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Anticipations of the Crisis: On the Similarities between post-Keynesian Economics and Regulation Theory

Les anticipations de la crise: à propos des similarités entre les économistes post-keynésiens et la théorie de la Régulation
Las anticipaciones de la crisis: a propósito de las similitudes entre los economistas Post-keynesianos y la teoría de la Regulación
Mark Setterfield


Ce papier explore les similarités entre l’approche post-keynésienne (PKE) et la théorie de la régulation (TR). Malgré des différences importantes entre ces traditions, il apparaît que les contenus analytiques entre PKE et TR possèdent d’importantes similarités dans leur traitement de la production/répartition des revenus, la tendance intrinsèque du capitalisme à l’instabilité, les spécificités nationales des régimes de croissance et l’importance du rôle des institutions dans la croissance et le développement économique. Cette thèse peut être illustrée par l’épisode de la crise financière de 2007-2009 et la grande récession qui en a suivi. Particulièrement, les deux approches ont eu en commun de caractériser et d’anticiper très tôt la crise comme le résultat de la financiarisation du régime de croissance.

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Notes de l’auteur

An earlier version of this paper was presented at l’Université Paris XIII (Paris Nord) (CEPN theme 2 : “Économie politique et macroéconomie appliquée”), November 19, 2009. I am grateful to seminar participants (in particular Cedric Durand, Jacques Mazier and Pascal Petit) and two anonymous referees for their helpful comments. Any remaining errors are my own.

Texte intégral

1. Introduction

1The purpose of this paper is to draw attention to similarities between post-Keynesian Economics (PKE) and Regulation Theory (RT), and to use anticipations of the recent financial crisis and “Great Recession” that appear in both literatures to exemplify these similarities.

  • 1  The literature on which the paper draws is limited to publications in English, making the argument (...)
  • 2  On these distinctions within RT see, for example, Paquette (1999) for a primer. Note that in what (...)

2The approach taken does not involve exhaustive reviews of the PKE and RT literatures. For example, no attempt is made to trace the intellectual origins and subsequent development of either tradition. Instead, the focus is on certain broad themes that together demonstrate the overlap between these traditions.1 Moreover, no pretense is made that there are not, in fact, obvious and important differences between PKE and RT. Indeed, well-known differences exist within the two traditions. Hence since Hamouda and Harcourt (1989) it has become common to refer to Marshallian (or American), Kaleckian and Sraffian “strands” within PKE that may display more or less coherence, while there exists a long-standing distinction between the Parisian and Grenoble schools of RT and a distinction between RT as a whole and its sister school, the American Social Structure of Accumulation Theory (SSAT).2 Nevertheless, by drawing on common themes within each tradition, the argument that follows will be that the analytical contents of PKE and RT display broad similarities, and that this theoretical overlap is exemplified by anticipations of the current crisis found in both the PKE and RT literatures.

3The project so-described is important for two reasons. The first is intellectual: exploring commonalities between traditions creates a basis for dialogue and hence for learning and advancement. The second is institutional: building institutions (including research centres and publication outlets) is essential to the success of heterodox economics (Palley, 1996, chpt.3). And this process of institution building requires resources that interaction – and eventually, explicit cooperation and collusion – between broadly similar research traditions may help furnish.

4The remainder of the paper is organized as follows. Section 2 begins by drawing attention to some important differences between PKE and RT, before section 3 argues that each of these differences can ultimately be seen to give way to a broad congruity between the two traditions. Section 4 argues that this congruity is reflected in the literatures that both PKE and RT produced prior to the onset of the 2007-2009 financial crisis and Great Recession, which anticipate the crisis as a product of the long boom that preceded it. Section 5 offers some conclusions.

2. On the Differences between PKE and RT

5Some authors associated with either PKE or RT have gone to lengths to emphasize the differences between these traditions. For example, Cornwall and Cornwall (2001, chpt. 5) contrast their evolutionary Keynesian account of the dynamics of post-war capitalism with both RT and SSAT. It is therefore prudent to begin by acknowledging some potential sources of disagreement between PKE and RT. Two such sources are discussed in this section: the basic “mechanics” of the income generating process; and the nature of aggregate fluctuations in economic activity.

2. 1. The income-generating process

6The roots of RT lie in Classical (Marxian) analysis. The following two-equation system provides a stylized description of the dynamics of the income-generating process that is consistent with the Classical tradition:

7where g denotes the rate of accumulation, sπ is the propensity to save out of profits, r is the rate of profit, v is the full capacity capital-output ratio, w is the real wage and k is the capital-labour ratio. Equation [1] relates the rate of growth to the rate of profit, while equation [2] defines the rate of profit as the surplus of real output per unit of capital over and above total wages per unit of capital. Substituting [2] into [1] yields:

  • 3  Other “strands” of PKE would describe the income generating process somewhat differently. For exam (...)

