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Cambridge Journal of Economies 1989,13, 395-412
Introduction
One of the central tenets of classical and Marxian political economy is the concept of an
inverse relationship between wages and profits. The existence of an inverse relation
between the real wage and the profit rate for any economically viable technique is now a
well-establishedprinciple in the theory of production (Pasinetti, 1977). If workers do not
save, and a constant fraction of profits is saved and invested, then the rate of capital
accumulation is also inversely related to the wage.
A quite different view of income distribution and economic growth emerges from the
work of Kalecki (1971) and Steindl (1952,1979). Their work implies that, under certain
conditions, a redistribution of income toward wages may result in a higher rate of capacity
utilisation (Harris, 1974; Asimakopulos, 1975). If desired accumulation (investment
demand) is an increasing function of both realised profits and the utilisation rate, then a
redistribution of income toward wages may also result in a higher rate of capital accumu
lation (Rowthorn, 1982; Dutt, 1984; Taylor, 1985). This so-called neo-Keynesian or
stands in striking contrast to the classical-Marxian conception of an
stagnationist theory
inverse relation between wages and accumulation. The stagnationist analysis also reveals
that this rests two crucial but usually unstated assumptions: a
conception implicitly upon
fixed utilisation rate, and no independent investment function.1
Recent trends in income distribution and economic growth in the OECD countries
would seem, at least at first sight, to cast doubt upon the stagnationist view. A number of
studies have found that wage shares rose and profit shares fell in the United States and
other western countries sometime after the mid-to-late 1960s.2 This distributional shift
roughly coincides with the period of 'stagflation', or slower growth accompanied by
inflationary pressures. The coincidence of higher wage shares with slower growth has
often been interpreted to imply that the world is now experiencing 'classical' rather than
Manuscript received 14 December 1987; final version received 6 April 1988.
*The American University, Washington, D.C. I would like to acknowledge helpful comments on earlier
versions of this paper from Andre Burgstaller, Paul Burkett, Giovanni Dosi, Donald Harris, Bert Hickman,
referees of this journal. I am especially
John Willoughby, Edward Wolff, Gavin Wright, and two anonymous
it. Any
indebted to one referee who carefully debugged my original model and showed me how to recast
remaining errors are my responsibility.
i *i
1 1_: if ntihentinn or*HtVtreruAfitmpntnfnrnfis varied over
Marx himself was certainly aware that both capacity utilisation and the reinvestment of profits varied
the cycle, but he never developed these insights into a macroeconomic theory of income determination.
2 See Nordhaus Gordon and Weisskopf (1986) for
(1974), Weisskopf (1979), Wolff (1986), and Bowles,
on relative shares in the US. See Bruno and Sachs (1985) for an international comparison.
empirical evidence
to decline, but all agree that it
All these studies differ in regard to the precise timing of when profit shares began
began by 1973 at the latest.
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396 R. A. Blecker
'profit squeeze' due to high wages and other costs, rather than to a 'realisation crisis' of
On closer examination, the recent historical trends are not necessarily inconsistent with
rate, even when the domestic economy is structured in complete accordance with stagna
tionist principles. That is, even if we assume that there is chronic excess capacity and that
investment is a function of utilisation as well as profitability, so that a redistribution
toward wages would definitely increase growth in a closed system, the same conclusion
will not generally obtain for an open economy.
Incorporating international competition into the analysis is essential for applying the
theory to post-war growth. Since 1945, most capitalist countries have become more open
to foreign trade, as both imports and exports have grown more rapidly than GDP. In part,
this has resulted from deliberate efforts at trade liberalisation and economic integration,
such as the GATT and the EEC. Another important cause has been the tremendous
norms, the great expansion of world trade implies intensified competition for shares of
world markets and global employment. It has been shown that, under these conditions,
countries with competitive advantages and chronic trade surpluses can export unemploy
ment to their deficit-ridden trading partners (Robinson, 1946-47; Bhaduri, 1986). In this
respect, it is well known that intensified competition can exacerbate tensions between
nations in an unevenly developing world economy.
What has not been emphasised nearly as much, at least in neo-Keynesian theoretical
work, is the effect of international competition on income distribution and thus on class
conflict within nations.1 In his posthumous essay 'Class struggle and the distribution of
income', Kalecki (1971, ch. 14) suggested that international competition could make
income distribution (relative shares) sensitive to changes in money wages, as we shall
argue here. Some more recent 'stagnationist' models (Dutt, 1984; Taylor, 1985) have not
foreign markets. On the other side, international competition limits the ability of firms to
pass on increases in domestic labour and materials costs to customers in the form of higher
prices. This creates the possibility that profit margins may be 'squeezed' between high
domestic costs and low foreign prices.
