The Distribution–Leverage Cycle: An Endogenous Theory of Macroeconomic Instability

This paper reexamines the foundations of business cycle theory by proposing that macroeconomic instability arises endogenously from the structural organization of production, distribution, and finance rather than from exogenous shocks or nominal frictions. It introduces the Distribution–Leverage Cycle (DLC), a framework in which cyclical dynamics emerge from the interaction between surplus distribution and leverage accumulation. The analysis identifies the distribution gap, defined as the divergence between productive capacity and effective demand, as a central mechanism driving instability. This gap emerges when surplus is concentrated among claimants with relatively low propensities to consume, including financial, entrepreneurial, and knowledge-based capital, particularly in the context of artificial intelligence. Credit expansion acts as a compensatory mechanism that sustains demand in the short run while increasing leverage and financial fragility over time. To provide a micro-foundation for surplus allocation, the paper builds on the concept of Socially Necessary Participation (SNP), defined as the institutional recognition of participation in value creation as the basis for claims on surplus. In this framework, macroeconomic instability reflects both demand imbalances and a structural decoupling between participation and entitlement to income. When participation is displaced, especially through technological change, credit substitutes for income and reinforces cyclical dynamics. Financial crises can be interpreted as the endogenous outcome of economies that rely on leverage to offset persistent distributional asymmetries. Building on Ethosism, a normative institutional framework, the paper extends this approach to examine how alignment between participation and surplus allocation can be restored through mechanisms such as profit-sharing, broadened ownership, and incentive-compatible distributive structures. By integrating distribution, leverage, and participation, the DLC framework moves beyond equilibrium-centered macroeconomic models and characterizes business cycles as structural and endogenous features of modern economies.