Conflicting Claims and Equilibrium Adjustment Processes in a Stock-flow Consistent Macroeconomic Model

Abstract

We revisit the old but still vibrant Post-Keynesian debate over 'fully-adjusted positions', defined by the long-run equality of actual and standard utilisation rates. The central proposition of this paper is that in a world where different groups inside and outside firms have different objectives, the equality of actual and standard utilisation should not be treated as the only possible long-run equilibrium condition. The argument is illustrated in a model of target return pricing with conflict inflation, building on the work of Marc Lavoie. A 'common language' for the conflicting claims by shareholders, managers and workers is developed in terms of target profit rates, and it is shown that these contradictory claims can be partly reconciled through variations in the utilisation rate. The analysis unifies history and equilibrium in the sense that the nature of final equilibrium position and the adjustment to it depend on the objectives of the dominant social groups. We distinguish a 'Fordist regime' and a 'financialisation regime' and produce simulation results within a simple stock-flow consistent model that are broadly consistent with the stylised facts of these distinct historical phases of capitalism.

‘Financialisation’ in Post-Keynesian Models of Distribution and Growth: A Systematic Review

“…Such mechanisms have been discussed by e.g. Boyer (2000), Dallery/van Treeck (2008), Hein (2008b,c), and Palley (2008). Furthermore, Lavoie (2006) and Palley (2006) consider the effects of 'cadrisme', implying an increasingly unequal distribution of white collar, or management, wages and blue collar wages.…”

“…Other authors have emphasised the financial effects of shareholder value orientation, based on the idea that a higher rate of distributed profits reduces managers' ability to invest (Hein, 2006(Hein, , 2007Lavoie, 1995Lavoie, , 2008Ndikumana, 1999;van Treeck, 2007). Finally, some authors have considered both effects to be relevant (Dallery/van Treeck, 2008;Hein, 2008b,c;Skott/Ryoo, 2008a). In our view, for the business sector as a whole, it seems plausible to assume non-zero coefficients on both the financial norm set by shareholders and on distributed profits, imply-ing that accumulation may be restricted exclusively by preferences in some firms, and by financing constraints in others.…”

“…This, however, also requires higher leverage of firms, and as soon as lenders refuse to expand the flow of credit to firms, the process of adjusting the realised profit rate to shareholders' target comes to an end. While Dallery/van Treeck (2008) have envisaged the possibility that, despite the failure to finally resolve this shareholder-creditor conflict, the economy converges to a steady state consistent with the maximum leverage ratio targeted by banks, Cordonnier/Van de Velde (2008, p. 14) point at the potentially 'depressionary pathos of financialised capitalism': When firms are systematically disappointed with their realised profit rate, they may become ever more selective in their investment projects in an attempt to move leftwards on their expansion frontier (see figure 1). This, however, may lead into a depressive spiral by further reducing aggregate demand and realised profitability.…”

“…A further mechanism that may countervail the depressive impact of larger profitability claims by shareholders has been analysed by Dallery/van Treeck (2008). They argue that when managers realise that the increased profitability claims are not being met, they may have incentives to buy back shares and/or to distribute higher dividends in order to satisfy shareholders.…”

Investment, Financial Markets, and Uncertainty

“…According to this view, firms maintain idle capacity in normal conditions due to the presence of uncertainty, which compels them to have excess capacity to respond to unexpected increases in demand (Lavoie, Rodríguez, and Seccareccia 2004). An alternative explanation of the presence of deviations between the current capacity utilization rate and its normal level is provided by Dallery and van Treeck (2011), which introduces two different targets: desired capacity utilization, and desired profitability. In the context of the latter contribution, firms prefer working in order to satisfy their objective of profitability instead of their capacity utilization target.…”