January 5, 2017    7 minute read

Class Conflict Explained

Neo Marxism    January 5, 2017    7 minute read

Class Conflict Explained

Class conflict is not a recent approach in economic literature, nor it is a phenomenon that unfolded a while ago in economic history. Conflict has been an inherent feature of capitalism since its dawn and has been present in all its forms from the factory system to the neoliberal era and up until today.

British political economist David Ricardo recognised the centrality of income distribution in economics, stating that:

“Determining the laws which regulate this distribution is the principal problem in political economy”.

Distributional concerns have been attractive to a vast number of economists throughout the middle of the 20th century up until today, and it has been approached uniquely by different subgroups within the Marxian and Post Keynesian literature. Richard Goodwin, Robert Rowthorn, Amit Badhuri and Stephen Marglin are benchmark papers in conflict economics who addressed distributional issues from different angles.

The Goodwin Growth Model

According to Goodwin (1967), conflict over distribution creates endogenous business and economic growth cycles, a phenomenon which tends to repeat itself continuously. In other words, wages and productivity growth might shift away from balanced growth due to tightness in the labour market. Conflict issues cannot be analysed in the absence of a Marxian infrastructure. Marx crises in capitalist economies arise from two main reasons – overproduction or class struggle, both acting separately or simultaneously to affect the accumulation of capital.

Since for Marx the profit rate is driving capitalist production, excess supply in the market could lead to an overproduction crisis where there is a tendency for the profit rate to decline. At the same time, out of the excessive accumulation of capital, demand for labour increases, strengthening workers’ position in the market. Consequently, wage increases squeeze the profit rate which will force a cut-down in production, while hiring less labour and taking advantage of the reserve army to cut wages and uplift their profit rates. This dilemma between profits and wages stands at the core of Goodwin’s framework.

Inspiration In Biology

The Lokta (1925) – Volterra (1926) model was inspirational to Goodwin. In biological systems, there is a dynamical relationship between predators and preys. When predators are small in numbers, preys grow and reproduce, hence increasing their shares in resources. This reproduction would be beneficial for the predators, as they would enjoy a larger amount of food. On the contrary, when predators are big in numbers, preys will be relatively scarce forming a cycle that repeats itself. Goodwin applied this model as if the wage share is the predator and employment the prey.

From this perspective, Goodwin explains how the interaction in the labour market between capitalists and workers affects the profit rate and leads to cyclical fluctuations in growth. In an expanding economy, capitalists’ demand for labour increased. The relative power of labour strengthens and takes the form of wage increases. Hence, wage share in the national income increases while profit share decreases. Because of wage inflation, capitalists respond by cutting down investment in order to enlarge their profit share.

Consequently, demand for labour will decrease as less output is produced and the reserve army will increase. Putting class into Goodwin’s mathematical derivations shows how the capitalist system suffers from structural instability due to the relationship between the wage share and
employment.

A Neo-Marxian Perspective: Rowthorn

Class conflict analysis went beyond Goodwin’s supply-side assumptions to include the relationship between effective demand and income distribution. According to Rowthorn (1977), inflation arises out of the conflict between workers and capitalists over their share in total income. Both groups exercise their relative power to achieve their target share while, at the same time, relative power being affected by the relationship between capacity utilisation and employment.

Future prices play a significant role in the class conflict. Workers negotiate for are larger wage share when prices are expected to rise. At the same time, capitalists have their target profits. If the bargaining process meets both parties’ expectations, no conflict arises. However, if the bargaining process squeezes capitalists’ target profits, conflict arises. If this is the case, capitalists will exercise their power to meet their desired target by setting a higher price than the one negotiated.

Thus, unanticipated inflation arises out of the distributional conflict. The differences between negotiated profit and actual targets measure the degree of conflict. Unlike Goodwin, demand in this model is a regulator to conflict. When the demand for labour is high, workers can use their power to absorb a larger wage share.

At the same time, high demand allows capitalists to increase their profit share ratio. Even when a tax is imposed by the government, demand decides who will hold the burden or whose share will decrease. In this respect, conflict over distribution could be inflationary or deflationary, depending on the relative power of economic agents.

A Post-Kaleckian Perspective

Cooperative capitalism, a belief that both capitalists and workers benefit from redistributing income towards wages does not hold in Badhuri and Marglin’s analysis. Possible outcomes of distributional conflict may differ, depending on the demand regime prevailing in an economy. It has been previously suggested by Kalecki and adapted by Rowthron that an increase in the wage share will have positive effects on aggregate demand and capacity utilisation since the propensity to consume out of wages is higher than that of profits. Thus, redistributing income towards workers could increase the profit rate and the degree of capacity utilisation, leading to higher growth rates.

However, Badhuri and Marglin (1990) diverge from this Kaleckian belief by showing that history in huge capitalist countries proves that a rising wage share is not always followed by a rise in capacity utilisation. Even more, investment behaviour plays a significant role in determining how distributional conflict shapes demand regimes. An increase in the wage share, meaning a reduction in the profit share, could raise investor concerns about future profits, leading to a lower investment spending. A lower profit share leads to a lower level of investment implies profit-led growth. On the contrary, a lower profit share leading to a higher level of investment implies wage-led growth.

The investment/saving (IS) curve decides whether a given regime is profit-led or wage-led. However, both regimes could be cooperative or conflict, depending on the elasticity of the IS curve. If one of the parties loses from an increase in capacity utilisation, the regime is conflictive, otherwise, cooperative. When workers are motivated by the wage bill, and the profit rate motivates capitalists, the regime could be either cooperative wage-led or profit-led. Hence, whether the slope of the IS curve is positive or negative, there is a positive relation between wage bill, profit rate and capacity utilisation.

In the presence of a cooperative wage-led regime, a higher wage share increases the profit share by increasing capacity utilisation. Finally, conflictual wage-led demand regimes meaning that a lower rate of capacity utilisation could achieve higher profit and growth rates are exceptional. Thus, Badhuri and Marglin (1990) provide a larger framework of distributional analysis that takes into consideration previous class analysis. Depending on the elasticity of the IS curve, cooperative capitalism could exist in both wage-led and profit-led regimes. The former describes the Kaleckian hypothesis in which an increase in the wage share increases total profits. The latter describes the supply-side hypothesis in which an increase in the profit shares, although decreases the wage shares, sees the total wage bill increase since more people are employed.

Conclusion

It is not a matter of controversy that distributional conflict between classes is an inherent feature of capitalism. But the determinants of distribution are problematic. Early Marxists, such as Goodwin, have presented a dynamic supply-side model where distributional conflict creates endogenous economic cycles. Rowthorn explains the relationship between income distribution and inflation – a model is assuming a Kalecian wage-led demand regime.

Nevertheless, Badhuri and Marglin went beyond Rowthorn and Kalecki by deriving different possible outcomes of distribution. Growth could be achieved under both profit-led, and wage-led regimes, depending on the elasticity of investment in its relation to demand. What remains significant in the previous papers is the absence of a relationship between planned investment and planned capacity utilisation.

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