages:127–150

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Multi-equation econometric frameworks are used to investigate the impact of household debt on GDP in the US. In the vector autoregression analysis capturing the transitory feedback effects, we observe a bidirectional positive feedback process between aggregate income and debt. According to the estimation of vector error correction models, there are negative long-run relationships between household debt and output. These empirical results provide a support for the view of the debt-driven business cycles.



Full Text

1 INTRODUCTION

Prior to the financial crisis of 2007, the US experienced a significant increase in household debt relative to income. Figure 1 depicts the ratios of consumer, mortgage, and household debt (sum of mortgage and consumer debt) relative to gross domestic product (GDP). Household debt outstanding as a share of GDP, for example, increased from about 45 percent in 1975 to nearly 100 percent in 2009. Although there is more fluctuation in the consumer debt–GDP ratio, a clear upward trend is observed, especially since 1985. Mortgage debt seems to be a dominating component of household debt, and the household and mortgage debt–GDP ratios seem to show close comovements.
Figure 1Debt outstanding as a share of GDP (1951Q4–2009Q1)

Citation: 4, 2;10.4337/roke.2016.02.01

Figure 2 depicts the evolution of debt–net worth ratios. This provides additional evidence of the substantial increase in debt. Similar to the debt–GDP ratios, both household and mortgage debt–net worth ratios exhibit a clear upward trend over the whole sample period. Consumer debt–net worth ratio shows an upward trend until the middle of 1970, but, after that, it shows considerable fluctuations. In general, the liability side has grown more rapidly than the asset side over the sample period. Similar to the debt–GDP ratios, household and mortgage debt–net worth ratios seem to show close comovements.
Figure 2Debt outstanding as a share of household net worth (1951Q4–2009Q1)

Citation: 4, 2;10.4337/roke.2016.02.01

Figure 3 depicts two measures of the debt service burden: household financial obligations as a percentage of disposable personal income (FODSP) and household debt service payments as a percentage of disposable personal income (TDSP). These two series have been used by the Federal Reserve as primary measures of the household debt burden (Greenspan 2004), and are available starting in 1980. 1 Both measures also show upward trends, indicating that households’ financial positions have been continuously worsening. These levels of debt accumulation eventually proved untenable – as has been broadly implied in the Great Recession.
Figure 3Debt service and financial obligation as a share of disposable income (1980Q1–2009Q1)

Citation: 4, 2;10.4337/roke.2016.02.01

A number of post-Keynesian scholars have addressed the macroeconomic implications of household debt using formal models. For example, Palley (1994) incorporates consumer debt into a linear multiplier-accelerator model and analyses the cyclical aspects of consumer borrowing over the business cycle. In his model, a rise in consumer debt initially increases consumption and hence promotes growth, but eventually the accumulation of debt becomes excessive. This implies that there is a transfer of income from low saving agents (debtors) to high saving agents (rentiers) at an increasing rate due to the debt service payments. The debt service burden then reduces consumption and output level. This provides a mechanism of credit-driven cyclical process of output. Dutt (2006) investigates the role of consumer debt within a neo-Kaleckian growth and distribution framework. In Dutt's model, an increase in household consumption debt raises the growth rate in the short run. In the long run, however, the effect is ambiguous because the accumulation of consumer debt results in a shift in income distribution toward rentiers, who have a higher propensity to save. This latter result has a depressing effect on the long-run growth rate in a demand-driven model. Nishi (2012) incorporates an endogenous interest rate into a neo-Kaleckian growth model, where the change in interest rate responds to workers’ indebtedness, and investigates the dynamic stability of the system. He also demonstrates that the introduction of household borrowing can change the characteristics of a demand-generating process (that is, wage-led and profit-led). 2

Post-Keynesian thoughts on the effect of debt on the macroeconomy are also strongly influenced by Hyman Minsky's financial instability hypothesis. Minsky's theory clarifies the two-sided aspects of debt-financed spending. During the boom phase of the business cycle, debt-financed household spending (and investment as traditionally emphasized) provides a source of additional economic stimulus. 3 However, as the economy experiences a prolonged phase of prosperity, more debt-financed spending occurs and the debt-to-income ratio eventually rises. The balance sheets of businesses and households deteriorate and the system becomes financially fragile. The system becomes highly vulnerable to negative shocks, potentially resulting in a severe economic downturn.

