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A case for democratic

planning?
a
Christos Pitelis
a
Judge Institute , Cambridge
Published online: 02 Nov 2006.

To cite this article: Christos Pitelis (1994) A case for democratic

planning?, International Review of Applied Economics, 8:1, 75-81, DOI:
10.1080/10260210310001635522

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 Book review articles 75

A case for democratic planning?

Christos Pitelis Judge Institute, Cambridge
Reviewing: H. J. Sherman, The business cycle: growth
and crisis under capitalism. Princeton, N J : Princeton
University Press, 1992,417 pp., US$54.95 cloth, US$14.95
paper.
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Work on the business cycle, as well as the business cycle itself, often
remind me of Mark Twain's famous aphorism that 'reports about my death
are grossly exaggerated'. The business cycle too has either been non-
existent for mainstream economics or dead after a short-lived existence.
Death, for example, has been officially declared in the ninth edition of Paul
Samuelson's famous text. In this huge book, Howard Sherman claims that
far from this being true, the 'cycle' is alive, well and going from strength to
strength. Indeed, in the author's view the cycle is inherent in the very
nature of the capitalist system, which is 'endogenous', not exogenous as
some in the mainstream would have us believe.
Sherman's book covers, in its 447 pages, virtually all macroecoriomic
theory, as this applies to the theory of the business cycle, and his own views
on the topic, which he has developed over a very long period of tinie. In
this sense the book simultaneously serves two purposes. It is an original
contribution which, however, incorporates substantial and very useful
textbook information. As Sherman's coverage includes both mainstream
and radical-Marxist views on a multitude of issues, it can be seen (and
used) as an alternative text, without this detracting from the original
content. This indeed is an achievement that presupposes this rare (these
days) ability to write clearly, simply and straight to the point. Sherman is
an old master of this, at times to an extent one may be misled into believing
that the ideas and concepts are simpler than they really are.
The book consists of four major parts. Part I is an overview of the main
issues, Part 11, introduces the main model, Part 111 introduces 'more
realistic approximations' to the basic model and Part IV discusses policy
issues. The overview discusses the 'waste of the business cycle', 'measuring
the business cycle', the 'history of the business cycle' and 'endogenous and
exogenous cycle theories' in four separate chapters. In Part 11, Sherman
covers 'consumption', 'investment', the 'profit hypothesis', the 'Multiplier-
Accelerator Model', the role of 'Income distribution', the 'Utilization-
unemployment hypothesis', 'Demand side' theories, the 'underconsump-
tion hypothesis', the role of 'cost of plant, equipment and raw materials',
and then, through a walk on the supply-side, the 'overinvestment and
 76 Book review articles

reserve army theories of the business cycle', the role of 'profits and profit
rates' and his own 'synthesis', the 'Profit squeeze (or nutcracker theory of
the cycle: production-realization hypothesis)'. These are in Chapters 5 to
13. The more realistic approximations in Part 111 include the role of 'credit
and financial crises' the relationship between 'monopoly power and
business cycle', the relationship between 'the international economy and
business cycles' and that of 'Government fiscal behaviour and the business
cycle'. These are covered in separate chapters from Chapters 14 to
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Chapter 17. Lastly, in the Policy part, two chapters address the question
'can reform policies lessen the business cycle under capitalism?' and 'can
the business cycle be eliminated?' To all these, eight Appendices are added
with useful definitions and statistical information.
In brief, one cannot fail to be suitably impressed by the author's effort
and achievement. As the topic is huge, one would inevitably expect some
areas to be given less consideration than possible. In this sense, some of the
critical points I wish to make below should be seen in the light of the huge
task at hand. Below, I briefly summarize some of the main points in the
various chapters and provide some critical remarks.
1 start from Chapter L on the 'waste of the business cycle'. Interesting
here is the author's plea for a new macro-economics focusing on a
'dynamic, historical, cycle-oriented view' (p. 4). 1 agree with this and
believe the author is making a genuine contribution in this direction in his
book. It is also claimed here, however, that the view that the contraction
phase of the cycle is 'a necessary evil which resolves some problems of the
system but opens the way to new and more vigorous growth' (p. 3) belongs
only to neoclassicals and that business contraction could be eliminated in a
more rational economic system. On this, it has to be observed, that for
many Marxists too the cycle is necessary for capitalist expansion, because
of its restructuring properties. Moreover, the nature of the more rational
economic system here needs to be specified.
Chapter 2 focuses on 'measuring the business cycle'; it also provides
various definitions based on Wesley Mitchell's pioneering work. Chapter 3
has a brief history of the business cycle, including a discussion of some
conditions for its existence (e.g., production for exchange in markets, wide
use of money, production for private profit) its spread and cycles in the US
economy. My only concern here is in the author's adoption of the official
dates provided. 'In spite of their many problems, these official dates are
followed throughout this book because they are the most commonly
accepted dates' (p. 38). I do not intend to be mean, but on the basis of this
argument one could adopt the neoclassical theory of the cycle! Having said
this, 1 can fully appreciate the immense problems of redefining the dates.
The question is whether or how a redefinition might affect the results.
Chapter 4 on endogenous and exogenous cycle theory is most important,
and arguably the backbone of the book. Here, Say's law is critically
 Book review articles 77

