You wonder what will happen when markets finally start working. How about, for example, a market that changes prices and wages quickly in response to fluctuations in demand? In a mixed economy with a government that tries to provide fiscal stimulus as needed, will it be of help to move toward such fast-adjusting markets? The two interactive diagrams in this post are based on figures 9a, 9b, 10a, and 10b in a Levy Institute working paper of mine called “Fiscal Policy, Unemployment Insurance, and Financial Crises in a Model of Growth and Distribution,” which was issued just this month and posted on the Institute’s site (math content somewhat crucial).
Each of the two figures shows one pathway followed by an imaginary economy. The pathways are computed by simulating a heterodox model, using a set of parameters as well as a starting point for each of the following variables: capacity utilization, public (government) production, the markup on labor costs used by businesses to calculate their prices, and the size of the labor force. As I explain in the paper, my parameter choices are not based on econometric estimates, but rather on a rough sense of what might be reasonable for a developed economy. In a moment, a new technology will give you a chance to see the impact of varying one of these assumed numbers. In fact, this post represents the first use on this blog of Wolfram’s interactive cdf format. You’ll need a free cdf reader and browser plug-in, which are downloadable at this link, if you don’t already have them.
The pathway shown in the figure just below is followed by public production, capacity utilization, and the markup. As shown, the pathway leads gradually upward in the figure toward an endless orbit called a “limit cycle.” The stabilizing effects of fiscal policy seem to be creating a steady, repeated elliptical pattern.
Now, move the lever above the diagram to the right by clicking and dragging with your mouse (or similar move with a touchpad or whatever hardware you have). As you move the lever to the right, you are increasing a parameter that controls the speed at which the markup changes in response to high or low levels of customer demand.
Move the lever just a little more to the right and you may find that you are a little less happy. What happens as the speed parameter is increased is that the economy’s pathway gradually changes until there is a relatively sudden vertical jump in the middle and much higher markup levels at the end—which means a bigger total rise in capital’s share.
The next pathway is the one followed by a second group of three variables during the same simulation. This second group includes: money, the government deficit (surpluses are negative numbers in this figure), and the employment rate (total work hours divided by total hours supplied). Here is the figure:
Once again, feel free to move the lever at the top of the picture from left to right and back using your mouse or other device, observing how the pathway changes. Please be sure to notice that when the lever is all the way to the right, the pathway begins with an outward spiral, leading to a new inward spiral, and finally an employment “crash” of sorts that occurs as the center of the second spiral is reached. This occurs after the markup has reached very high levels, as seen in the earlier diagram. Big changes can occur in an economy with very little warning, just when things seem to be stabilizing!
Future applications of the cdf technology on this blog are potentially varied and might include, for example, figures that allow one to toggle between two different types of fiscal-policy rules. In future posts, I may revisit the model depicted in these figures and comment on its implications for some of the economic issues of the day.
(Images/cdf’s slightly revised October 3, 2012)