Minsky's financial instability hypothesis has been applied to household debt by Cynamon and Fazzari (2008), who provide a very informative discussion of household debt from a Minskyan perspective. They observe that, from the 1980s to the early 2000s, the US experienced consumption expansion accompanied by significant household debt accumulation. Cynamon and Fazzari (2008) argue that, although this provided a substantial macroeconomic stimulus, this unprecedented rise in household debt could have planted the seeds for financial instability and a non-trivial economic downturn.

As the argument by Cynamon and Fazzari (2008) implies, Minsky's financial instability hypothesis can be read as highlighting distinctive debt effects depending on the time frame under consideration. Debt-financed household spending may provide a source of additional economic stimulus in the shorter time period, but eventually the accumulation of debt could become excessive, generating a negative impact on consumption and output level in the long run (for example through the higher debt service payments and frugal consumer behavior due to the excessive debt level). The system could become highly vulnerable to negative shocks, potentially resulting in a severe economic downturn. From this point of view, there are distinguishing effects of debt in the short and longer time period. 4

I approach my empirical investigation from the theoretical perspective of debt-driven business cycles. I will empirically distinguish the short-run and the long-run impact of household debt on real GDP. Multi-equation econometric frameworks are used to analyse the relationship between household debt and aggregate income. I study the unit roots and cointegrating relationships. Based on the findings, I implement vector autoregression (VAR) and vector error correction (VECM) models. In the VAR analysis, which captures the transitory (short-run) feedbacks among the growth rates of debt, GDP, and net worth, I observe a bidirectional positive feedback process between aggregate income and debt. According to the VECM estimation, which captures long-run relationships in a multi-equation framework, there is a negative long-run relationship between household debt and output. Our results provide evidence for household debt-driven busine
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Wages, prices, and employment in a Keynesian long run

Stephen A. Marglin

Keywords: flexprice adjustment; fixprice adjustment; conventional wage; unlimited supplies of labor; capital widening; capital deepening; Phillips curve

Published in print:Jul 2017

Category:Research Article


Pages:360–425

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The central question this paper addresses is the same one I explored in my joint work with Amit Bhaduri 25 years ago: under what circumstances are high wages good for employment? I extend our 1990 argument in three directions. First, instead of mark-up pricing, I model labor and product markets separately. The labor supply to the capitalist sector of the economy is assumed à la Lewis to be unlimited. Consequently the wage cannot be determined endogenously but is fixed by an extended notion of subsistence based on Smith, Ricardo, and Marx. For tractability the product market is assumed to be perfectly competitive. The second innovation is to show how disequilibrium adjustment resolves the overdetermination inherent in the model. There are three equations – aggregate demand, goods supply, and labor supply – but two unknowns – the labor–capital ratio and the real price (the inverse of the real wage). Consequently equilibrium does not even exist until we define the adjustment process. The third innovation is to distinguish capital deepening from capital widening. This is important because, ceteris paribus, wage-led growth is more likely to stimulate the economy the greater the fraction of investment devoted to capital deepening. A final section of the paper shows that US data on employment and inflation since the 1950s are consistent with the theory developed in this paper.



Full Text

1 INTRODUCTION

Are high wages good for employment? Does higher employment lead to more inflation? When do higher prices mean stagflation? This essay lays out and tests a new framework for assessing the relationship between prices and wages on the one hand and output and employment on the other. I build on my work with Amit Bhaduri of a quarter of a century ago (Marglin and Bhaduri 1990; Bhaduri and Marglin 1990). The central innovation of this joint work was to question the conventional wisdom of left-leaning political economy that higher wages are always good for employment and output. Higher wages, Bhaduri and I argued, may decrease aggregate demand through a negative impact on investment demand. Here, I expand the argument by focusing on the differences in the relationship between wages and employment under different adjustment regimes. The expanded model allows me to examine supply and demand shocks under different dynamic assumptions, and to test the Keynesian idea that aggregate demand matters against data on employment and inflation. I also offer an argument about how different types of investment respond to profitability and capacity utilization, an argument intended to clarify the impact of wages on aggregate demand via the investment channel.

