Does investment call the tune? Empirical evidence and endogenous theories of the business cycle
01 Dec 2012-Vol. 28, pp 229-259
TL;DR: The role of investment in the business cycle can be classified into two main groups, exogenous and endogenous, according to the way they explain economic fluctuations as discussed by the authors, either as responses of the economy to factors that are external (exogenous shocks) or as upturns and downturns of the economic system internally generated (by endogenous factors).
Abstract: Theories of the business cycle can be classified into two main groups, exogenous and endogenous, according to the way they explain economic fluctuations – either as responses of the economy to factors that are external (exogenous shocks) or as upturns and downturns of the economic system internally generated (by endogenous factors). In endogenous theories, investment is generally a key variable to explain the dynamic status of the economy. This essay examines the role of investment in endogenous theories. Two contrasting views on how changes in investment and profitability push the economy towards expansion or contraction are represented by the insights of Kalecki, Keynes, Matthews and Minsky versus those of Marx and Mitchell. Hyman Minsky claimed that investment ‘calls the tune’ to indicate that investment is the only variable not determined by other variables, so that future profits, investment and the dynamic status of the economy are determined by current investment and investment in the near past. However, this hypothesis does not appear to be supported by available empirical data for 251 quarters of the US economy. Statistical evidence rather supports the hypothesis of causality in the direction of profits determining investment and, in this way, leading the economy towards boom or bust.
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TL;DR: The authors argue that it was not competitive devaluation that restored growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital, and that the same holds for the policies of "austerity", which are designed to reduce debt and raise profitability.
Abstract: The ultimate cause of crises in capitalism is lack of profitability. The Keynesian and Austerians (the supporters of austerity measures), deny this. So their solutions to crises do not work. Keynesian state-induced stimulus programs (redistributive, monetary, and fiscal) cannot overcome the underlying tendency for profitability to fall. The same holds for the policies of "austerity," which are designed to reduce debt and raise profitability. These conclusions are particularly relevant for the weaker Eurozone economies in the midst of the euro crisis. In a case study of Argentina, we argue that it was not competitive devaluation that restored growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital.
25 citations
01 Jan 2015
TL;DR: SOLIDAR as mentioned in this paper is a European network of membership based Civil Society Organisations who gather several millions of citizens throughout Europe and worldwide, and voices the values of its member or ganisations to the EU and international institutions across the three main policy sectors; social affairs, lifelong learning and international cooperation.
Abstract: This publication has been produced with the fi nancial support of the European Union. The information contained in this publication does not necessarily refl ect the position or opinion of the European Commission. SOLIDAR is a European network of membership based Civil Society Organisations who gather several millions of citizens throughout Europe and worldwide. SOLIDAR voices the values of its member or ganisations to the EU and international institutions across the three main policy sectors; social affairs, lifelong learning and international cooperation.
13 citations
19 Oct 2016
TL;DR: In this article, the authors examine and challenge the Financial Instability Hypothesis (FIH) developed by Hyman Minsky and his adherents, and propose an alternate perspective on financial instability and risk, in light of the history of risk management within Canada's housing finance sector.
Abstract: The precise relationships between neoliberalization, financialization, and rising risk are still being debated in the literature. This paper examines, and challenges, the Financial Instability Hypothesis (FIH) developed by Hyman Minsky and his adherents. In this perspective, the level of financial risk builds over time as participants orient their behavior in relation to assessments of past levels of risk performance, leading them to overly optimistic valuation estimates and increasingly risky behavior with each subsequent cycle. However, there are problems with this approach, and many questions remain, including how participants modify their exposure to risk over time, how risk is scaled, and who benefits from changes in exposure to risk. This paper examines such questions and proposes an alternate perspective on financial instability and risk, in light of the history of risk management within Canada’s housing finance sector. The rise of financialization in Canada has been accompanied by shifts in the sectoral and scalar locus of risk within the housing sector, from the federal state, to lower levels of government, third-sector organizations, and finally, private households. In each case, the transfer of risk has occurred as participants in each stage sought to reduce their own risk exposure in light of realistic and even pessimistic (not optimistic) expectations deriving from past exposure, contradicting basic assumptions of Minsky’s FIH. This is the process that has driven the neoliberalization of housing finance in Canada, characterized by the socialization of lender risk while households increasingly take on the financial and social risks relating to shelter.
