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
\n(1943) political business cycle. It incorporates the three fundamental assumptions
\nthat govern Kalecki’s model: wage-led demand, the “reserve army of labor”
\neffect, and capitalists’ disproportionate power over fiscal policy. In our model,
\nendogenous cycles are the outcome of capitalists’ changing preferences over fiscal
\npolicy. Decreasing opposition to fiscal expansion by capitalists triggers the boom
\nphase of the cycle, lest demand deficiency lead to a slowdown in accumulation. The
\ndownturn of the cycle is induced by capitalists’ rising opposition to government
\nspending, lest workers’ growing political power at the peak of the cycle undermine
\ntheir influence. This approach is unlike that taken by Goodwin and neoclassical
\nPBC models, where a profit squeeze and the timing of elections or political
\nideologies determine cycles.