From a mainstream point of view, the entire tradition in which Bhaduri and I situated our work – the tradition in which aggregate demand matters in the long run as well as in the short run – was conceived in error. The process of consolidating the Keynesian revolution made a role for aggregate demand contingent on one form or another of market imperfection or friction, and the resulting sand in the wheels was supposed to operate only in the short term. By the late 1960s, when the neoclassical counter-revolution had begun in earnest, the Keynesians had already abandoned the long run to the neoclassicals. Robert Solow's 1956 essay was widely understood to have demonstrated the irrelevance of aggregate demand, even though the ‘demonstration,’ as Solow himself recognized (ibid., p. 91), is simply an assumption.

The counter-revolution, led by Milton Friedman (1968) and Edmund Phelps (1968), delivered the knock-out punch – or so it was believed. A positive relationship between employment and inflation, enshrined in the Phillips curve (Phillips 1958), was understood by Keynesians to reflect the operation of aggregate demand. The counter-revolutionaries dismissed the Phillips curve as the result of misperceptions that would necessarily disappear as agents developed more sophistication about the economy. The implication was that demand cannot matter in the long run. Indeed, Friedman and Phelps predicted that periods of high inflation would not be accompanied by higher economic activity. In the long run there is no Phillips curve, no trade-off between economic activity and price stability. In this perspective raising money wages is necessarily an exercise in futility: higher wages can mean only higher inflation, with no impact on employment and output. The classical dichotomy with a vengeance!

Some years later, Robert Lucas (1981, p. 560) claimed that experience had borne out the Friedman–Phelps predictions:


The central forecast to which their [Friedman and Phelps's] reasoning led was a conditional one, to the effect that a high-inflation decade should not have less unemployment on average than a low-inflation decade. We got the high inflation decade, and with it as clear-cut an experimental discrimination as macroeconomics is ever likely to see, and Friedman and Phelps were right. It really is as simple as that.We have a lot more data available today than Lucas had at his disposal in 1981. And the data do appear to bear out the prediction that there is no relationship between employment and inflation. Figure 1 plots the data over more than half a century. Analysing these data, economists have found, if anything, a negative relationship between real economic activity and inflation. Cross-sectional studies by Stanley Fischer (1993), Robert Barro (1996), and others have found a significant negative correlation between growth and inflation, but their results are dominated by high inflation rates, where negative supply-side effects plausibly dominate. More striking are the findings of Moshin Khan and Abdelhak Senhadji (2001), who separate poor and rich countries and find that for the rich countries the threshold above which inflation is associated with lower GDP growth is only 1–3 percent per year.


Figure 1Employment vs inflation, 1956–2011

Citation: 5, 3;10.4337/roke.2017.03.04

None of this should surprise us. Once it has been determined that demand does not matter in the long run, it makes sense to treat all observations symmetrically and look for supply-side effects.

Appearances notwithstanding, we can make sense of the data in terms of a Phillips curve along which movements reflect demand shocks but which is itself moved by supply shocks, as Robert Gordon (1984; 2013) and others have argued. Demand shocks result in the standard Phillips result, a positive relationship between employment and inflation. As we shall see, supply shocks are more complicated.

The key to finding order in the randomness of Figure 1 is to filter the data in two ways. Not only must we separate demand and supply shocks, we must also sort out wage shocks (which affect employment and wages through their effect on labor supply) from price shocks (which operate through goods supply on employment and output). This done, there were, I shall argue, two periods in which wage pressure exerted a strong influence on the positive Phillips-curve relationship: in the late 1960s and early 1970s upward pressure on wages displaced the relationship between employment and inflation upwards, and in the mid 1990s downward pressure on wages displaced the relationship downwards. This suggests that high(er) wages have historically exerted a negative influence on the economy, but, in line with the central hypothesis put forward by Bhaduri and me 25 years ago, this result is contextual. Both instances of wage pressure took place under conditions of high employment and, presumably, high investment demand – precisely the conditions under which Bhaduri and I argued that higher wages would not improve aggregate outcomes.

This leaves open the possibility that under conditions of slack, such as characterize global capitalism since the financial crisis that inaugurated the Great Recession, the impact of higher wages would be very different from 20 or 40 years ago. Higher wages would indeed stimulate the economy.