1 An
important exception is Marglin and Bhaduri (1988). I became aware of their work in this area after the
present paper had been submitted to this journal. I would like to acknowledge a helpful conversation with
Amit Bhaduri and correspondence from Stephen Marglin.
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International competition 397
competition for the relationship between income distribution and economic growth in a
neo-Keynesian or stagnationist framework. Section 1 explains the basic logic of the stag
nationist view using a simple mathematical model of growth and distribution for a closed
economy. The model is then extended to allow for international competition by adding
import and export demands and the balance of payments into the analysis in section 2. The
notion that international competition can squeeze profit margins (and the profit share) is
Section 3 discusses intuitively the conditions under which the relationship between the
wage share and the growth rate will be positive or negative, and how those conditions
depend on the degree of openness to foreign trade and the intensity of foreign competition.
The mathematical derivation of these conditions is outlined in an Appendix. Section 4
concludes with a discussion of the social and political implications of the analysis and some
brief comments on its limitations.
The model presented here is essentially a one-sector, short-run macro model. The
national economy is treated as if it were one 'representative firm' that produces a single
industrial commodity. For simplicity, labour is the only variable input. This specification
abstracts from both inter-industry relations and inter-firm competition within a country.
Such an extreme simplification may be justified, in the present context, by the need for a
simple specification of the domestic economy which can be used to analyse the effects of
introducing international competition later in the paper. Certain nominal variables (the
money wage, the exchange rate, and the price level) are included in the model, but
y= Y/N, (1)
where y is taken as given. Output is related to the utilisation of productive capacity by the
identity
Y = uvK, (2)
where u is the utilisation rate, v is the capacity-capital ratio, and K is the capital stock.
Both v and K are assumed fixed in the short run. In general, we would expect to find less
than-full capacity utilisation: u < 1. This assumption may be justified on the ground that
industrial firms typically build ahead of demand in a growing economy. Firms do so partly
because of indivisibilities in plant and equipment, and partly in order to be able to meet
unanticipated surges in demand.
Net output or national income Y is divided between wages, profits, and tax revenue.
P=r(Wly), (4)
where r> 1 is the mark-up rate and ( Wjy) is unit labour costs.
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398 R. A. Blecker
The assumption of a fixed mark-up implies that increases in money wages are fully
passed on in the form of higher prices, with no effecton either relative shares or real wages.
Assuming for simplicity that profits are taxed at the same rate as wages, equations (3) and
(4) together imply that the after-tax wage share is = ( 1 t)r and the after-tax profit share
is 1 w r=(1 r)(r 1 )/t. The after-tax real wage is fixed independently of the money
wage by the tax rate, the mark-up rate, and productivity: (1 t)WP={ 1 t)yx.
In a closed economy, macroeconomic equilibrium requires that savings be equal to
investment plus the government budget deficit:
S=I+G-T, (5)
S = srK, (6)
where s is the savings rate out of profits, and
r = (l w t)uv (7)
where IjK is the rate of capital accumulation. Desired accumulation depends on expected
profitability because profits are both the returns to investment and the primary source of
finance for investment.2 Assuming static expectations, the expected profit rate is equal to
the current profit rate, r. The coefficient a2 represents the accelerator effect: high utili
sation induces firms to expand capacity more rapidly in order to keep up with anticipated
demand; while low utilisation (undesired excess capacity) induces them to cut back on
planned investment (Steindl, 1952).
Equations (5)(8) together imply that the accumulation rate (I/K) is an increasing
function of the wage share (u>). This relation is depicted in Fig. 1 (see Appendix for
derivation). If the wage share increases, income is redistributed to the class which spends a
higher fraction of its income on consumption: the workers' marginal propensity to
'
This investment function is due to Rowthorn (1982); similar functions were used by Taylor (1983) and
Dutt (1984).
2
Although external finance is not taken into account in this model, it should be noted that the terms on
which external funds are available to the firm generally depend on the firm's flow of internal finance. See
Kalecki (1937) and Fazzari and Mott (1986-87).
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International competition 399
I/K - a (tf )
Fig. 1.
consume is 1, while the capitalists' is (1 s)< 1. Assuming s>a, (i.e., savings are more
responsive to profitability than investment), such a redistribution increases aggregate
demand and capacity utilisation.1 In a closed economy, as specified here, the increase in
capacity utilisation outweighs the decrease in the profit share, so that the profit rate
actually ends up higher.2 Since desired accumulation is an increasing function of both the
profit rate and the utilisation rate, then, the accumulation rate also rises (see Appendix for
more details).