8where g* denotes the equilibrium rate of growth. In PKE, meanwhile, the dynamics of the income-generating process are exemplified by the following stylized Kaleckian analysis:3

9where u denotes the rate of capacity utilization, π is the profit share of income, and all other variables are as previously defined. Equation [4] describes the rate of accumulation as a function of capacity utilization, while equation [5] is often referred to as the Kaleckian “pricing” equation (since the profit share, π, is understood to be determined by the mark up established by firms in the determination of prices). Finally, equation [6] is simply the inverse of equation [1], describing the rate of profits as a function of the rate of growth. Substitution of [6] into [5] and the result into [4] now yields the equilibrium rate of growth:

10Equations [3] and [7] illustrate two important differences between the Classical and Kaleckian descriptions of the income generating process. Hence note that it follows from [3] that:

11and (for economically meaningful values of r):

12Meanwhile, it follows from [7] that:

13given that where a denotes the labour-output ratio, and:

14In other words, the Classical and Kaleckian conceptions of the income-generating process suggest that the latter is either: profit-driven (an increase in the real wage squeezes profit and reduces growth, as in [8]) and supply-led (saving creates capital creates growth, as in [9]); or wage-driven (an increase in the real wage increases aggregate demand and hence capacity utilization and hence growth, as in [10]) and demand-led (saving reduces demand reduces growth, as in [11]).

2. 2. Long waves versus phases of economic growth

15As befits its Classical foundations, an important theme in RT is that of crisis. The recurrence of periodic minor crises (associated with business cycle recessions) is acknowledged, but of greater interest are less frequent major crises that can perturb the institutional foundations of the mode of regulation. The occurrence of these major crises is often associated with an explicitly cyclical view of long run capitalist growth and development – specifically, the notion that capitalism is characterized by Kondratieff or long waves with a period of approximately 4-5 decades (see, for example, Gordon et al, 1982, chpt.2).

16PKE, meanwhile, is traditionally associated with short run analysis. But the project of extending Keynesian analysis to the long run is well established (see, for example, the various survey essays on Keynesian growth theory in Setterfield, 2010a). And although much of the analysis associated with this project revolves around the comparative static properties of steady state equilibrium solutions, the notion that the long run is characterized by aggregate fluctuations can be found in PKE. Hence, for example, Cornwall and Cornwall (2001) discuss alternating medium run episodes (lasting for two or more complete business cycles) of better and worse macroeconomic performance in their conception of long run dynamics.

17This having been said, the aggregate fluctuations in Cornwall and Cornwall (2001) bear greater resemblance to Maddison’s (1991) distinct but aperiodic phases of economic growth than a strict growth cycle. Indeed, Cornwall (1990, p. 3) is explicitly critical of long wave analysis as an “inexorable mechanism” in which recovery inevitably follows decline. It is therefore tempting to conclude that RT displays a deeper and richer commitment to the notion that the long run is characterized by aggregate fluctuations, and that when PKE does move towards discussion of unsteady growth, the vision that emerges is distanced from the sort of explicitly cyclical interpretation of the long run that RT has shown a greater willingness to embrace.

3. Transcending the differences: searching for the common core of PKE and RT

18The purpose of thissection is to show thatdespite the differences between RT and PKE identified in the previous section, there exists a broad analytical congruity between the two traditions – one that is cemented by the importance that is attached in both traditions to the role of institutions in the functioning of a capitalist economy.

3. 1. The income-generating process again

19Setterfield (2009) argues that the dynamics of the income generating process in both Classical and Keynesian economics can be summarized by a single canonical model of the form:

20where y and yp are the actual and potential rates of growth (respectively), q is the rate of growth of labour productivity, n is the rate of population growth and the vector Z is a collection of variables associated with either the rate of growth of saving (as in the Classical tradition) or the level and/or rate of growth of autonomous demand (as in the Keynesian tradition). This system of equations admits solutions for two distinct growth rates. First, combination of [12]-[14] yields:

21Meanwhile, from [15] and [16], we get:

  • 4  This claim is straightforward to demonstrate. To begin with, note that the actual and potential le (...)

22Equations [17] and [18] represent the natural and the actual (equilibrium) rates of growth, respectively. On the basis of these equations, we can then identify two different growth regimes that are common to all heterodox growth models (regardless of whether they are of a Classical or Keynesian genus). The first is a labour constrained (or, following Robinson, 1956, “golden age”) regime, where y = yp. As is clear from [17] and [18], this regime will arise only if . In terms of the model specified above, this is an unlikely special case – but it may become a more general case if additional dynamics exist that cause q, n, or Z to adjust whenever this condition is not, at first, observed (on which see Setterfield, 2009). The second growth regime describes non-labour constrained or “dual” economies (Skott and Ryoo, 2008b), where . In this regime, the first Harrod problem (the inequality of the actual and natural rates of growth) is observed, and the employment rate will be non-constant.4

  • 5  Instead, equations [3] and [7] in section 2(i) – with their markedly different properties – are si (...)
  • 6  The investment function in [4a] can be justified as a linearization of the implicit investment fun (...)