 Wage increases, transfers, and the socially determined income distribution in the USA*

Lance Taylor, Armon Rezai, Rishabh Kumar, Nelson Barbosa and Laura Carvalho

Keywords: wealth distribution; income distribution; SAM

Published in print:Apr 2017


Category:Research Article

DOI:https://doi.org/10.4337/roke.2017.02.07Pages:259–275

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This paper is based on a social accounting matrix (SAM) which incorporates the size distribution of income based on data from the BEA national accounts, the widely discussed 2012 CBO distribution study, and BLS consumer surveys. Sources and uses of incomes are disaggregated by household groups including the top 1 percent. Their importance (including saving rates) differs markedly across households. The SAM reveals two transfer flows exceeding 10 percent of GDP via fiscal (broadly progressive) and financial (regressive) channels. A third major flow over time has been a ten percentage point increase in the GDP share of the top 1 percent. A simulation model is used to illustrate how ‘feasible’ modifications to tax/transfer programs and increasing low wages cannot offset the historical redistribution toward the well-to-do.

1 INTRODUCTION

In the USA there is ongoing debate about how the positions of the ‘poor’ (say, households in the bottom one or two quintiles of the size distribution of income), the ‘rich’ (the top decile or top percentile), and the ‘middle class’ (households ‘between’ these two groups) will be affected by fiscal and other initiatives such as raising the minimum wage. Feedbacks of distributive changes into macroeconomic performance are equally of interest. This paper highlights the severe limitations to reducing income inequality in the USA. In model simulations, when they are applied at politically ‘feasible’ levels, standard policy tools such as increased taxes on high income households, higher transfers to people with low incomes, and raising wages at the bottom do not reduce rich-vs-poor inequality by very much.

The basic reason is that consistent macroeconomic accounting shows that there are three income redistribution flows on the order of 10 percent of GDP. The first two are fiscal tax/transfer payments (broadly progressive) and financial transactions (regressive). The last is an increase over 2 decades by 10 percent of GDP in the share of primary incomes appropriated (some might say expropriated) by the top 1 percent of income recipients. In a macroeconomically consistent framework incorporating the size distribution of income we show that policy interventions such as those mentioned above cannot reverse this historically large and unrequited income transfer.

For ease of presentation the household size distribution is rescaled to the national income and product accounts (NIPA). It is summarized by a metric (the ‘Palma ratio’) which, as opposed to the standard Gini coefficient, emphasizes the disparity in incomes between the ‘poor’ (say, households in the bottom one or two quintiles of the size distribution of income) and the ‘rich’ (the top decile or top percentile). The ratio has trended strongly upward over time.

To trace macroeconomic and distributive linkages through, we use a simple, static demand-driven macro model based on a social accounting matrix (SAM) which enfolds meso-level data on key distributive variables (types of income including transfers received, taxes paid, consumption, saving) for swaths of the size distribution into the NIPA system. Basically, we rescaled available data to fabricate a representation of the size distribution consistent with the NIPA from the US Bureau of Economic Analysis (the BEA accounts are themselves a fabrication). The numbers provide a broad-brush representation of the distributive situation for the period 1986–2009. For the model simulations we focused on 2008, a relatively ‘representative’ year for the economy. 1 While the distribution of income for the US economy is well known, there is less clarity on the size distribution of expenditure. As a first approximation we use less granular estimates on consumption and saving rates for most of the population. For the top decile and fractiles (top 10 percent and top 1 percent) we extend the relationship between income and saving using log-linear extrapolation. Our numbers are consistent with other estimations of the size distribution of income, such as the recent study by Alvaredo et al. (2013) and Saez and Zucman (2014). We use a Congressional Budget Office (CBO) study, itself based on administrative tax data, which captures a detailed breakdown of income across a more representative sample of households. Unlike the Survey of Consumer Finances (SCF), there is less concern in this data set regarding oversampling of wealthy households and exclusion of the Forbes 400.

