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Economic Black Holes- The Dynamics And Consequences Of Accumulation

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  • Trond Andresen
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    Abstract

    The long-range impact of real returns on any form of saved or invested money on a macroeconomy is modeled and discussed. It is shown that, subject to conditions concerning savings rate and loan amortization time, any economic system with positive real returns must eventually reach a depression-like economic state, regardless of real output growth. The observed disproportionate growth of financial sectors in recent years is explained by the proposed theory. A simple dynamic model for "long waves" in world capitalism is also presented. IMHO there are two _different_ explanations for long-term cycles/paths toward depression in capitalism, which have that in common that they may be categorized as "accumulation- related". (there are also other explanations, f.inst. innovation- oriented ones) First the "capital intensity" theory: A long-term falling trend in the average rate of profit mainly due to growth in capital intensity is used to explain the transition from boom to recession to depression. This theory is widely known and discussed. Then to the second theory (argued in the paper). It is based purely on he dynamics of accumulation of financial--in all senses--assets. Accumulation is a simple and well-known phenomenon, familiar to everybody with an elementary knowledge of the interest mechanism. It is therefore remarkable that the macroeconomic consequences of this mechanism have not--as far as this author has been able to ascertain-- been explored rigorously and comprehensively. The paper is an attempt to do so. (The strong focus on money and finance in the paper is not to be understood such that "the real economy" is considered unimportant. The primary concern of economics is of course--or at least should be--real economic goals. But when specific financial phenomena run their course regardless of real economy developments, and sooner or later also influence real economic indicators decisively and negatively, one has no choice but to to focus strongly on money and finance.) The model developed in the first part of the paper may be shortly put like this. Define the population of agents in an economy as gvt., municipalities, firms and households. Sort those agents into two aggregates; an "aggregate agent" of net creditors (NC) and another of net debtors (ND). (Society as a whole will have zero aggregate net debt/assets, when we look at a closed economy). Between the two groups one will have a net cash flow going from ND to NC consisting of returns (interest, dividends on stocks) and repayments (not on stocks, but on loans given). Another net cash flow goes the other way, consisting of new loans, purchase of bonds, purchase of stocks. Those flows imply future returns back from the ND to the NC. Let us call both these flows for _financial_ flows. All other cash flows, such as wages, purchase of capital goods, consumption, etc., are _real_ flows. Now, under quite non-restrictive conditions, it is easily proved that financial flows will grow exponentially with time: If the NC aggregate has a sufficiently high propensity to save (in an average sense that is, and/or real interest rates are high, and/or repayment rates are low, this will be the case. Aggregate net assets for the NC--let us call this term A(t)--will also grow exponentially. Correspondingly, A(t) is also the aggregate net debt for the ND. I call this growth process "polarization". Assuming that the money stock among the ND increases slower than this exponential growth, a relatively decreasing share of cash will circulate as real flows and a correspondingly increasing share as financial flows. Assuming that the propensity to save for the NC aggregate is constant, so also the propensity to consume. This means exponentially increasing consumption for the NC aggregate.One will expect consumption and capital goods purchases for the NC aggregate, and also employment in the financial sector to increase relatively, and a relative decrease of consumption, capital goods purchases and employment in the rest of the economy which delivers goods and non- financial ("real") services. If, however, money is somehow injected into the real part of the economy (Friedman's "helicopter money"/increased velocity there/near-monies being used more extensively for transactions) this will counter the real flow relative cash depletion effect. In this case, if physical output doesn't also increase exponentially, we will have inflation, which will erode aggregate assets A(t): Inflation will work against polarization. But if polarization is present, this _neccesarily_ means relative depletion of real cash flows. Now to a point made against me in a discussion of the polarization theory: Suppose a growing economy, meaning that output increases each year. Lenders can accumulate assets and borrowers can accumulate debts for ever as long as the rate at which this accumulation takes place is less than the rate of growth. This is a polarization time path. Financial fragility will inexorably increase. This means crisis sooner or later. Growth in real output has no influence on this. Polarization may-- however--be at work for a long period with no crisis symptoms, and with increased real wages and economic growth: Assume a situation where we have a positive inflation rate, a higher nominal mean interest rate, and also a (not too low) savings rate among the NC, such that in spite of inflation polarization is positive, but slow. Since polarization is slow in relation to the inflation rate, nominal aggregate wages (the sum of wages in the financial sector and in the rest of the economy) will grow. Furthermore, let us assume that the workforce also grows, but somewhat slower than aggregate nominal wages, such that the average workperson also experiences a positive, albeit lower, nominal wage growth. If productivity increase is such that real output grows faster than aggregate demand, the expanding workforce will also experience _real_ wage growth. The key point then, is the rate of productivity increase. It follows that a long-range trend of average increase in living standards, as observed after World War II, does not as such exclude the presence of polarization in this period. What is invariant, however, is this: Under any combination of inflation rate, productivity increase and nominal wage increase, and whether overall employment waxes or wanes: If polarization is present, it should always be accompanied by a relative increase in activity - cash flows and employment - in the financial sector. This inexorable tilt in the direction of finance _must_ lead to crisis: Economic fragility will increase since an increasing share of cash flows are contracted financial cash flows which cannot not be easily reduced as with an agent's consumption or purchase of capital goods. In other words: Crisis will happen regardless of continuous growth in productivity and physical output, it is cash depletion and fragility that decides this. Sooner or later physical output will stagnate, in spite of steadily increasing productivity, due to insolvency epidemies reducing employment and production. The paper develops the polarization theory, which is presented as a theoretical argument, not accompanied by empirical data. But, even if empirical studies are not presented in the paper, it seems that one sort of empirical evidence is the extreme relative growth of the financial sector in the 80ies. I started this note by mentioning that there is another theory for the expanation of long waves or long-term paths towards depression, by me called the "capital intensity" theory. In what way is this theory different from the polarization theory? Imagine an economy where manufacturing technology is fairly unchanged for several decades. Following the capital intensity argument, this economy should then be _exempt_ from the long-term crisis mechanism. But, imagine that this society has a real level of interest/returns sufficient for lenders/investors to financially accumulate. Accumulation of assets on one side is accumulation of debts on the other, what we may call polarization. Economic fragility will increase with polarization as stated above. Debtors will sooner or later default on a large scale, and creditors will lose money, and also have few new safe investment opportunities. Society will grind to halt. If such a crisis mechanism is present, also a technologically static economy will experience a path towards depression. On the other hand, the first (capital intensity) mechanism does not predict crisis for such a society. By this I have made the point that the two theories are qualitively different.

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    Paper provided by Post-Keynesian Archive in its series Papers deposited by Authors with number _017.

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    Date of creation: 1994
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    Handle: RePEc:wop:pokear:_017

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