Since the 1980s many authors have worked on macroeconomic models incorporating ideas from Michal Kalecki, Nicholas Kaldor, Richard Goodwin, Hyman Minsky, and Charles Kindleberger. The premises are widely known. Relevant questions are whether the models provide insight into how economies behave in terms of cyclical growth, and how macroeconomic performance is affected by institutional and policy changes. Events leading up to the 2007-2009 crisis provide a natural tests and illustrations of the models. Summaries appear in Palma (2009) and Taylor (2010). This paper provides background for much of the verbal discussion in the latter reference. The presentation focuses on simple, partial models designed to highlight different aspects of macroeconomic adjustment and growth.
We begin on the real side of the economy by sketching an investment-driven theory of growth and then bringing in Goodwin-style distributive cycles. One key issue, implicit in the contrast between the pioneering growth models of Roy Harrod and Evsey Domar, is whether capital stock growth is intrinsically stable or not. If not, how can it be stabilized?
Changes in income distribution may play a role. The Goodwin extension describes how the level of economic activity and distribution interact over the cycle, and how the economy is influenced by distributive trends. Linearized 2 x 2 phase diagrams are used to present patterns of cyclical behavior that are generated under Harrod and Domar-style assumptions about investment demand growth. Domar is broadly consistent with US data.
The emphasis then shifts to asset price inflation (using the price of equity as an illustration) and its effects on the real side of the system. Like investment in Harrodian theory, an asset price during a boom is subject to positive feedback of its level into its own rate of growth. As emphasized by Kindleberger and Minsky the bubble is supported by endogenous credit creation. Bubbles do not last forever. Using another phase diagram, two illustrative models are developed to show how they may deflate. Growth in debt may persist for a time after relevant asset prices start to fall, as demonstrated by US data.