Care must be taken in interpreting this conclusion, however. In a model with a fixed
mark-up rate, workers cannot achieve a higher relative share (and the associated gains in
income and employment) by raising their nominal wage. The wage share can be increased
only by a reduction in the mark-up rate on the part of capital. Conversely, a rise in the
mark-up rate lowers the wage share and redistributes income to profits, thus raising the
average savings rate for the economy as a whole, which depresses utilisation and reduces
the growth rate. Indeed, the origin of the term 'stagnationism' was Steindl's (1952)
hypothesis that the process of 'absolute concentration' of industry would lead to rising
gross profit margins and a secular tendency toward excess capacity and sluggish growth in
income, G/ Y) would increase aggregate demand, capacity utilisation, and realised profits
through the multiplier process, and thus raise the desired rate of capital accumulation. In
terms of Fig. 1, this could be represented by an upward shift of the I/K curve, yielding a
higher accumulation rate for any given wage share. A rise in money wages ( W) merely
increases the price level (P) proportionally, with no real effects. Increases in productivity
(y) lower P proportionally and therefore raise the real wage, with no effect on relative
shares, utilisation, or accumulation in this short-term model.
1 See the for the derivation of the condition for dudw>0. The assumption that s>a is also
Appendix
necessary for stability of the output adjustment process.
2 This result
requires a restriction on the budget surplus, which may not exceed a certain (positive) fraction
of national income: (TG)l Y < ajv.
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400 R. A. Blecker
" 1
I/K-A(b,w)
yj) vv
A-'~^yJy
A, \>\
y *3 V 45
A2
4.
>
Fig. 2.
In an open economy, macroeconomic equilibrium requires that the current account bal
ance (B) equal the difference between income and absorption, which is equivalent to the
excess of private domestic savings over investment plus the government budget surplus:
B = (S-I)+(T-G). (5')
B equals the real trade balance in terms of domestic output if we abstract from profit
Using (5') and ()-^),1 it can be shown that the accumulation rate (I/K) is a function
of both the wage share (w) and the trade balance (measured as a fraction of national
yield a constant rate of accumulation. The curves further to the right represent suc
1
This
analysis assumes the same form of the desired accumulation function (8) that was assumed for the
closed economy. In an open economy with direct foreign investment, it is possible that desired accumulation
could become inversely related to relative unit labour costs, if workers in different countries compete directly
for jobs with the same multinational firms. This specification would obviously make it more likely that
equilibrium I/K would be inversely related to the wage share of national income. This possibility is not
allowed for in this paper, so that we can focus on the indirect competition between workers which is mediated
by the competition for their products in the world market.
2 The critical trade balance ratio b' lies in the deficit
region if and only if the government budget surplus does
not exceed a certain
(positive) fraction of national income. In order to focus our attention on the role of
international trade, we may assume that the government budget is balanced (G = T), which is sufficient (but
not necessary) for b' < 0. For the derivation of b' see the Appendix.
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International competition 401
balance is initially in a large enough deficit, the latter effect will outweigh the former, and
the net effect on accumulation will be negative. Otherwise, the former effect dominates,
and the net effect on accumulation is positive.
The trade balance must also be equal to the difference between exports and imports:
B = X-{eP*!P)M, (9)
where X is the volume of exports, M is the volume of imports, e is the exchange rate (price
of foreign exchange), P* is the foreign price level, and eP*P is the relative price of
imports in domestic currency. The exchange rate is taken as given independently of the
trade balance in the short run. This assumption is consistent with either a fixed exchange
rate, or a flexible rate which is driven mainly by asset-market transactions in the short
run.' Trade surpluses (deficits) are assumed to be accommodated fully by capital out
flows (inflows). However, it is not assumed that the capital flows are 'perfectly elastic',
which would imply equalisation of profit rates between countries.2
Import and export demands are given by the standard constant-elasticity functions3
M=(eP*/pyY (io)
and
X=(PleP*)"Y*e (11)
where Y* is foreign real income, r< 0 and ^ < 0 are price elasticities, and e > 0 and p > 0 are
income elasticities. The Marshall-Lerner condition is assumed to hold: |r+ y/\ > 1. This
condition is necessary and sufficient to guarantee that an improvement in price competi
tiveness (a rise in eP* IP) will improve the balance of trade, ceteris paribus, starting from an
initial equilibrium with balanced trade (B = 0).
