Thomas R. Michl

Biased Technical Change and the Aggregate Production Function

This paper offers a classical model of biased technical change in the MarxRicardo tradition as a framework for theoretical and applied studies of growth. The observable data it generates would appear to an unsuspecting economist to be well-described by a neoclassical model with a static Cobb-Douglas production function, when in fact this production function describes only the technological history of the economy. The CobbDouglas form results from the capital-using, labour-saving bias of technical change. The models trajectory in wage-profit space will lie along the displaced image of the neoclassical factor price frontier, in contradiction to marginal productivity theory. The Solow residual can be reinterpreted by the classical theory as a measure of the size of this displacement.

The Two-Stage Decline in U.S. Nonfinancial Corporate Profitability, 1948-1986

The decline in the rate of return on nonfinancial corporate capital from 1948-1986 can be usefully divided into two distinct periods. From 1948-1972, a decline in the profit share accounts for most of the decline in the profit rate. From 1972-86, the profit share rose, and a decline in capital productivity accounts for the continued decline in the profit rate. Regression analysis of the trend structure and a decomposition of the factors accounting for the profit rate are used to support this thesis.

Can Rescheduling Explain the New Jersey Minimum Wage Studies

This paper interprets the New Jersey minimum wage studies of Card and Krueger and their critics, Neumark and Wascher, through a scheduling model. The former found an increase in the number of workers in New Jersey fast-food restaurants after the state minimum wage was increased, while the latter found a decline in the total payroll hours of New Jersey restaurants. The scheduling model predicts that firms will substitute workers for hours per worker after a wage increase, which is consistent with both studies. Evidence from a subset of restaurants that reported both workers and hours data to Neumark and Wascher supports this interpretation. The New Jersey minimum wage appears to have redistributed income effectively to the targeted population by raising wages and reducing weekly hours per worker by just over one hour without causing any job loss.

Three Models of the Falling Rate of Profit

Three models are presented which hold in common the assumption of imperfect competition but differ in their treatment of technical change. When technical change is purely endogenous (Model I) or exogenous (Model II), the rate of profit declines to some steady-state value, either as capital accumulates or as time passes. Dynamic wage-profit curves describe the paths over time of the product wage and profit rate. Under a combined form of technical change (Model III), the slope of the dynamic wage-profit curve is indeterminate but it converges on some steady state. These steady states are the terminus of a historical process rather than the equilibria of the models. The models invite comparisons between neoclassical and Marxian theory.

The Fossil Production Function in a Vintage Model

This paper extends the fossil production function to incorporate embodied technical change. The fossil production function provides an alternative to the standard neoclassical explanation for the aggregate production function. In a Classical Ricardian spirit, the paper assumes that capital-using, labour saving technical change prevails, and shows that it generates a fossil production function in Cobb-Douglas form. The power term of the production function mediates the viability of new machines. A sufficient condition for viability is that the power term equals or exceeds the profit share on new machines. Empirical estimates show that this sufficient condition is satisfied, a result inconsistent with the neoclassical interpretation of the aggregate production function.

Tinbergen Rules the Taylor Rule

This paper elaborates a simple model of growth with a Taylor-like monetary policy rule that includes inflation targeting as a special case. When the inflation process originates in the product market, inflation targeting locks in the unemployment rate prevailing at the time the policy matures. Even though there is an apparent NAIRU and Phillips curve, this long-run position depends on initial conditions; in the presence of stochastic shocks, it would be path dependent. Even with an employment target in the Taylor Rule, the monetary authority will generally achieve a steady state that misses both its targets since there are multiple equilibria. With only one policy instrument, Tinbergens Rule dictates that policy can only achieve one goal, which can take the form of a linear combination of the two targets.

Capitalists, workers, and the burden of debt

Abstract This paper analyzes the burden of debt in a growth model that combines overlapping generations of workers who save for life-cycle reasons and dynastic agents who save for bequest reasons (‘capitalists’). Ricardian Equivalence prevails, but capitalists regard the debt serviced out of taxes on workers as net wealth. In the long run, the Cambridge Theorem holds: the relationship between the rate of profit and rate of growth is determined by the capitalist saving function, independently of worker or government saving. Two alternative closures are considered. Under exogenous growth constrained by a fully employed labor force, debt and deficits result in temporary effects on the distribution of income but permanent effects on the distribution of wealth. Under endogenous growth constrained by a fully utilized capital stock, debt and deficits result in temporary effects on the growth rates of the components of wealth and permanent effects on the level and distribution of capital.

Hysteresis in a Three-Equation Model

This paper introduces two post-Keynesian hysteresis mechanisms into a standard textbook three-equation model. The mechanisms work through wage bargaining and price setting. Workers are assumed to change their wage aspirations when the actual wage differs from their target wage, and firms are assumed to change their mark-up norm when the actual profit share differs from their target share. These mechanisms do not themselves guarantee hysteresis. A pure inflation shock will create hysteresis even if expectations are anchored to the central bank’s inflation target. After a demand shock, if inflation expectations are not anchored, these mechanisms generate persistence but not true hysteresis. But if expectations are partially (as they seem to be) or fully anchored, a demand shock will have a permanent effect on output, employment, and the real wage, because in this case the central bank is not obligated to reflate as aggressively in order to manage expectations. Hysteresis effects may explain the absence of disinflation and the fall in the wage share in the aftermath of Global Financial Crisis.

Why Is the Rate of Profit Still Falling

This paper elaborates a fixed-coefficient, capital, labor, non-raw material intermediates, raw materials production model; estimates the wage share-profit rate frontier associated with it for U.S. manufacturing from 1949 to 1986; and suggests the following explanation of declining profitability. From 1949 to 1970, a rising wage share drove the manufacturing industries up along the wage-profit frontier. Declines in relative raw material prices shifted the frontier out in this period. From 1970 to 1986, raw material prices shocks shifted the frontier in, but as raw material prices declined in the 1980s, the failure of either the wage share or the rate of profit to recover to their previous levels suggests that a secular decline in the output-capital ratio has rotated the frontier inwards. This finding has significance for the tneory of technical change.

Rentier Consumption and Neoliberal Capitalism

Abstract: This article puts forward a theoretical model and some empirical evidence arguing that a central contradiction of neoliberal capitalism arises from changes in financial structure and corporate governance that have simultaneously effected a massive redistribution of income from workers toward corporate profits and the incomes of C-level executives while diverting corporate managers from the forms of real investment spending that could potentially relieve the shortages of aggregate demand that are inevitably generated when real wage growth becomes uncoupled from productivity growth. As a result, the neoliberal model of capitalism relies on the consumption spending of a capitalist class responding rentier-style to wealth effects from a rising and historically high corporate valuation or q-ratio. This model of capitalism has proved to be unworkable at the zero lower bound on interest rates, which explains the emergence of secular stagnation.