We begin the presentation in Sections 2–4 with a review of the US size distribution in the context of the SAM, shedding light on how relatively large fiscal and financial transfer payments and unequal income flows fit into the macro system. In Section 5, we go on to simulation results, before concluding with a brief discussion in Section 6. Appendix 1 briefly discusses the Republican ‘Path to Prosperity’ budget proposal in the House of Representatives. Appendix 2 reports details on how we put the accounting together and sets out the specification of the model.
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The road they share: the social conflict element in Marx, Keynes and Kalecki

Pablo Gabriel Bortz

Keywords: Keynes; Kalecki; Marx; social conflict; fiscal policy; interest rate

Published in print:Oct 2017

Category:Research Article


Pages:563–575

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https://www.elgaronline.com/view/journals/roke/5-4/roke.2017.04.06.xml

This paper sets out to find commonalities and divergences in the writings of Marx, Kalecki and Keynes regarding their analysis of social (class) conflict in capitalist societies. We find evidence that shows that, contrary to a harmonious view of society, Keynes had a class stratification of society and an understanding of conflictive interests and developments compatible with that of Marx and Kalecki. The presence of political motivations as fuel for economic instability is another shared element between Kalecki and Keynes. Differences arise regarding the relative importance of the inter- and intra-class dynamic as a driver of distributive conflict, and the State's capabilities to guide or control those conflicts and their consequences.

1 INTRODUCTION

‘The class war will find me on the side of the educated bourgeoisie’, Keynes famously stated in his pamphlet ‘Am I a liberal?’ (CW IX, p. 297). 1 His political affiliations have been the object of several analyses (Skidelsky 2003; Dostaler 2007, among others). It is widely known that he rejected Marxism, and particularly Marx's theory, even though on many occasions he made use of some of Marx's concepts, such as the monetary circulation scheme. It is understood that Keynes sought to protect capitalism by changing it from within. This paper seeks to explore a different aspect of Keynes's theory, not focusing on his political actions and tastes, but on the political corollaries of his theory. We aim to understand the role of conflict and social struggle; whether it implies a harmonious view of (capitalist) society such as in the marginalist theory (as presented by Jevons or John Bates Clark, for instance); or whether it reflects a struggle, divergence and incompatibilities in the interest of the different classes of society that expresses itself in an economic behaviour full of macroeconomic consequences. We are also interested in Keynes's acknowledgement of the political obstacles faced by the policy choices implied by these theoretical corollaries, both in domestic and international affairs.

It seems natural to compare this role with the theories of the other two major economists who adopted a class stratification structure when developing their analyses of capitalism, namely Karl Marx and Michał Kalecki. Marx is known to define class struggle, or social conflict, as the engine of history. In a capitalist society, the search for higher profits through cost-cutting innovation and labour-saving investment eventually produces the opposite effect by leading to falling profit rates and accumulation crises. Giving in to this analysis, Bismarck developed what we call today a welfare state, in order to support a minimal standard of living for the working poor and the disabled, effectively sustaining a certain demand level. It would not be stretching the imagination too far to say that such appeasing policies, which seem to have got the approval of Kalecki and Keynes, would reflect a social cooperation view identifiable with the writings of these authors. 2 However, it is the contention of this paper that Kalecki's and Keynes's view and theories on the topic have more in common with Marx than a casual reading might suggest. That is not surprising for the case of Kalecki, who was himself inspired by authors such as Rosa Luxemburg and Mikhail Tugan-Baranovsky, but also in the case of Keynes, a careful reading will show that a class structure also permeates his view and analysis, with conflicting interest among and within them.

The paper is structured as follows, with the clarification that we will restrict our focus to writings referring to capitalism. Section 2 reviews the role of intra- and inter-class conflict in Marx's analysis, using it as the background or benchmark for comparison throughout the paper. Section 3 reviews Kalecki's writings on the topic under discussion, while Section 4 surveys Keynes's writings, quoting extensively in order to reflect a consistent view of the political factors, inextricably linked with class interests, involved in the description, diagnosis and policy prescriptions for the maladies of capitalist economies. Section 5 concludes.
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Rethinking macroeconomic theory before the next crisis
Marc Lavoie
Keywords: potential output; financial crisis; hysteresis; DSGE models


Published in print:Jan 2018Category:Research ArticleDOI:https://doi.org/10.4337/roke.2018.01.01Pages:1–21
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Misguided economics policies relying on an unrealistic macroeconomic theory that denied the possibility of a crisis are at the origins of the global financial crisis. The goal of the present paper is to recall how the end of the Great Moderation has been interpreted by the advocates of mainstream economics, and how they have questioned their own macroeconomic theories as a consequence of what happened during and after the financial crisis. There is thus a need to reconsider most aspects of mainstream theory. In particular, the crisis has once more demonstrated that potential output is influenced by aggregate demand – a phenomenon associated with hysteresis, which also questions concepts such as the natural rate of interest and crowding-out effects.
Full Text