Most standard models of balance of payments adjustment take prices as given in the
seller's currency, and focus on changes in the exchange rate. For our purposes, however,
we are more concerned with price determination as it affects international competitive
ness. In an open economy model, the assumption of a fixed mark-up would be implausible.
This assumption would imply that firms pass on 100% of increases in unit labour costs in
the form of higher prices regardless of how uncompetitive domestic products become and
how much their market share falls. Moreover, to assume a fixed mark-up in an open
economy model would be to rule out a priori the possibility that intensified international
competition could account for a squeeze on corporate profits, as discussed in the introduc
tion. In order to allow for this possibility, and to make the specification of pricing and
distribution more plausible for an open economy, we need to adopt a flexible mark-up
rule.
Let us therefore assume that the mark-up rate or gross margin is sensitive to the
competitiveness of the nation's products. Domestic firms may take advantage of greater
1 To of a flexible exchange rate would be beyond the scope of this paper.
try to explain the determination
The traditional view that a flexible exchange rate would automatically adjust so as to maintain current account
balance in the short run is now totally discredited. The continued appreciation of the US dollar from 1981 to
early 1985 in spite of rising current account deficits confirms the demise of the traditional view. See Isard
(1978) for a critical survey of theories of exchange rate determination.
2 See Feldstein and Horioka
(1980) for empirical support for the assumption of imperfect capital mobility.
3 This that import demand may be sensitive to income distribution
specification ignores the possibilities
(e.g. if capitalists have a greater propensity to import luxury goods) or that investment requires imported
capital goods, as in Taylor (1983) andDutt (1984). These complications are especially important in models of
less developed countries, but less important in models of industrialised nations. I am indebted to Paul Burkett
for raising this issue.
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402 R. A. Blecker
competitiveness (due to either lower unit labour costs, higher import prices, or a currency
are forced to cut mark-ups in an effort to limit the loss of market share. Formally, it is
elasticity function
z = i(eP*!P), (12)
where 0 < 9 < 1 is the elasticity of the mark-up with respect to the relative price of imports.1
For convenience, we shall refer to r as the 'target mark-up'. On the assumption
that domestic products are imperfect substitutes for foreign products, purchasing power
parity (eP*/P= 1) will not generally hold, and the actual mark-up will diverge from the
target.
With a flexible mark-up, as specified in equation (12), the wage share becomes sensitive
to domestic labour costs. Let q = (W/y)leP*, the ratio of domestic unit labour costs to
import prices in domestic currency. Using equations (3)-(4) and (12), it can be shown that
This equation represents the possibility of a profit squeeze arising from either higher
money wages relative to labour productivity, an appreciation of the currency (fall in e), or a
cut in the foreign price level, any of which would raise q. Now the wage share can be
increased by either a rise in q or a fall in the target mark-up ?, although in each case the
increase in w will be less than proportional (the elasticities 91(1+0) and 1/(1 + 9) are both
less than unity).
eP*P=(rq)-m+0\ (14)
A rise in q makes domestic products more expensive and lowers eP*\P, but less than
proportionally since firms cut their mark-ups to try to protect their market shares. A fall in
t makes domestic products cheaper and raises eP*jP, but also less than proportionally
since the actual mark-up will not fall by as much as the 'target' as firms take advantage of
their enhanced competitiveness.
Thus an increase in the wage share may be associated with either worsened or improved
changed their pricing policy. This means that the relationship between the wage share (w)
and the accumulation rate (IIK) will now depend on the source of a change in w. As Fig. 2
shows, in an open economy, the accumulation rate depends on the external balance of
trade as well as the internal distribution of income. This means that we must look not only
at the direct effects of changes in w on I/K, but also at the indirect effects which are
mediated by changes in the country's competitiveness.
' In an
econometric case study of the American steel industry in Blecker ( 1989), I obtained estimates of 6 of
approximately 0 03, for the period 1962-83. Although this estimated elasticity is small, it is statistically
significant at the 5% level. Furthermore, for the same period, I found that steel profit mark-ups became
sensitive to capacity utilisation, with an elasticity of 0-2. This latter sensitivity undoubtedly includes some
indirect effects of import competition.
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International competition 403
-> w
T <
Fig. 3.
This section considers the effects of changes in the two determinants of the wage share:
first, the 'target' mark-up r, and, second, the ratio of domestic labour costs to import prices
q. A fall in r is equivalent to a downward shift in the mark-up function (12). Note that this
is not just a reduction in the actual realised mark-up, but rather a change in firms' pricing
policies such that they desire a lower mark-up for any given degree of competitiveness.
