Roads to Social Capitalism
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Roads to Social Capitalism

Theory, Evidence, and Policy

Peter Flaschel and Sigrid Luchtenberg

The current crises in the financialization of capitalism, and their repercussions on the financial viability of entire countries, severely question the achievements of mainstream economics and its disregard of Keynes’s theory of effective demand and finance. In view of this, Peter Flaschel and Sigrid Luchtenberg consider roads to a type of capitalism that could eventually be considered as ‘social’ in nature. The authors underpin their study with theory, empirical evidence, and policy from a positive as well as a normative perspective. As points of departure for their concept of social capitalism, the theoretical framework provides a synthesis of the work of Marx, Keynes, and Schumpeter on ruthless capitalism, regulated capitalism, and competitive socialism.
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Chapter 8: Rampant Fiscal Policy, IMF Intervention and Policy Reforms

Peter Flaschel and Sigrid Luchtenberg


8.1 Introduction In this chapter we consider the conduct of fiscal policy in the context of the distributive cycle. We first investigate a basic case where government expenditures are financed through taxes and bonds (not yet consols, as in Ricardo’s times, but fixed-price bonds with a given rate of interest that can be manipulated by the government). Government expenditures are completely unproductive, having no impact on the private sector of the economy whatsoever, that is, in principle the case where the government is acting like a king’s court by just extracting taxes from its tributaries and using bonds to finance excess goods demand of the court. We however here still consider a case where this is done in a somewhat disciplined manner, since this government has a debt to capital target towards which it is adjusting its expenditure over time. We therefore start from a distributive cycle model (of LotkaVolterra prey-predator type) where fiscal policy is just ‘harvesting’ from this predator-prey (wage share employment rate) interaction. We therefore start from an extension of the Goodwin growth cycle where government behaves in a way such that Say’s Law still holds true, where only wages are taxed and where government bonds are a perfect substitute for asset holders in comparison to their real investment into the capital stock they own. Deficit spending of the government is therefore matched by a reduction of capital stock growth, while wage taxation provides the tax base for government spending. The model provides in a very...

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