1 INTRODUCTION



While many countries throughout the world have faced severe financial crises over the last decades, and while the Japanese stagnation and the 1997 Asian financial crisis did induce some additional interest for the introduction of banking and finance into macroeconomic theory, it is only with the advent of the US subprime financial crisis that macroeconomic and monetary theories put forward by mainstream economists have started to be questioned. Still, there are at least two views about the role played by economic theory in generating the global financial crisis, which, depending on one's opinion, can be ascertained as having started at any of the three following times: when real-estate prices in the US started to decline in the summer of 2006; when interbank money markets first froze in Europe during the summer of 2007; or when it was announced that the Lehman Brothers investment bank declared bankruptcy on the 15th of September 2008. If we take the earliest date, then we can say that the financial crisis and its aftermath have been going on for over a decade.



Heterodox authors were criticizing mainstream economic theory in all its incarnations long before the global financial crisis. My purpose in writing this paper is not to survey these heterodox criticisms, whose value has been reinforced with the advent of the crisis, nor to assess the impact of the crisis on the future of heterodox economics. 1 Rather, the goal of the present paper is to briefly recall how the end of the Great Moderation – this 15-year period of low inflation and low variance in real growth rates in the Western world – has been interpreted by the advocates of mainstream economics: this is mainly done in Section 2. The rest of the paper is devoted to a review of a number of key issues in macroeconomic theory, examining what seems to have been changed or been questioned as a consequence of what has happened during and after the financial crisis. As a result, Section 3 will be devoted to the concept of hysteresis, which seems to have been resurrected by mainstream economists. Section 4 will deal with a number of miscellaneous issues, in particular the shape of the aggregate demand curve and the lack of a relationship between interest rates and public debt or deficit ratios. I will conclude in Section 5 with broad brush-strokes about what ought to disappear and what might disappear from macroeconomic theory. Many others, such as Stiglitz (2011; 2015) and Mendoza Bellido (2013) have done an excellent job in pursuing this kind of exercise. Here I offer my idiosyncratic thoughts, starting with the reaction of economists to the crisis.

https://www.elgaronline.com/view/journals/roke/6-1/roke.2018.01.01.xml

Have we been here before? Phases of financialization within the twentieth century in the US

Apostolos Fasianos, Diego Guevara and Christos Pierros

Keywords: financialization; monetary regimes; speculation

Published in print:Jan 2018

Category:Research Article


Pages:34–61

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This paper explores the process of financialization from a historical perspective during the course of the twentieth century. We identify four phases of financialization: the first from the 1900s to 1933 (early financialization), the second from 1933 to 1940 (transitory phase), the third between 1945 and 1973 (de-financialization), and the fourth period picks up from the early 1970s and leads to the Great Recession (complex financialization). Our findings indicate that the main features of the current phase of financialization were already in place in the first period. We closely examine institutions within these distinct financial regimes and focus on the relative size of the financial sector, the respective regulation regime of each period, the intensity of the shareholder value orientation, as well as the level of financial innovations implemented. Although financialization is a recent term, the process is far from novel. We conclude that its effects can be studied better with reference to economic history.

1 INTRODUCTION

When did financialization start? While there is much literature on the increasing dominance of finance in the United States after 1970, little work to date has attempted to investigate whether financialization was taking place earlier. Whereas few authors consider financialization as an evolutionary process that can be traced back to pre-capitalist societies, most analysts emphasize the neoliberal period beginning in the 1980s.

Financialization, as Sawyer (2013/2014) appropriately describes it, is a process that widely varies in form and intensity across time and space. Accordingly, by utilizing empirical and qualitative analytical tools coming from different schools of thought, we identify distinct phases of financialization during the twentieth century in the US. In particular, we examine the resemblance of financialization's characteristics in the early twentieth century with those of the contemporary period, questioning whether the current phase of financialization is a vaguely different repetition of its older counterpart, as observed, for example, in the early 1900s.