23Of course, the synthetic model described above does not eliminate the basic differences between profit/supply-led growth and wage/demand-led growth identified earlier.5 But it does provide the opportunity to reinterpret these differences, as either: (a) a fulcrum for more specific debate over the mechanics of the growth process within a broadly common research programme – as in the debates about the behaviour of the actual and natural rates of capacity utilization between Duménil and Lévy (1999), and Lavoie (1995) and Dutt (1997); or (b) special cases of a general “non-neoclassical” conception of the income-generating process (as in Bhaduri and Marglin, 1990). For example, suppose we replace equation [4] with:6

24When [4a] is combined with equations [5] and [6], the generic equilibrium rate of growth in [18] becomes:

25from which it follows that:


27This model retains one distinctly Keynesian feature (the result in [11a]), but otherwise suggests that growth may be either wage- or profit-led (as in [10a]). It therefore provides a synthetic framework within which both Keynesian and Classical hypotheses about the income-generating process may be entertained.

  • 7  See also Milberg’s (2001) review of Mazier et al (1999), which compares the extensive and intensiv (...)

28Finally, and with specific reference to the similarities between RT and PKE (rather than Classical and Keynesian macroeconomics more generally), it is very important to note that RT is not characterized by unequivocal commitment to a strictly Classical view of the income generating process. As Paquette (1999, p. 968) notes, it is a distinguishing feature of the Grenoble school of RT that it is “rooted more heavily in Marxist theory”, while members of the Parisian school explicitly discuss problems associated with aggregate demand formation (see, for example, Mazier, 1998) and even adopt Keynesian descriptions of the income generating process that would be immediately familiar to Post Keynesian economists. Examples include the Kaldorian process of cumulative causation found in Boyer and Petit (1991) and Petit (1999), and the analytical model in Boyer (2000), central to which are the demand-generating properties of wage formation and accelerator effects.7 Finally, a notable feature of the work of Bowles et al (1990) is the notion that crises of capitalism can result from workers being either “too strong” or “too weak” – that is, from either profit squeezes or wage squeezes (corresponding to the derivative in [10a] being either negative or positive, respectively).

29In sum, the question as to whether long run growth is wage-led and demand-determined or profit-led and supply-determined is important, but need not (and should not) balkanize research in the RT and PKE traditions.

3. 2. The nature of long-run aggregate fluctuations

  • 8  This is true even for strict adherents of long wave analysis such as Gordon et al (1982).

30The critical issue here is whether the difference between long waves and Maddisonian “phases of economic growth” is, in fact, a difference of degree rather than of kind? Arguably, it is. Hence note that drawing on its Classical heritage, RT emphasizes that following a major crisis and the consequent breakdown of a previously prevailing mode of regulation, processes of social conflict and struggle are intrinsic to the forging of a new mode of regulation.8 There is no reason to interpret such processes mechanistically. Indeed, conflict, interpreted as an open, non-deterministic process, can be seen as an important source of the fundamental uncertainty emphasized by PKE.

  • 9  These “systematic changes in financial structure” are associated by Minsky (1964, pp.326-327) with (...)

31From this perspective, then, it can be argued that rather than having disparate visions of the long run, both RT and PKE share a common conception of capitalist growth as unsteady – i.e., subject to aggregate fluctuations. Hence the Classical heritage of RT leads inevitably to an emphasis on recurrent crises as a feature of the growth process. Meanwhile, although the use of steady-state equilibrium techniques sometimes masks this emphasis, the notion of unsteady growth and the potential for crises is evident in both key methodological (Kregel, 1976) and theoretical (Harrod, 1939; Minsky, 1978) contributions to PKE. Indeed, Minsky (1964) explicitly connects his theory of financial instability to long waves, arguing that long-wave upswings (characterized by “mild depression” business cycles) culminate in a “deep depression” business cycle, the monetary and financial causes of which can be traced to systematic changes in financial structure induced by conditions prevalent during the long-wave upswing itself.9 Although long wave crises are not thought of as having exclusively monetary and financial causes in RT, Minsky’s thinking dovetails with the importance attached to the system of money and credit creation in RT, and the possibility that crises will have monetary and financial origins (see, for example, Plihon, 2007, 2009, and the various references in section 4(i) below).

  • 10  Essentially this is because the employment rate is bounded both above and below, so that the only (...)

32It is also worth noting in passing that an emphasis on unsteady growth is, in one sense, important for the analytical structure of RT and PKE (rather than just their correspondence to reality). Hence referring back to the previous sub-section, unsteady growth helps make sense of the “dual” economy growth regime, where and the first Harrod problem prevails. This is because only the labour-constrained or “Golden Age” growth regime is strictly consistent with long run steady-state equilibrium conditions.10

3. 3. Emphasis on the institutional and historical contingency of capitalism

33To the extent that a common emphasis on unsteady growth can be said to characterize RT and PKE, this points to a further point of comparison between these traditions. Specifically, the analysis of longer term aggregate fluctuations is qualitatively similar in both traditions, in the sense that it involves emphasis on the role of institutions in structuring the accumulation process.