assessed and various exogenous and endogenous theories of the cycle are
being overviewed. Notable among the former are 'equilibrium business
cycles' associated mainly with Robert Lucas and 'real business cycles'.
These theories are criticized both for their unrealistic assumptions (e.g.
only voluntary unemployment exists, only full employment equilibrium
exists in the absence of outside shocks) and relatedly for overstating the
importance of exogenous factors. Following this, the endogenous cycle
theories are introduced, both demand side theories (multiplier-
accelerator, underconsumption) and supply-side ones (real overinvest-
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ment, monetary overinvestment, the reserve army, and the profit squeeze
(or 'nutcracker effect'). The latter is traced to the writings of Marx,
Mitchell, Keynes and Kalecki. The chapter concludes by deriving1
providing a framework for analysis which represents the basis of what is to
follow and outlines the author's methodology of 'successive approxima-
tions'. Concerning the 'framework', Sherman stresses the importance of
investment, the expected profits as the determinant of investment, the
importance of cost and aggregate demand as a determinant of profits, the
endogeneity of the cycle and the importance of factors such as the degree
of monopoly, the financial system, international relationships and govern-
ment behaviour. On methodology, 'successive approximations' implies
starting from the simplest models and then 'adding' realism.
Given the importance of this chapter, 1 wish to stay here a bit longer.
Two observations I believe are in order here. First, for an exposition of
such length and importance, the survey of the literature on the cycle is
rather limited. Even without mentioning the existence of 'catastrophe and
chaos' theories and other such recent developments, one would expect
more here on, for example, financial instability, Schumpeter and impor-
tantly, I believe, Kaldor and Goodwin, as for example in Mullinaux (1990),
Kramer (1992) and Dore (1993). 1 doubt if such accounts would change
much of what Sherman has to say, yet it could contribute to his case.
Second and relatedly, his support of the endogeneity of the cycle finds me
in agreement but I doubt it can convince 'the other side', in part because
the case could be argued more strongly.
In Part 11, the chapter on consumption is a useful account of existing
theories, and the role of consumption on the cycle. Here again more could
be said on important issues such as the growth and role of retained profits,
of 'occupational pension funds' and the growth and role of social security
saving and on M. Feldstein's hypothesis of 'substitutability' between such
types of 'compulsory' and other (voluntary) saving. Again, such coverage
would not necessarily change the author's conclusion (that his 'class
income' theory is not rejected by the existing empirical evidence) but could
strengthen the case, see for example Pitelis (1987).
Sherman's next chapter on 'investment' provides again a survey of
existing views on the determinants of investment and concludes tentatively
 78 Book review articles