To carry out our task, we divide the sample period into four distinct regimes, marked by structural breaks in the institutional setting of the economy, which affected the functioning of the financial sector. The first period of early financialization lasts from the beginning of the twentieth century up until 1933, as the New Deal agreement brought significant changes in financial regulation and policy orientation. The second period (1933–1940) reflects the transitory phase of the economy that leads to the third period, the ‘Golden Age of Capitalist Development’ (1945–1973). The crisis of 1973 heralded the end of the Golden Age. Last, we apply Dumenil and Levy's (2011) definition of neoliberalism as ‘financialized capitalism’ to link the fourth period of complex financialization with 1974–2010.

We contribute to the relevant literature by exploring financialization from a historical perspective and pointing out different varieties of financialization throughout the twentieth century in the US. While most studies focus on a few criteria to establish evidence of financialization, we employ a plethora of empirical and qualitative indicators that allow us to formulate a synthetic argument for the pace and the form of financialization in each distinct regime. We argue that financialization, characterized by an increased role for the financial sector along with higher complexity across financial objectives and institutions, is merely the current phase of a historical process that has been unfolding since the dawn of the twentieth century. In our view, the early 1930s period presents a significant resemblance to the current phase of financialization.

Financialization is associated with financial booms and busts and has a negative impact on the real production of the economy, as it results in unemployment and highlights income inequalities. History shows that the degree of financialization is a policy variable. For instance, in the postwar period, policymakers implemented a range of policy instruments (such as full employment policies of a Keynesian flavor) and enforced a strong regulatory environment in order to restrict the uncontrolled explosion of finance. The implications of our findings could point towards policies that could reverse the destabilizing effects that financialization has on society.

The paper is organized as follows: Section 2 discusses theoretical contributions with respect to financialization; Section 3 looks at the data relating to the financialization process, focusing on the importance of the US financial sector; and Section 4 provides an analysis of the course of financialization throughout the twentieth century, paying close attention to the interaction between financial innovations and the regulatory environment, as well as to the degree of shareholder value orientation in the US economy. We also scrutinize the commitment of fiscal and monetary policies to full employment and low-inflation targeting and examine whether the economic system is prone to financial collapse. The penultimate section (Section 5) summarizes our findings, which formulate and support our argument, while the last section (Section 6) concludes.

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A predator–prey model to explain cycles in credit-led economies

Óscar Dejuán and Daniel Dejuán-Bitriá

Keywords: business cycles; financial instability; predator–prey models; post-Keynesian economics

Published in print:Mar 2018

Category:Research Article


Pages:159–179

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This paper develops a predator–prey model to explain cycles in credit-led economies. The predator is the part of the financial sector that issues credit money for non-output transactions. It increases the indebtedness ratio and inflates bubbles that eventually have a negative impact on the real rate of growth (the prey). From this basis, we build a couple of models that may lead to self-contained or explosive cycles. Even in the first case, there is a risk of a financial collapse when certain variables move far away from their long-term equilibrium positions. In order to tame the cycle and avoid extreme positions, governments should ban the expansion of credit money for the purchase of assets and introduce permanent checks to risky credit.

Full Text

1 INTRODUCTION

This is a theoretical paper whose backdrop is the credit boom leading to the financial crash of 2007 and the first great recession of the twenty-first century. This crisis witnesses the ‘financial instability hypothesis’ of Minsky (1964; 1982; 1986; 1992). It also shows that the ‘originate-to-distribute model of banking,’ which characterizes our financialized economy, has accelerated the deterioration of the debt structures. Section 2 revises the key data of this process in the USA – the epicenter of the financial turmoil.

The Minskyan ‘financial instability hypothesis’ is deployed by means of a predator–prey model. This model was introduced in the natural sciences by Lotka and Volterra. Through a system of differential equations, they captured the systemic interdependency among marine species. In Volterra (1926), the higher the population of whiting (prey), the higher the food ratio and population of sharks (predator). After a certain point, the smaller population of whiting is bound to check the expansion of sharks. The traditional idea of the survival of the fittest is not always true in nature, he concluded.

Goodwin (1967) introduced the predator–prey model to explain the counter-clockwise movement in the employment rate and the labor share in income. A profit squeeze may damage the accumulation process and, therefore, the employment rate. Goodwin's model has prompted numerous extensions to the relation between distribution and accumulation. Goodwin et al. (1984) offer a survey. More recently, Arnim and Barrales (2015) have concluded that the Goodwin–Kalecki model of ‘profit squeeze’ continues to be the preferable approach to explain supply-driven cycles.