  • 11  As indicated above, the mode of regulation is accompanied in RT by the concept of a regime of accu (...)

34The notion of 1amode of regulation – an institutional infrastructure that regulates or guides historically-specific regimes of accumulation – is a sine qua non of RT. The mode of regulation is typically characterized as comprising five institutional pillars, which give definition to capital-labour relations, the precise form of competition between firms, the relationship between the state and the private economy, the system of money and credit creation, and the international order governing the relationships between national economies.11 These institutional pillars are distinct but interrelated – not least because there must be a sufficiently good fit between them (a “logic of the whole”) to create and sustain a long-wave upswing. From this observation follows a principle tenet of RT: that the rise and decline of modes of regulation in capitalist history is associated with long swings in the pace of accumulation and growth.

35What if any counterpart to this analysis exists in PKE? In PKE, aggregate fluctuations are traditionally associated with variations in the “state of long run expectations” (confidence, animal spirits etc.) that are, in turn, associated with decision making under uncertainty. These, moreover, are traditionally viewed as business cycle phenomenon. But many PK economists identify relatively enduring (but ultimately transmutable) institutions as part-and-parcel of the behavioural response of decision makers to conditions of uncertainty, and these institutions are increasingly seen as contributing to longer phases of growth and retardation. For example, Crotty (1994) argues that institutions provide a source of “conditional stability” in a capitalist economy, without which uncertainty – or more specifically, flighty behavioural responses to uncertainty on the part of decision makers – would render the economy kaleidic. The examples that Crotty provides of institutions that create (or have created) this conditional stability include relatively long-lived arrangements, such as oligopolistic practices in product markets and the Bretton Woods system governing international finance. These examples are noteworthy because they are recognizable as two of the institutional structures that are found in RT accounts of the “Fordist” mode of regulation associated with the post-war Golden Age (1948-1973) of capitalist development.

36Elsewhere, Cornwall (1990), Cornwall and Cornwall (2001), and Cornwall and Setterfield (2002) appeal explicitly to the notion of an “institutional framework” to explain medium run “episodes” of macroeconomic performance during the twentieth century. Despite the objections of Cornwall and Cornwall (2001, chpt.5) noted earlier, the “institutional framework” is fundamentally similar to the idea of a mode of regulation, providing a sort of social “operating system” within the context of which basic economic functions (such as production and exchange) are undertaken. In particular, the “social bargains” in the labour market on which the success of the post-war Golden Age was predicated according to Cornwall (1990) are directly comparable to the Fordist “wage labour nexus” or “capital-labour accord” emphasized in RT. Meanwhile, Minsky’s maxim that “stability breeds instability” is – in the spirit of Minsky (1964) – increasingly understood by PK economists as referring to longer-term (rather than business cycle) dynamics, connected to the emergence and subsequent atrophy of financial sector institutions. For example, Wray (2009) argues that New Deal legislation and the rise of “big government” in the US gave rise to the post-war Golden Age, but that the financial stability associated with the latter encouraged the steady erosion of precisely those financial institutions on which the Golden Age was (in part) based, creating increasingly frequent and severe financial crises over the past 30 years. This process – which Wray has labelled the “Minsky half century” – gave rise to the emergence of a financially fragile “money manager capitalism” akin to the “finance capitalism” that preceded the Great Depression, and primed to fail in the manner witnessed in late 2008. Meanwhile, Palley (2009a) discusses a Minsky “super cycle” that

works over a period of several business cycles and operates at the system level. The super cycle is a process of transforming business institutions, business conventions, and structures governing the market. These structures are critical for ensuring the stability of capitalist economies
(Palley, 2009a, p. 7)

37Palley goes on to explicitly link the period of these Minsky super cycles to “the long cycle thinking of economists such as Schumpeter ... and Kondratieff” (Palley, 2009a, p. 2).

38Finally, it can be argued that Institutionalist economists (implicitly) recognize the concept of institutions, as used in the “original” institutional economics associated with, inter alia, Thorsten Veblen, Clarence Ayres and John Dunlop, as an important “bridge” between RT and PKE. Hence while Hodgson (1989, 1999) discusses the links between institutionalism and PKE, the same author also acknowledges similarities between institutionalism and RT (see Labrousse and Vercueil, 2008).

39Of course, RT calls attention not just to the role of institutions but also that of technology in shaping capitalism – specifically, the technical (as well as social) character of the point of production, and the contribution this makes to defining regimes of accumulation (see, for example, Coriat, 1991, 1997; Coriat and Weinstein, 2002; Coriat, Orsi and Weinstein, 2003). As noted earlier, there is no obvious counterpart to the regime of accumulation in PKE, as a result of which little attention is paid in this tradition to the structural impact of technology on the point of production. Instead, the microfoundations of macroeconomic analysis in PKE focus more on pricing rules (and the distribution of income) than on technical relations of production. It should be noted, however, that there is a rich emphasis on the dynamics of technical change in the Kaldorian branch of PKE. This extends to emphasizing the importance of sectoral differences in the capacity of the economy to generate productivity growth (Cornwall, 1977; McCombie and Thirlwall, 1994, pp. 164-166) – a theme that has also been explored in the RT tradition (see, for example, Petit 1986).