that investment is associated with profit rate expectations and total profits
available for reinvestment. Chapter 7 outlines the mechanics of the multi-
plier-accelerator model, which is seen to offer 'very important insights'
(p. 152). Chapter 8 on income distribution outlines the 'utilization-
unemployment hypothesis'. Four hypotheses are discussed, which stress
different factors. The 'wage lag' hypothesis (which predicts a decline in the
labour share during expansion), the overhead labour thesis (which sup-
ports the wage lag theory of postulating a negative relationship between
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the labour share and capacity utilization), the 'reserve army hypothesis'
(which, in its sophisticated version, predicts that the labour share rises in
expansion, but after an initial decline at its early phase, because of
increasing labour strength) and the utilization-unemployment hypothesis,
which predicts that the labour share declines in the recovery phase of the
cycle, because of rapid rises in productivity (and slower rises in wage rates)
due to rising capacity utilization. After discussing problems of measure-
ment of profits, wages and productivity and after having employed their
cyclical and long-term changes, Sherman concludes that the 'basic facts
appear to support the wage lag and overhead labor hypotheses, but appear
to contradict the reserve army hypothesis' (p. 183) and after discussing
some econometric evidence he observes that 'the evidence is consistent
with the utilization-unemployment hypothesis, which says that the labor
share is negatively influenced both by capacity utilization and by unem-
ployment, the latter with a long time lag' (p. 187).
In Chapter 9 Sherman discusses the demand-side theories (undercon-
sumption and realization of profits) hypothesis. Unlike existent widespread
criticisms of this theory, the author finds it completely consistent with itself
and in line with existing evidence. Its weakness has to do with its
downplaying of the role (and cyclical behaviour) of costs. The role of costs
is discussed in Chapter 10, where it is shown that, with one exception, raw
material prices rose much faster than finished goods prices in the average
expansion, but fell much faster in the contraction. In Chapter 11, the
overinvestment and reserve army theories of the cycle are evaluated, in the
author's 'walk on the supply-side'. These theories are seen to underplay
the role of demand. Chapter 12 then discusses the definitions and role of
profits and profit rates. It concludes that they are strongly procyclical. Here
one may have reservations on the focus on manufacturing, pre or after tax
profits and the overall suitability of the official statistics, including their
compatibility with the MarxianIKaleckian terms the author is interested in.
On this basis, the author's claims on 'no long-run trend in the rate of profit
in the past ten cycles' (p. 234), appears debatable, as does, for different
reasons, the view that 'with respect to the problem of the business cycle, it
makes little difference which definition of the profit rate it used' (p. 243).
Surely not, if, for example, taxes are used to dampen the effects of the
cycle!
 Book review articles 79

Chapter 13 is Sherman's original contribution to the business cycle

theory, the profit squeeze (or nutcracker) theory. Here, all the elements
from the previous analyses are put together to provide a production
realization hypothesis, which is both linked theoretically with the contribu-
tion of authors such as Marx, Keynes, Mitchell and Kalecki, but it also
formalized and argued to contain underconsumption, overinvestment and
reserve army models as special 'cases. Following this, in Part IV, more
realistic approximations are made by introducing to the basic motlel the
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role of credit, monopoly power, the international economy and 'govern-

ment fiscal policies'.
Starting from credit, this is said to prop up the economy but at the price
of higher and higher interest rates, and then that it declines rapidly,
worsening the contraction. The role of credit on the basic model is
analysed. Sherman concludes that the introduction of credit would 'in-
crease the amplitude of cycles. However, the basic shape of the endo-
genous cyclical movements would remain the same' (p. 294). 1 fear more
research would be required to actually prove this. In Chapter 13, the role
of monopoly power is explored, including that of global multinational
firms. Here, some of the data are rather dated (e.g., on repatriated profits)
and some assertions, for example, on 'multinationals' and 'neocolonialism'
would require further discussion. The basic conclusion is that monopoly
increases cyclical unemployment and that modifying the basic model would
require disaggregating it in two sectors, but it also shows how the two
sectors interact and affect the whole economy. This is a tall order indeed,
and becomes an even taller one when the international economy is being
examined. After discussing the rise and fall of US domination and having
considered recent changes in the international scene, Sherman concludes
that the export surplus, Foreign Direct Investment inflows and outflows,
and instability transmission mechanism (bank failures, stock market col-
lapses, debts, etc) need to be considered. Sherman believes that 'the close
international economic relationships are a factor of increased instability'
(p. 338). Incorporating these factors to the profit squeeze model would
involve, among others, considering, for example, the USA as one country
and the rest of the world as another, in~orderto analyse a two country
interaction model, but also to introduce separate sectors for the developing
countries and the socialist countries. Last, in this part, in Chapter 17, the
main claim is that government fiscal behaviour is an endogenous part of the
business cycle, and has a significant impact on it, but it is not the most
important factor in peacetime cycles. Here again I am in agreement but
have to observe that the underlying 'theory of the state' could be more
elaborate.
Part IV concludes the book with 'Policy' issues. In Chapter 18 the
question examined is whether the cycle can be lessened under capitalism.
This chapter involves a summary of the main conclusions of the book so
 80 Book review ctrticles