Taylor and O'Connell (1985) used a predator–prey model to formalize Minsky's hypothesis of an ongoing climate of financial fragility leading to economic crises. In a nutshell: the endogenous deterioration of the debt structure increases liquidity preference and checks productive investment.

Taylor and O'Connell (1985) was the seminal paper that encouraged post-Keynesian economists to study the dynamic competition between the real and financial sectors of the economy. 1 The new models differ mostly on the variables playing the roles of prey and predator. For Asada (2001; 2011), private debt is the predator, and income (related to capacity utilization) is the prey. In Dejuán and González-Calvet (2005), the predator is the rate of interest, while the prey is the rate of growth of real GDP. Fazzari et al. (2008) and Oreiro et al. (2013) relate the cashflow of firms (inversely related to the rate of interest) to their investment decisions. Taylor (2012) relates Minsky with Goodwin-style cycles.

Without using a proper predatory–prey model, Ryoo and Skott build a variety of stock-flow consistent models to show the relationship between the increasing leverage of firms, the capital gains resulting from the sale of stocks, and the investment decisions that depend on Tobin's q. The final effects on the real economy will depend on whether we adopt a Kaleckian view (capacity utilization closure) or a Kaldorian one (profit share closure). In the Kaldorian version, the real sector itself has an inherent tendency towards cyclical behavior (‘short cycles’), along with the cyclical forces generated by endogenous changes in financial practices (‘long waves’) (Skott 1994; Ryoo and Skott 2008; Skott and Ryoo 2008; Ryoo 2013a; 2013b). 2 Palley (1994; 2011) contrasts the long financial cycles leading to financial crashes with the traditional business cycles. Palley (2013, p. 65) states that credit-led capitalism has developed a ‘predator–prey’ mechanism.

Our paper has also been influenced by Badhuri et al. (2006) and Werner (1997; 2005; 2015). Badhuri et al. confront the real economy (from which output and profits accrue) and the virtual one that inflates bubbles and capital gains. Werner differentiates between the circuit of output transactions and the circuit of non-output transactions (assets). The first circuit is a positive-game. The second circuit is a zero-sum game where bubbles are inflated. He reinstates the ‘quantity theory of credit’ to explain asset inflation.

In our paper, the prey will be the productive sector represented by the rate of growth of real GDP. 3 Since our interest is in the impact of financial forces, we will consider an economy that is growing at the autonomous trend marked by the expansion permanent autonomous demand, with inflation controlled by the central bank. In Section 3 we combine the Keynesian–Kaleckian principle of effective demand (Keynes 1936; Kalecki 1971) and the multiplier-accelerator mechanism. This is the supermultiplier model introduced by Hicks (1950), Serrano (1995), Bortis (1997), Dejuán (2005; 2016), and Serrano and Freitas (2015).

Following Werner (1997), the predator has been identified with the financial sector when it provides credit for non-output transactions. It brings about higher indebtedness ratios and bubbles that (eventually) damage the real economy. Section 4 analyses the forces that affect creditworthiness and their influences on aggregate demand: default rate, indebtedness ratio, burden of debt, vertigo–stampede effects, wealth effects.

In Section 5 (and in the mathematical Appendix 1) we build a variety of predator–prey models leading to self-contained or explosive cycles. Even the first ones may lead to a credit crunch and a recession. This happens when the gap between the current trend of certain variables and their long-term equilibrium rate becomes too broad. Arguably, one of the main contributions of this paper is the presence of gravity centers compatible with the principle of effective demand. The expected growth of permanent demand, provided it endures long enough, is an attractor of the growth of output at full capacity (not full employment). The same rate plus the inflation target fixed by the Central Bank marks the long-term equilibrium growth of credit. In a Sraffian mood, the fundamental value of assets (discounted at the normal rate of profit) becomes a gravity center of asset inflation (Sraffa 1960).

The conclusions of the paper are summed up in Section 6. In order to tame the cycle and avoid extreme positions, governments should ban the expansion of credit money for the purchase of assets and introduce permanent checks to risky credit.

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