4. Anticipations of the current crisis

40The thesis in this section is that there exist important commonalities as between RT and PKE anticipations of the current crisis in capitalist economies, and that these serve to exemplify the broad analytical similarities between the traditions identified in the previous section. Specifically, it is claimed that, while other accounts of contemporary conditions consistent with the basic strictures of either RT or PKE can certainly be entertained, a common theme in both traditions is that the current crisis represents the exhaustion of a financialized growth process. It is possible to show that, prior to the crisis, both: (a) the “financialized” and financially fragile character of the pre-2008 growth process is clearly identified in both PKE and RT; and (b) the importance of real wage stagnation in driving household debt accumulation – the “ground zero” of contemporary financial fragility – is clearly identified in both traditions.

4. 1. A “financialized” growth regime subject to increasing financial fragility

  • 12  The term “financialization” is notoriously imprecise. It suffices for the purposes of this paper t (...)

41The RT literature prior to the 2008 financial crisis is replete with contributions that identify the then-contemporary growth regime as “financialized” and/or financially fragile (and therefore ripe for financial crisis).12 For example, Lippit (1997) identifies the institutional 1development of the US financial sector during the 1980s and 1990s – including, but not limited to, financial sector deregulation and central bank policy rules – as enhancing an already well-developed venture capital industry, on which technology-intensive start-up firms are heavily dependent. This, he argues, is particularly advantageous at a time of rapid technological change, and should therefore be regarded as one of the institutional pillars associated with a nascent long-wave upswing in the US economy dating from the early 1990s. Boyer (2000), meanwhile, develops a theoretical model of a financialized growth regime as a precursor to evaluating the possibility that such a regime has replaced the Fordist regime of accumulation characteristic of the Golden Age. Confronting the model with a variety of statistical indicators, he concludes that the model is best suited to a description of Anglo-Saxon economies, noting that the spread of financialization is less evident in Europe and Japan. Finally, Aglietta and Breton (2001) identify the increased importance of financial markets (rather than just information technology) as a defining feature of the “new economy”. They focus in particular on the prominence of the market for corporate control, arguing that this forces a norm of “shareholder value” on firms. As a result of this norm, firms must focus on distributing dividends at the expense of internally funding investment, the upshot being that their growth is retarded.

42Other contributions to the RT tradition caution that financialization may de-stabilize the growth process. Hence Boyer and Juillard (1998) argue that financial liberalization helped de-synchronize the post-war institutional architecture of the Japanese economy, and was thus an important contributor to the “lost decade” in Japan. Meanwhile, O’Hara (2002) argues that a1 successful financial social structure of accumulation (FSSA) must generate financial stability, conflict resolution between finance and industry, and sustainable productivity growth and profitability in the financial sector. He argues that the contemporary US FSSA generates none of these, and is therefore the Achilles heel of the growth process in the US. Both Aglietta (2000) and Boyer et al (2005) draw attention to the financial fragility inherent in a financialized growth regime. Finally, Guttmann (2007, p. 2), writing at the very dawn of the crisis, anticipates that “what has transpired so far may well show this to have been the first systemic crisis of a new finance-led accumulation regime and as such an important stress test for an entire infrastructure of financial markets underpinning this regime”. He goes on to question numerous features of this regime – including the combination of previously separate financial activities within single firms, and the suitability of the regulatory framework – before alluding to the propensity of long periods of stability to breed financial fragility (citing Minsky in the process). Not surprisingly, the theme of financial fragility has also been pursued in contributions to the RT literature that have appeared since the onset of the crisis (see, for example, Kotz, 2009; Guttmann and Plihon, 2010).

43The PKE literature can justifiably claim to echo all of these same themes and concerns. This is perhaps not surprising, given the longstanding concern in PKE with the central roles of money and finance in the accumulation process. Hence Palley (1996, chpt. 3) identifies endogenous money and finance as the “yin and yang” of accumulation and growth in PKE. While credit creation facilitates real expansion by relaxing the constraint on aggregate spending imposed by current income and previously accumulated wealth, the existence of liquid financial assets creates a potential “purchasing power sink” that can cause aggregate demand deficiencies, while debt accumulation can generate financial fragility and crisis a la Minsky.

44Against this backdrop, the period prior to the 2008 financial crisis witnessed a flourishing of PK models designed to investigate the impact of financialization on growth (see, for example, Stockhammer 2004, 2005-2006; Lavoie, 2008; Skott and Ryoo 2008a, 2008b). An important theme that emerges from this literature is the potentially ambiguous effects of financialization on growth in steady-state PK models.