far, a discussion of the Keynesian and monetarist approaches to pollcy. and

the various limitations of, and constraints on, such policies. Sherman
emphasizes such limitations and constraints and goes on to propose 'a
coherent liberal macro policy' and its problems of, for example. the
Edward Kennedy type (higher government spending, reduced taxes to thc
poor, low interest rates, price controls etc). Sherman concludes correctly
that such a programme may have short-term success but eventually is not
sustainable for various reasons, e.g., distributional battles, etc (one could
and should add here, I believe, that such programmes totally ignore the
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supply side, e.g., industrial strategies and the like, issues very relevant and
topical these days).
The problems with the liberal programme lead to a consideration of
whether the business cycle can be eliminated through 'economic democ-
racy and democratic planning'. Here, proposals include, among others. a
socialization (public ownership, workers' co-operatives) of the largest 1000
US corporations, and 'a constitutional right of every adult person to full
employment with the government as the employer of last resort' (p. 391).
These are controversial ideas, hard to discuss in detail in a book review.
Moreover, I wish to avoid the usual trap of focusing on the easy target (the
policy issues) when faced with an important scholarly contribution. For this
reason, I only wish below to make few final remarks, including critical
ones, on the book.
First, although 1 have raised many questions and critiques in this review,
it must be said that analysis of the cycle involves analysis of the whole
(political) economy (and more), therefore any contribution would have
limitations. In addition to the ones I noted, my reservations would include
the use of rather simplistic econometric evidence by Sherman, not to
mention the very role and use of econometrics which some would dispute.
Having said this and despite inevitable limitations. I believe Sherman has
made an important contribution to the analysis of the Marxist theory of the
business cycle, the theory of the business cycle (do the two differ?) and the
capitalist economy as a whole. His suggestions, for one, have ensured more
research for him and his students for generations to come. Those consider-
ing what their next publication should be on, they can find a mine of
research topics and ideas in Sherman's Busirless cycle.

References
Dore, M.H.I. 1993: The t?iacmdyyrzamics o/' hu.sir~e.rcycles. Oxford: Black-
well.
Kramer, R.E. 1992: Finance in u tllcory of the hiisO~e.s.scvcle. Oxford:
Blackwell.
Mullineaux, A. W. 1990: t3ltsinc.v.s cycles rrt~rljitlcir~ciul crist.s. London:
Wheatsheaf.
 Book review articles 81

Pitelis, C.N. 1987: Corporate capital: control, saving, ownership and crisis.
Cambridge: Cambridge University Press.

Measuring innovative activity

Peter Swann London Business School
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Reviewing: D. Archi bugi and M. Pianta, The technological

specialization of advanced countries: A report to the EEC
on international science and technology indicators. Dor-
drecht: Kluwer and The Commission of the European
Communities, 1992,164 pp. ISBN: 0 7923 1750 5.

Recognizing that innovation is one of the key determinants of national

economic performance, the authors' aim in this book has been to describe
the technological specialization of advanced countries and how that
changes over time. To do this the authors make extensive use of data on
R&D spending, patenting, and bibliometric indicators of scientific citation.
In terms of what we can learn from such measures this book is a major
achievement. Along with the outstanding work of Keith Pavitt and Pari
Patel, this book gives as full a picture as we have of what these measures
can tell us about technological activities and technological specialization,
and does so in a most accessible and well-organized manner.
Yet whiie reading it, 1 simply could not get away from my deep seated
doubts about what patents and bibliometric methods can actually tell us
about innovative activity. The difficulties with patent statistics have been
voiced time and time again, and perhaps it is tedious to rehearse these
well-known arguments once more. In another sense, it is fair to do so and,
more than that, it is timely. We could use the conventional analysis of two
competing standards or bandwagons to illustrate my point. The achieve-
ment of Pavitt and Patel, and of Archibugi and Pianta, and others suggest
to me that the bandwagon behind patent statistics and bibliometric
measures, which is already large, will continue to grow, while the frail
trajectory of research that seeks direct measures of innovative activity may
fail to develop momentum. I think it essential that this second strand of
research develops further if we are to expand our understanding of the
process and effects of innovation.
I shall return to this theme below. But first I want to do justice to
Archibugi and Pianta's achievement. The authors start by surveying some
of the recent contributions to the analysis of technological specialization,
including national systems of innovation, the increasing international