This would presumably come about only as a result of a major restructuring of an economy
(e.g. through deregulation of industry or the sudden entry of new, innovative firms) or
from a change in marketing strategy (e.g. a drive to penetrate foreign markets).
In an open economy, reducing the target mark-up rate can still lead to a higher growth
rate, but only under certain conditions. Since income is redistributed toward wages, and
workers do not save, aggregate demand increases, and capacity utilisation and capital
accumulation both increase (ceteris paribus). In addition, since a lower mark-up makes
domestic products more competitive in price terms, the trade balance should tend to
(ceteris paribus). However, these positive effects are offset by the income-elasticity of
import demand, which implies that higher utilisation and national income tend to worsen
the trade balance (ceteris paribus).1 The condition for a cut in the mark-up rate to
stimulate growth in an open economy is that the price elasticities of import and export
demand must be relatively high (in absolute value) compared with the income elasticity of
import demand and the initial proportion of imports to national income (see Appendix).
The possible outcomes of a fall in z may be analysed with the help of Fig. 3. The upper
right hand part of the diagram reproduces the accumulation rate curves from Fig. 2,
turned sideways. Since the comparative statics for the trade balance are analysed in the
1
This negative effect is emphasised by Thirlwall ( 1979) in his concept of 'balance-of-payments-constrained
growth'.
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404 R. A. Blecker
neighbourhood of an initial equilibrium with balanced trade, only the downward sloping
accumulation curves along the 6 = 0 axis are drawn in Fig. 3. The upper-left hand part of
the diagram shows the relationship between the trade balance ratio (b = B/Y) and the
target mark-up, ?. This relationship may be either increasing or decreasing, depending on
how high is the income elasticity of import demand relative to the price elasticities of
import and export demand (see Appendix). The lower-right quadrant in Fig. 3 shows the
inverse relation (13) between ? and the wage share, w. The lower-left quadrant contains a
45 line which simply projects T from the downward axis to the leftward axis.
Assuming an initial equilibrium at b = 0, the target mark-up must be r0, the wage share is
wg, and the accumulation rate is A0. Now consider a reduction in the target mark-up from
Tq to F,. The wage share rises from zv0 to w,. If b is a decreasing function of z, as in the case of
the solid line FF, then the trade balance improves, and the country definitely ends up with
a higher accumulation rate (A). But if b is an increasing function of?, as in the case of the
dashed line FF', then the trade balance worsens, and it is possible (although not necess
ary) that the resulting deficit will be large enough to offset the positive effect of a higher
wage share. The country could thus end up with a lower accumulation rate (A2), as shown
in Fig. 3.
For a cut in the target mark-up not to increase the accumulation rate, a country would
have to be highly dependent on imports (in the sense of a relatively high ratio of imports to
national income and a high income elasticity of import demand), and would also have to
have very rigid trade (in the sense of comparatively low price elasticities of demand for its
imports and exports). In this case, the improvement in competitiveness has relatively little
impact, while the domestic demand stimulus is outweighed by the increased import
demand. Otherwise, the competitive gains from lower mark-ups will more than outweigh
the induced increase in imports. Provided that a country is not excessively dependent and
rigid, then, cutting mark-ups remains a viable strategy for promoting growth with a
redistribution of income toward wages in an open economy.
The problem with this strategy for growth in an open economy is that its success comes
partly at the expense of the country's trading partners. This strategy essentially amounts
countries whose market shares are eroded may react with counter-measures to increase
competitiveness or to protect their markets.1 In the long run, chronic trade surpluses
should eventually generate an offsetting tendency for the currency to appreciate, although
monetary policies and asset market forces may impede this tendency for a considerable
period of time.
Now consider the case of a rise in q = ( W/y)eP*, the ratio of unit labour costs to import
prices. This is essentially the case of a 'profit squeeze', in which profit margins are com
pressed between domestic costs on the one side and foreign competition on the other. If
money wages rise relative to productivity, firms lower their mark-ups in an effort to
preserve part of their market shares. If the currency appreciates (e falls) or import prices
are cut in foreign currency (P* falls), firms respond in exactly the same way. If q rises, the
wage share increases, but the competitiveness of domestic products is reduced, and a trade
deficit results.
1
Different responses would have different implications for global growth. For example, if capitalists in
other countries retaliate by cutting their target mark-ups, the competitive effects should roughly cancel out.