  • 13  This identity follows from the national income accounting identity:
    I + G + X ≡ S + T + M
    where I de (...)

45At the same time, the PKE literature produced numerous early warnings of growing financial fragility in the US and its potentially negative impact on macroeconomic performance. Perhaps the most celebrated of these are the Strategic Analyses produced by Wynne Godley and his various co-authors at the Levy Economics Institute of Bard College (of which Godley and Izurieta, 2002, is an excellent example). These track external, public sector and private sector balances in the US which, for any given level of income, must conform to the identity:13

trade surplus ≡ public sector surplus + private sector surplus

46Particular attention is focused on the evolution of household balance sheets – more specifically, the failure of households to de-leverage during and after the 2000-2001 recession, and the mounting financial fragility of the US household sector thereafter. Similar warnings can be found in Palley (2002), who identifies household debt accumulation in the US as an unsustainable offset to a latent aggregate demand deficiency masking (but incapable of indefinitely forestalling) a severe crisis of demand in the US economy.

47Again, it is not surprising to find that PKE analysis of the consequences of financialization and mounting financial fragility has continued in the wake of the financial crisis and subsequent Great Recession (see, for example, Hein and van Treeck, 2010, and various of the papers published in the special issue of the Cambridge Journal of Economics (volume 33, number 4, July 2009) on the global financial crisis).

4. 2. The demise of the Fordist wage labour nexus and household debt accumulation: the current crisis as a product of the previous crisis

48As noted earlier, the idea that macroeconomic success during the post-war Golden Age was predicated on (inter alia) a Fordist “wage labour nexus” or “social bargain” is found in both RT and PKE. The notion that the atrophy or breakdown of these arrangements since 1973 has contributed to the current crisis can also be found in both traditions.

  • 14  These propositions are demonstrated formally in the appendix to this paper.

49The basic argument with which we are concerned here can be traced back to Glyn et al (1990), who argue that the success of the post-war Golden Age was based, in part, on real wage growth keeping pace with productivity growth during the period 1945-1973. Since for most households real wage growth is the well-spring of real income growth and hence increased consumption spending (the latter being by far the largest single component of aggregate demand), and since productivity growth is the main driver of potential output growth in advanced capitalist economies (where population growth rates are typically low), the equality of real wage growth and productivity growth results in the roughly balanced growth of aggregate demand and “aggregate supply” (potential output). This, in turn, is necessary for the maintenance of a constant rate of employment and hence for the long-term sustainability of any equilibrium rate of growth.14 In short, the equality of real wage growth and labour productivity growth can be thought of as a “golden rule” for sustainable, steady growth consistent with a constant rate of employment.

  • 15  Note that the wage share of income, ωW, is given by:

50It follows from what has been said above that if real wages grow slower than productivity growth, the “golden rule” for sustainable growth consistent with a constant rate of employment is violated: other things being equal, the economy is primed for chronic aggregate demand deficiency, resulting in sluggish output growth and steadily rising unemployment. It is precisely this violation of the “golden rule” that Petit’s (1999, pp. 223-226) growth accounting identifies with the post-Fordist era (which he dates from the mid-1980s). Hence according to Petit, growth since the mid-1980s has been characterized by slow (but positive) productivity growth coupled with stagnant real wages, consistent with a declining wage share of income.15 Kotz (2008, p. 175), meanwhile, argues that the neoliberal era (which he dates to circa 1980) is characterized by “a contradiction between the conditions for creation of surplus value and those necessary for its realization” because “stagnating wages creates a potential problem of overproduction relative to demand”. He goes on to connect the failure of this problem to materialize to household debt accumulation, before warning that this latter process may have reached its limit.

  • 16  Household debt accumulation can be seen as the “American solution” to the aggregate demand deficie (...)

51Exactly the same arguments are prominent in PKE anticipations and analyses of the fundamental causes of the current crises. In simplified form, the PKE argument runs as follows. Since the late 1970s, real wages have grown at a slower pace than productivity in advanced capitalist economies, thus creating a latent aggregate demand deficiency. The latter did not immediately become manifest, however, because households seeking increases in their standard of living resorted to debt accumulation to finance increasing consumption expenditures that could not be funded by rising real income – thus filling the aggregate demand gap that would have otherwise resulted from real wage growth lagging productivity growth.16 But the same process of household debt accumulation resulted in increasing household debt to income ratios and debt-servicing burdens. In other words, the process was ultimately unsustainable: growth based on the debt-financed expansion of consumption expenditures by households experiencing little or no growth in real incomes must eventually grind to a halt – and according to PKE, it has done just this since 2008.

  • 17  See also Godley and Izurieta (2002) and Cynamon and Fazzari (2008) on the links between unsustaina (...)

