Class conflict, fiscal policy, and wage-led demand: A model of Kalecki’s Political Business Cycle

Abstract

This paper provides a demand-driven growth model of Kalecki’s (1943) political business cycle. It incorporates the three fundamental assumptions that govern Kalecki’s model: wage-led demand, the “reserve army of labor” effect, and capitalists’ disproportionate power over fiscal policy. In our model, endogenous cycles are the outcome of capitalists’ changing preferences over fiscal policy. Decreasing opposition to fiscal expansion by capitalists triggers the boom phase of the cycle, lest demand deficiency lead to a slowdown in accumulation. The downturn of the cycle is induced by capitalists’ rising opposition to government spending, lest workers’ growing political power at the peak of the cycle undermine their influence. This approach is unlike that taken by Goodwin and neoclassical PBC models, where a profit squeeze and the timing of elections or political ideologies determine cycles.