Given the logic of the model, the result would then be higher wage shares in all countries and faster growth in
the world economy as a whole (which is a closed system). A protectionist response, however, might not have
the same expansionary effects, especially if it leads to higher foreign profit shares.
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International competition 40$
-> w
Fig. 4.
This case is shown diagrammatically in Fig. 4. The top part of this diagram is similar to
Fig. 3, but with the trade balance ratio (6) drawn as a function of the labour cost ratio (q) on
the left-hand side. In this case, the FF line must be downward sloping as long as the
Marshall-Lerner condition holds (see Appendix). Starting from an initial equilibrium
with balanced trade = 0), the labour cost ratio must be q0, the share is w0, and the
(b wage
accumulation rate is A0. If the labour cost ratio rises to qv the wage share rises to wv while
Clearly, if the FF curve was flatter (i.e. net exports were less price-elastic) and/or the
accumulation rate curves were steeper (i.e. more sensitive to income distribution),1 the
The possibility that a rise in q, due to an increase in money wages, could lead to a higher
accumulation rate would appear to imply the potential feasibility of a strategy of 'wage-led
growth' in an open economy. However, it turns out that such a strategy can only succeed
for a very narrow range of parameter values and initial levels of the variables. Intuitively, it
would require that an economy was relatively closed to foreign trade, in the sense of having
relatively low price elasticities of import and export demand (in absolute value), a low
income elasticity of import demand, and a small proportion of imports to national income
(see the Appendix for the precise condition). The structural transformations of the world
economy in the post-war period make it increasingly unlikely that industrialised capitalist
countries will find themselves in such a situation unless there is a dramatic increase in
protectionism.
1 The accumulation curves would be steeper if either the capitalists' savings rate (s) or the sensitivity of
desired accumulation to utilisation (a2) were higher, since in either case realised accumulation would be more
responsive to a redistribution of income from profits to wages.
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406 R. A. Blecker
economy. Wage-led growth can only succeed if the economy is relatively closed to foreign
trade, in the sense just described. At the same time, the success of wage-led growth
depends on the sensitivity of mark-ups (and hence relative shares) to international com
petitive pressures (9 > 0). But if an economy is relatively closed, profit mark-ups should be
relatively insensitive to such pressures. Thus these two conditions for wage-led growth to
growth is more likely to be effective in a relatively open economy, at least in the short run.1
If a relatively open country cuts its money wage relative to its labour productivity,
thus reducing the ratio q, it will increase its net exports by more than enough to offset the
adverse effects of increasing the profit share on domestic demand, resulting in higher rates
wage cut, since it redistributes income to profits. This point is important because it is often
politically easier to depreciate the currency than to get workers to accept a nominal wage
reduction.
From the perspective of growth, it does not appear to matter whether money wages are
workers' welfare, however, it does make a difference how unit labour costs are reduced. If
the real wage is measured in terms of a consumer price index (Pc) which includes foreign
goods, with the fraction 0 </? < 1 of expenditures spent on domestic goods, then the after
where = Now workers will suffer real losses if money are cut (or
Pc P\eP*Y wage wages
the currency is depreciated), but will make real wage gains if productivity rises. In terms of
real wages, then, workers should definitely prefer productivity increases to money wage
cuts or a depreciation.
However, in a highly open economy, lower wages (real as well as nominal) can 'buy'
additional jobs through improved competitiveness.2 Conversely, employed workers can
gain higher wages at the expense of increased unemployment. In the present model, this
conflict between wages and employment arises solely from the international competitive
effects, as there is no neoclassical production function with diminishing marginal produc
tivity of labour.
4. Conclusion
In the closed economy neo-Keynesian model presented in section 1, under certain plaus
ible assumptions, a redistribution of income toward wages raises capacity utilisation and
stimulates capital accumulation. In this sense, stagnationist theory implies that there is no
1 Of
course, this type of export-led growth comes at the expense of other countries, and therefore runs into
the same potential international obstacles as were mentioned above in regard to a strategy of cutting profit
mark-ups.
2
Productivity growth may also increase employment along with real wages, but only if the competitive
effects are large enough to more than compensate for the lower wage share and reduced labour coefficient
(My)
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International competition 407
conclusion must be drastically revised in the light of the model of an open economy
analysed in sections 2-3. With a flexible mark-up, the possibility of a conflict between
a redistribution toward wages and maintaining international competitiveness greatly
lessens the prospects for a happy coincidence of workers' and capitalists' interests.