52The argument outlined above is exemplified by Palley (2002), who explicitly connects real wage stagnation and household debt accumulation, identifying the latter as an unsustainable “temporary offset” to the aggregate demand problems caused by the former.17 Not surprisingly, the PKE literature has been replete with references to the real wage stagnation/unsustainable debt accumulation dynamic since the advent of the Great Recession (see, for example, Palley 2009b, 2010; Setterfield 2010b).

  • 18  The breakdown of these arrangements is a theme that is well rehearsed in the RT literature. But it (...)

53If – as both the RT and PKE literatures suggests – violation of the “golden rule” since the late 1970s marks both a departure from the conditions prevalent during the Golden Age and a fundamental cause of the current crisis, then why did this transition occur? On this theme, the RT and PKE literatures again speak with one voice, suggesting that primary responsibility lies with the breakdown of the industrial relations (based on a Fordist “wage labour nexus” or “social bargain”) described at the start of this section.18 Hence Glyn et al (1990, p. 58) argue that the “golden rule” was “embedded in the particular institutions of the wage-determination process” (p. 58) during the Golden Age, including collective bargaining with unionized workers and minimum wage regulations, which together assisted the spread of wage norms established in unionized sectors to non-unionized sectors of the workforce. They then emphasize the breakdown of these institutions amid the strike and wage explosions of late 1960s/early 1970s as resulting in the initial violation of the “golden rule”, resulting in real wage growth that exceeded productivity growth (and hence precipitated the onset of a profit squeeze). Kotz (2008), meanwhile, associates the subsequent (post 1980) neoliberal growth regime – in which productivity growth exceeded real wage growth – as resulting from the demise of the “regulationist” institutional structure characteristic of the golden age and its replacement by neoliberal institutions that (inter alia) weakened the bargaining power of labour. In very much the same vein, Palley (2002) identifies “business dominated labour markets” as one of the causes of America’s unsustainable growth path since 1980, arguing that “remedying this calls for rebuilding the institutions that gird the labor market, including the minimum wage and union density” (p. 30). And once again, these themes have been echoed in post-crisis PKE analysis (see, for example, Setterfield 2010b).

54In short, it is possible to identify contributions to both the RT and PKE traditions that anticipate the current crisis as arising from essentially the same source: an imbalance in the aggregate demand generating process associated, in the first instance, with the failure of real wage growth to keep pace with that of productivity, and explained ultimately by the atrophy of a system of industrial relations specific to the post-war Golden Age. The fact that RT and PKE are capable of furnishing such compatible accounts of the events of the last six decades only enhances the claims made in the previous section regarding their broad analytical congruity.

5. Conclusions

55It is often remarked that beauty lies in the eye of the beholder. So, too, perhaps, does the answer to the question: are there are more similarities than differences between RT and PKE? Nevertheless, the argument advanced in this paper is that there are real and important analytical similarities between RT and PKE, and that these similarities merit emphasis despite certain genuine differences between the two traditions. It has also been shown that anticipations of the current crisis in both RT and PKE bear out the thesis that there is much in common between these traditions. There are branches of both literatures that identify the same structural flaw in the post-1980 growth regime (productivity growth in excess of real wage growth) as the ultimate progenitor of the crisis, and which explain the emergence of this flaw in similar fashion (institutional change that upset a previously existing balance in the dynamics of aggregate wage formation). Ultimately, then, it seems fitting to close by quoting Foley and Michl (2010, p. 56), whose final appraisal of the Classical and Keynesian traditions in growth theory serves as an equally fitting assessment of the relationship between RT and PKE:

it is tempting to conclude that the disagreements that remain chart a common research program rather than a gulf of irreconcilable scientific differences.

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1  The literature on which the paper draws is limited to publications in English, making the argument that follows something of an “Anglicized” view. There are, of course, considerable PKE and (especially) RT literatures in French, on which a similar comparative study of these traditions might also be based.

2  On these distinctions within RT see, for example, Paquette (1999) for a primer. Note that in what follows, RT is defined broadly to include the contributions of SSAT.

3  Other “strands” of PKE would describe the income generating process somewhat differently. For example, Kaldorians would emphasize the fundamental role of international trade in determining the rate of growth (see, for example, McCombie and Thirlwall, 1994). The Kaleckian model is privileged here by virtue of the ease with which it facilitates comparison and contrast with the stylized Classical system in equations [1] and [2]. This involves no great loss of generality, as will become clear in the following section.

4  This claim is straightforward to demonstrate. To begin with, note that the actual and potential levels of real output, Y and Yp, respectively, can be written as:
where N denotes the level of employment and L the size of the labour force. It follows that:
y = q + e
yp = q + n
where e is the rate of growth of employment. Hence in the presence of the first Harrod problem (i.e., when y ≠ yp):
e ≠ n
Finally, note that it follows from the definition of the employment rate, ε = N/L that:
Hence if e ≠ n, we must observe Image15 – i.e., a non-constant rate of employment. A corollary of this result is, of course, that Image16, in which case the employment rate will be constant.

