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.
Citations
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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
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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
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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
References
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TL;DR: In this article, economic behavior over the cycle early theories of the cycle are discussed and the Monetarist Model, Rational Expectations Model, New-Keynesian Model and Real Business Cycles are discussed.
Abstract: Preface Introduction Economic Behavior Over the Cycle Early Theories of the Cycle The Monetarist Model The Rational Expectations Model The New-Keynesian Model Real Business Cycles Important Features of Modern Models Historical Episodes Before World War II World War II to 1989 Some Macroeconomic Puzzles Economic Forecasting Bibliography Index
28 citations
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18 Jan 1997
TL;DR: The history and history of the business cycle can be found in this article, where the authors present a history and a framework for the analysis of the economic cycle, including the following: 1. Measurement of the Business Cycle. 2. Aggregate Supply, Demand, and Profits.
Abstract: I. HISTORY AND FRAMEWORK OF THE ANALYSIS. 1. Aggregate Supply, Demand, and Profits. 2. History of the Business Cycle. 3. Measurement of the Business Cycle. II. SOME COMPONENTS OF REVENUE AND COST. 4. Consumption. 5. Investment. 6. Functional Income Distribution: Labor Income and Property Income. 7. Material Costs and Profits. III. THEORIES OF THE CYCLE. 8. Business Cycle Theories Before Keynes. 9. Business Cycle Theories After Keynes. 10. The Multiplier-Accelerator Model. 11. Demand-Side Theories. 12. Supply-Side or Cost Theories of the Business Cycle. 13. Profit Squeeze (or Nutcracker) Theory of the Cycle. IV. ADDING REALISM TO THE BASIC MODEL. 14. Credit and Financial Crises. 15. Monopoly Power, Inflation, and Business Cycles. 16. The International Economy and Business Cycles. 17. Government Fiscal Behavior and Policy. 18. How to Prepare a Forecast. 19. The Indicator Approach. 20. Time Series Models. 21. Econometric Models. 22. Examples of Forecasting and Models.
27 citations
"Does investment call the tune? Empi..." refers background in this paper
...Any cursory examination of economic statistics shows that the main element of aggregate demand fluctuating upward during expansions and downward during recessions is investment, while consumption varies little between expansion and recession (Mitchell 1951, Sherman and Kolk 1997)....
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TL;DR: This paper provided empirical support for an interpretation of the Goodwin growth cycle as isolating the main forces underlying distributive conflict, but in a fragile symbiotic mechanism because of endogenous forces that modify the balance of class power.
Abstract: This paper provides empirical support for an interpretation of the Goodwin growth cycle as isolating the main forces underlying distributive conflict, but in a fragile symbiotic mechanism because of endogenous forces that modify the balance of class power. Goodwin cycles are the shorter run cycles that appear around a long run motion that is the product of structural change. The paper describes long run trends in the Goodwin variables in the US corporate economy from 1948 to 2004, which exhibit both a sharp break at the beginning of the 80s, and no long run cycles. Short run detrended Goodwin cycles are identified, which broadly coincide in period and timing with the NBER dating of (the troughs of) business cycles. The paper then divides the employed nonfarm private industry labour force into supervisory and nonsupervisory workers, and focuses on the latter. The same two conclusions apply.
25 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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01 Jan 1995
TL;DR: In this article, the authors propose a dual agency approach to state and market to achieve sustainable growth in an open economy, based on the Minsky cycles and a dual-agent approach.
Abstract: Part I. Introduction: 1. Macroeconomic policies for sustainable growth Gerald Epstein and Herbert Gintis 2. Stability, in egalitarianism and stagnation: an overview of the advanced capitalist countries in the 1980s Andrew Glyn Part II. Savings, Investment and Employment: 3. Putting the horse (back) before the cart: disentangling the macro relationship between investment and saving David M. Gordon 4. US national saving and budget deficits Robert Eisner 5. Wages, aggregate demand, and employment in an open economy: a theoretical and empirical investigation Samuel Bowles and Robert Boyer PART III. The Determinants of Investment: Profits, Demand, Debt, and Expectations: 6. Investment and profitability: the evidence from the advanced capitalist countries V. Bhaskar and Andrew Glyn 7. Expectations and investment: an economic defense of animal spirits Christopher Heye 8. Private investment and debt overhang in Latin America Manuel Pastor Part IV. Finance and Accumulation: Efficiency and Instability: 9. Financial innovation, deregulation, and Minsky cycles Peter Skott 10. Financial liberalization, capital rationing, and the informal sector in developing countries J. Mohan Rao 11. International profit rate equalization and investment: an empirical analysis of integration, instability, and enforcement Gerald A. Epstein 12. Growth, distribution, and the rules of the game: left structuralist macro foundations for a democratic economic policy David Gordon 13. A dual agency approach to state and market Gerald Epstein and Herbert Gintis 14. Escaping the efficiency equity trade-off: productivity-enhancing asset redistributions Samuel Bowles and Herbert Gintis.
24 citations
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TL;DR: In this article, a Kaldorian supply-and demand-based alternative to sources of growth based on a familiar output growth vs. productivity growth diagram with constant employment growth contours added in look like a useful alternative to the mainstream models.
Abstract: Standard sources of growth accounts are empty of content because they rely on neoclassical production theory. Rather, analysis can be based on productivity growth quations derived either from NIPA accounting conventions or algebraic identities. These complementary schemes impose valid restrictions on growth rates of the wage rate, profit rate, capital, labor, and their respective average productivities. A Solow-type growth model based on proper accounting can be shown to converge. Detailed results differ markedly from those of the standard model. Alternative, essentially Kaldorian supply-and demandbased alternatives to sources of growth based on a familiar output growth vs. productivity growth diagram with constant employment growth contours added in look like a useful alternative to the mainstream models
21 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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