The relevance of demand factors for explaining growth was stated almost simultaneously by Michal Kalecki and John Maynard Keynes in the 1930s. The main conclusion of the theory of effective demand is that spending determines income. Keynes stated that the marginal propensity to consume decreases when total income growths. Kalecki considered different propensities to consume out of wages and profits. This led to the theoretical possibility that the redistribution of national income between workers and capitalists could influence the level of output. Almost nobody, however, examined the implications of that difference for the theory of economic growth until Amit Bhaduri and Stephen Marglin 1 did.
The starting point of their model was the consideration of real wages as the most important cost of production, but also as the most important determinant of aggregate demand. As a cost their increase has a negative effect on investment, owing to the decline of profit margins when wages rise. However, as a source of income their increase have a positive effect on consumption, thanks to the higher propensity to consume out of wages than out of profits.
Thus, rising real wages and, consequently, wage share in national income, can both benefit or hamper economic growth. It will depend on which is the dominant component of demand. If it is investment, a rise in wage share will have a negative impact on aggregate demand. Increasing consumption will not be enough to counterweight decreasing investment and exports. Rising wage share will undermine growth. On the contrary, growth will be promoted through increasing investment as the profit share rises.
Bhaduri and Marlgin call this profit-driven pattern of growth “exhilarationist” regime. This kind of growth not only benefits capitalists, but it also benefits unemployed workers through new jobs created. Job creation, however, is achieved at the expense of average real wages of those already employed. In addition, decreasing consumption due to lower salaries in a context of higher productive capacity can produce an overaccumulation crisis after years of profit-led growth.
If consumption is the dominant component of aggregate demand, then an increase of wage share in national income will have an overall positive impact on demand, in spite of its negative impact on investment. The regime is called “stagnationist”. Growth is wage-driven. The positive effect of consumption on capacity utilisation allows higher total profits (and even higher profit rate) to be achieved in a context of lower profit margins and share.
The authors call this “cooperative capitalism”. That result allows them to assert that “[c]apitalism is not necessarily a zero-sum game” (op.cit.: 382). Nevertheless, they also consider the limits that cooperation confronts when rising wages led to profit squeeze. In the short run profit squeeze can result in a conflict within different sections of the capitalist class. In the longer run it can produce an underaccumulation crisis. In conclusion, growth is not completely assured in any of Bhaduri-Marglin model’s regimes.
During the last years the model has been applied to the analysis of several countries’ regimes of growth. Theoretically, in the context of a highly opened economy, like today’s world economy, the results obtained for a stagnationist regime may be altered, as long as the negative effect of decreasing wage share on consumption can be outweighed by the positive effect of lowering labour costs on exports. Most of the econometric studies, however, suggest that developed economies (such as France, Germany, Japan, United Kingdom or United States) are predominantly wage-led, though some of the studies achieved sometimes contradictory results for the same economy (for a summary of the literature see 2).
There is a lack of analysis of the model for developing economies, except for some works (which focus on economies such as China, Mexico, South Africa, Turkey or Thailand), most of them tentative. The existing ones have arrived to the conclusion that the economies analysed are predominantly profit-led, at least when the economy’s openness is taken into account. However, preliminary studies on the effect of last decades real wage restraint policies on world economy’s performance point to a negative effect of those policies on overall growth 3. This is due to the impossibility for all countries to achieve simultaneous external competitiveness gains, a fact that Bhaduri and Marling already warned about.
Recent theoretical developments have tried to endogenize the explanatory variables of the model. The main way to do this is by considering the effect of increasing returns to scale, made possible by higher capacity utilisation, and technical progress on factor shares. In the context of a stagnationist regime, the increase of labour productivity can lead to a fall in wage share, restraining the positive impact of rising real wages on growth. Thus, to be compatible with steady-state growth labour productivity must rise by a rate that makes wage share relatively constant over the long-run.
In this model, the growth of both wages and productivity are simultaneously driven by within capitalist class competition and between capitalist and working classes conflict 4. Technical progress is consequence of the attempt of capitalists to overcome rising real wages by improving labour productivity. Therefore, wages restraint policies would slow down the rate of technical progress.
On the other hand, in both of the regimes of growth stated by the model, both in and out of equilibrium, i.e. stable and unstable, outcomes are possible5. Production and distribution are linked by combining supply-side and demand-side problems. The need to rely on capital-labour substitution for explaining technological progress and to rely on marginal productivity for explaining factor shares distribution, as neoclassical economics does, is avoided.
In fact, the main corollary of the model is that there is no universal answer for the problem of economic growth. Both pro-capital and pro-labour policies could promote growth depending on which is the dominant component of aggregate demand.
One of the limitations of the model, however, is that it does not take into account the historical limits to the accumulation process stated by previous political economists. As it is usual in economics, it neither deals with ecological limits and gender inequalities due to its lack of consideration of both physical dimension of economic processes, and out-of-the market economic activities. Nevertheless, the model is still very useful for evaluating nowadays policies against the crisis, which are enlarging the already regressive pattern of distribution by adopting pro-profit policies in wage-led economies, so, further undermining economic recovery.
- Bhaduri, A. and Marglin, S. (1990): “Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies”, Cambridge Journal of Economics, 14 (4), 375-393. ↩
- Stockhammer, E. and Onaran, Ö. (2012): “Wage-Led Growth: Theory, Evidence, Policy”, PERI Working Paper Series, 300. ↩
- Onaran, Ö. and Galanis, G. (2012): “Is Aggregate Demand Wage-Led or Profit-Led? National and Global Effects”, ILO Conditions of Work and Employment Working Papers Series, 40. ↩
- Bhaduri, Amit (2006): “Endogenous Economic Growth: A New Approach”, Cambridge Journal of Economics, 30, 69-83. ↩
- Bhaduri, Amit (2008): “On the Dynamics of Profit-led and Wage-led Growth”, Cambridge Journal of Economics, 32, 147-160. ↩