5  Instead, equations [3] and [7] in section 2(i) – with their markedly different properties – are simply special cases of the generic equilibrium growth rate in equation [18].

6  The investment function in [4a] can be justified as a linearization of the implicit investment function
g = g(r), given that r = π u / v from [5].

7  See also Milberg’s (2001) review of Mazier et al (1999), which compares the extensive and intensive accumulation regimes described in the latter to the exhilarationist/stagnationist dichotomy developed by Bhaduri and Marglin (1990), and also discusses the intellectual debt of the authors to Kaldor.
Of course, it is quite possible to couch the possibility of aggregate demand failures in Classical language, by distinguishing the process of surplus value creation from its realization, from which arises the possibility of overproduction. But the argument here is that the Parisian school of RT goes beyond this, openly embracing both the rhetoric and analytical structures of explicitly Keynesian models.

8  This is true even for strict adherents of long wave analysis such as Gordon et al (1982).

9  These “systematic changes in financial structure” are associated by Minsky (1964, pp.326-327) with increasing financial fragility, and include rising debt to income ratios, increasing stock and real estate prices, and increasing private sector illiquidity.

10  Essentially this is because the employment rate is bounded both above and below, so that the only rate of growth of the employment rate consistent with steady state equilibrium conditions is Image21. However, as demonstrated in footnote 3 above, whenever the first Harrod problem prevails, we will observe Image22.

11  As indicated above, the mode of regulation is accompanied in RT by the concept of a regime of accumulation. The latter captures, among other things, the industrial structure of the economy, and the interaction of organization and technology that characterizes the point of production (as summarized by different systems of production, such as the craft system or Fordism). There is no obvious counterpart to the regime of accumulation in PKE. Nor, however, is there any obvious contradiction between PKE and the concept of a regime of accumulation. The latter can, instead, be thought of as a lacuna in PKE in its present state of development – a gap that might eventually be filled by drawing on the insights of RT.

12  The term “financialization” is notoriously imprecise. It suffices for the purposes of this paper to appeal to Epstein’s (2005, p. 3) broad definition of the phenomenon, according to which “financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies”.

13  This identity follows from the national income accounting identity:
I + G + X ≡ S + T + M
where I denotes investment spending, G is government spending, X is exports, S denotes saving, T is total tax revenues and M is imports (in other words, total injections are identically equal to total leakages). Re-arranging this identity yields:
X – M ≡ (T – G) + (S – I)
which is the identity stated in the main body of the paper.
Note also that although the focus of the discussion in the text is on domestic developments, the identity above draws attention to the links between domestic and international balances. The importance of international trade and financial arrangements are recurrent themes in both RT and PKE. In view of the persistent trade deficits run by the US economy, the equally persistent trade surpluses of countries such as Germany, Japan, and China, and the US dollar’s role as de facto world reserve currency (which has enabled the US to borrow continually from the rest of the world), it is not surprising to find that these themes have been discussed in both RT and PKE in connection with the current crisis. See, for example, Guttmann (2009) and Blecker (2011), respectively.

14  These propositions are demonstrated formally in the appendix to this paper.

15  Note that the wage share of income, ωW, is given by:
which implies that:
(given ωW >> 0). In other words, the wage share will decline – as observed by Petit (1999) – if real wage growth falls short of productivity growth.

16  Household debt accumulation can be seen as the “American solution” to the aggregate demand deficiency identified above. Other economies – most notably Germany and Japan amongst the advanced capitalist countries – pursued export-led growth to offset deficiencies in the size of their domestic markets. But the latter was facilitated to a substantial degree by the willingness of the US to act as a “consumer of last resort” for foreign goods, as reflected in the substantial size of the US trade deficit over the last thirty years. In short, the “American solution” turns out to have been a “global solution,” thus justifying the focus on US household debt accumulation in PKE analysis of the crisis.

Note, however, that the preceding analysis once again calls attention to international dimensions of the neoliberal growth regime. Again, see Guttmann (2009) and Blecker (2011) for more detailed RT and PKE analyses (respectively) of international dimensions of the current crisis.

17  See also Godley and Izurieta (2002) and Cynamon and Fazzari (2008) on the links between unsustainable US household debt accumulation and consumption expenditure.
In addition to household debt accumulation, Palley (2002) identifies a number of other “temporary offsets” – including, but not limited to, wealth and expectational effects associated with asset price bubbles – responsible for keeping US aggregate demand buoyant during thirty years of real wage stagnation.

18  The breakdown of these arrangements is a theme that is well rehearsed in the RT literature. But it is also prominent in certain branches of PKE analysis. See, for example, Cornwall (1990), Cornwall and Cornwall (2001) and Setterfield (2006, 2007). Note, also, that much has been written in both RT and PKE about the period of crisis (during the 1970s and ‘80s) that separates the Golden Age from the more recent post-Fordist or neoliberal growth regime. It is beyond the scope of this paper to discuss this literature in detail, but see Lipietz (1985) and Cornwall (1990) for representative examples.

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