In a relatively open economy (as defined above), the aggressive pursuit of high wages by
the working class in one nation can impede that nation's economic growth and reduce its
level of employment. The point is not that workers are to blame for slow growth or high
unemployment. The point is rather that international capitalist competition in the prod
uct market compels workers in different countries to compete with each other for employ
ment. This is additional to direct foreign investment motivated by a search for cheap
labour. In Marxian terms, one could say that foreign trade relations create international
'relations of production'. In the world economy, just as within a nation, 'the labour of the
individual asserts itself as a part of the labour of society, only by means of the relations
which the act of exchange establishes directly between the products, and indirectly,
through them, between the producers' (Marx, 1967, p. 73).
A situation in which competitive wage cuts (or 'wage restraints') are pursued in all
countries will potentially harm the interests of workers everywhere: real wages will be
sacrificed, as long as mark-ups are flexible; but employment will not increase, as long as the
competitive gains cancel each other out. In this case, the regressive effect of multilateral
wage cuts on income distribution could well lead to a world-wide depression of demand
and employment. On the other hand, if workers in all countries increase their money
wages, and if the international competitive effects roughly cancel out, then the world
economy as a whole can potentially enjoy wage-led growthprovided that firms still feel
sufficient competitive pressures to compel them to cut their mark-ups in response to the
wage increases.
development of the world economy. Either by cutting profit mark-ups or by lowering unit
labour costs relative to import prices, an individual country can enjoy a bout of export-led
growth, but only at the expense of other countries. Thus unplanned capitalist trade leads
It might appear that fiscal policy would provide a harmonious way of increasing utilis
ation and accumulation in an open economy, just as it does in a closed system. The model
developed above implies that expansionary fiscal policy is still effective for stimulating
accumulation in the short run in an open economy, holding the exchange rate constant (see
Appendix). However, it is well known that the effectiveness of fiscal policy in an open
economy is severely limited by the balance of payments and exchange rate difficulties
associated with the resulting chronic trade deficits. With a flexible exchange rate and a
high degree of capital mobility, the trade deficits may even grow large enough to offset
the expansionary fiscal policies completely, as occurred in the United States in the
mid-1980s.1
The present analysis has been based on a number of important simplifying assump
tions. The assumption of a single 'representative firm' can be taken to imply the existence
of a stable oligopolistic structure across all industries within a country. In some respects,
1 In
1988, the US federal government budget deficit of $142-3 billion was almost exactly matched by a
current account deficit of $136-2 billion.
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40S R. A. Blecker
this is a useful first approximation, as it captures the problems facing a mature capitalist
economy which goes from being relatively closed to relatively open, such as the United
States in the 1960s and 1970s. However, it is clearly an exaggeration to suppose that all
internal price competition is suppressed, and only foreign competition upsets an other
particular firms or industries would squeeze their profit margins if the cost increases were
only partially passed on. In this respect, the individual firm or sector is analogous to an
open economy: a redistribution toward wages has an adverse competitive effect. Unlike a
national economy, however, an individual firm or industry does not benefit in any appreci
able way from the demand-side effects of a lower profit share. If profits are squeezed in
many sectors simultaneously, the average wage share may rise, and capacity utilisation
could increase in a closed economy. However, the effect on the aggregate accumulation
rate would not be so certain in this case, as desired investment might fall in the sectors
suffering the greatest profit squeeze.1 And wage-led growth would still be unlikely to be
run model presented above ignores monetary relations, financial assets, and interest rates.
Integrating asset accumulation into the analysis would be essential for understanding the
long-run adjustment processes, and indeed for allowing for the possibility of steady-state
be essential for determining whether a country could sustain a long-run competitive edge
in relative prices. Nevertheless, as Keynes and Kalecki always reminded us, life takes
place in a series of short-run episodes which may never approach any long-run equilib
rium. From this viewpoint, it is hoped that the present analysis will be of some interest.
Bibliography
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Blecker, R. A. 1989. Mark up pricing, import competition, and the decline of the American steel
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' Note that for those individual firms or sectors whose relative unit labour costs
increase, the profit share
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2 The existence of mechanisms
which tend to perpetuate absolute competitive advantages is argued by
Kaldor (1981) and Dosi and Soete (1983). However, it remains to be demonstrated whether such advantages
are not offset by some automatic adjustment mechanism, as asserted by Thirlwall (1979).
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International competition 409
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Appendix
u=aj<p(w), (A.l)
where
=
[(s-al)(l-w-t)-g+t]v-a2.