6 citations
TL;DR: Minsky's theory of financial instability helps clarify how Marxist theory can explain the highly financialised capitalism of today, and the crisis which started in 2008 as mentioned in this paper, and the combination of instability and stagnation which results from an excess supply of loanable capital.
Abstract: Minsky’s theory of financial instability helps clarify how Marxist theory can explain the highly financialised capitalism of today, and the crisis which started in 2008. The advanced economies currently have high realised profits in the productive sector and lagging rates of investment. Shareholder pressures encourage corporate strategies which focus on stock-market ratings and MA low interest rates; recurrent boom and bust in asset markets; the fuelling of huge increases in household and government debt; and the combination of instability and stagnation which results from an excess supply of loanable capital.
3 citations
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References
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TL;DR: In this article, the authors examine the relationship between investment, market valuation, and proxies for fundamentals over the last 90 years and find that a limited role of market valuation has been played by investment during the episodes associated with the crashes of 1929 and 1987.
Abstract: Should managers, when taking investment decisions, follow the signals given by the stock market even when those do not coincide with their own assessment of fundamentals? Do they? In this paper we review theoretical arguments and examine the empirical evidence. First, we look at the relation between investment, market valuation, and proxies for fundamentals over the last 90 years. Second, we look at the behavior of investment during the episodes associated with the crashes of 1929 and 1987. We find a limited role of market valuation, given fundamentals.
427 citations
TL;DR: In this article, the authors present a phase diagram of the U.S. economy with a regular counterclockwise cycle involving capacity utilization u (horizontal axis) and the labor share ψ (vertical axis) in the US economy.
Abstract: There are regular counterclockwise cycles involving capacity utilization u (horizontal axis) and the labor share ψ (vertical axis) in the US economy since 1929. As in Goodwin’s cyclical growth model, ψ can be interpreted as a Lotka–Volterra predator variable and u as prey. In a phase diagram, dynamics around the u=0 schedule respond to effective demand that econometric estimation (1948–2002) shows to be profit-led. Distributive dynamics around the =0 curve demonstrate a long-term profit squeeze. Across cycles, the real wage and labor productivity grow at 0.57 per cent per quarter, holding the labor share broadly stable. Modeling the cycle in the (u, ψ) plane provides a parsimonious description of demand and distributive dynamics, consistent with the macroeconomics embedded in the work of Kalecki, Steindl, Goodwin and many subsequent authors.
290 citations
"Does investment call the tune? Empi..." refers background in this paper
...To state that we have a profit-led economy (Barbosa-Filho and Taylor, 2006; Rada and Taylor, 2006; Mohun and Veneziani, 2008) probably amounts to something similar....
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Book•
01 Oct 1989
TL;DR: In this paper, the degree of monopoly and distribution of income were investigated for determining profits and national income in the United States, and the short-term and long-term rates of interest were determined.
Abstract: Foreword Part 1: Degree of Monopoly And Distribution of Income 1 Costs and Prices 2 Distribution of National Income Part 2: Determination of Profits and National Income 3 The Determinants of Profits 4 Profits and Investment 5 Determination of National Income and Consumption Part 3: The Rate of Interest 6 The Short-Term Rate of Interest 7 The Long-Term Rate of Interest Part 4: Determination of Investment 8 Entrepreneurial Capital and Investment 9 Determinants of Investment 10 Statistical Illustration Part 5: The Business Cycle 11 The Mechanism of the Business Cycle 12 Statistical Illustration 13 The Business Cycle and Shocks Part 6: Long-Run Economic Development 14 The Process of Economic Development 15 The Development Factors
278 citations
247 citations
"Does investment call the tune? Empi..." refers background in this paper
...A different perspective is offered by those who from a variety of theoretical positions support the so-called profitsqueeze hypothesis (Boddy and Crotty, 1975; Boldrin and Horvath, 1995; Bhaduri and Marglin, 1990) in which high wages lead to recession through the demand side....
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