The government spending rate g = G/Y and the (uniform) income tax rate t = TY are assumed to be
exogenously fixed. In order to ensure stability of the equilibrium as well as a positive utilisation rate,
we assume a0>0 and $)(>) >0.Then utilisation is an increasing function of the wage share
(dudw>0) as long as <p\w) <0, which requires s> a. In fact, s> <j, must be satisfied if ip(w)> 0 and
the budget surplus is below a certain (positive) upper bound, since <p(w) > 0 is equivalent to
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410 R. A. Blecker
which is stronger than r>a, as long as tg<ajv. Either a balanced budget or a deficit (g>t)
obviously satisfies this condition. It can also be shown that drjdw > 0 as long as tg<a2v.
Equations (7)(8) and (A. 1 ) yield the following reduced form for the rate of capital accumulation:
tg <sajav.
Equation (A.2) is presented graphically in Fig. 1 in the text on the assumption that this inequality
holds (again,g>t is sufficient but not necessary).
The comparative static results for the effects of expansionary fiscal policy do not depend on any
initialconditions about the budget surplus. The derivatives du/dg > 0 and d(IK)dg > 0, which may
be obtained from (A.l) and (A.2), respectively, are unambiguously positive.
u=ao/0(b,w), (A.l')
where b = B Y, and
0(b,w) = [(s
wt)
b
g+t]v
a,)(l a2>0
Using (A.l') in place of (A.l) makes the accumulation rate also a function of b as well as w:
which is presented graphically in Fig. 2 in the text. It may be seen that Ab>0 unambiguously, while
= (A. 3)
Aw uv[av(b+g -t)+sa2\0(b,vi).
b+g1> saja,a.
b' ~(tg)
sa2l av.
Assuming t
g < sa2av (the same assumption necessary for a'(w) > 0 in the closed economy model),
V will definitely be negative. In the text, we assume t=g which is sufficient (although not necessary)
for >'<0, and hence Aw>0 when evaluated at b = 0. Then we are justified in drawing the A(b,w)
curves such that IK is rising as w increases along the b = 0 axis in Figs 2-4.
Using equations (2), (9)(11), and (A.l'), we can derive the following expression for the trade
balance ratio:
b = (zq)"Kl+e) - "(1 +
Y*c[0(b,w)aovK) (xq) ^+S[0(b,w)la0vK\1
= F(b,q,t), (A.4)
since w is a function of q and f by (13). Totally differentiating (A.4) and evaluating the derivatives at
>= 0 yields:
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International competition 411
b+<H
n
+ l|/ = I + Qz
| Tj |
m
^
xx b+'/'h
\
\
Fig. 5.
d6
[(1 + t] + i//)&(b,w)+fivw(s a,)]*
db
[(1 +t] + y/)<P(b,w) dfivw(s a)]x
dq [<t>(b,w)+ fivx]q(1+6) (A.6)
where x = X / V > 0.
Derivative (A.5) is ambiguous in sign. The condition
for d6/dr<0 (evaluated at >= 0) is \r+
y|>l + \jivw(s ax)l<l>(b,w)]. This is stronger than
simple the
Marshall-Lerner condition (\r+
i/\> 1). The sign of (A.5) determines the slope of the line FF (or FF) in Fig. 3. Derivative (A.6),
is definitely The condition for db/dq<0 at 6 = 0) is |i/+(y|>l
however, negative. (evaluated
[0fiwv(sax)l<P(Jb,w)]. As long as 6>0, assuming Marshall-Lerner is sufficient for dbdq<0. This
derivative is represented by the line FF in Fig. 4.
From the system of equations (13), (A.2'), and (A.4) we can deduce the following total derivatives:
d (IIK)
uv{[alv{\w t) + a^{\ + ri+ i//)x+ 6w[a1v(b+g tfix) + sa2]}
dq [0(b,w)+fivx]q(l + 9) (A.8)
Assuming balanced trade (b = 0) and a balanced budget (g = t), the conditions for (A.7) and (A.8) each
to be negative are
+ y\>\-z
\rf (A.9)
and
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412 R. A. Blecker
there is a positive relation between zv and IjK in the case of a reduction off, but an inverse relation in
the case of an increase in q. In region III, d(//AT)/df <0 and d(IjK)jdq > 0, so that there is a positive
relation between zv and 7/K for either a fall in tor a rise in q. Region III
corresponds to what is called a
'relatively closed' economy in the text; regions I and II together are referred to as 'relatively open'.
The effects of fiscal policy in the open economy model are given by
= + ivx] < 0
dbjdg fivx/[(p(b,w)
and
holding the exchange rate e constant. The higher are the income-elasticity of import demand n and
the import-income ratio x, the more b falls and the smaller is the increase in IjK.
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