Growth, Employment, Inequality, and the Environment

Unity of Knowledge in Economics: Volume II

A. Figueroa

• Editore: Palgrave Macmillan
• Anno: 2015
• ISBN:
  9781137506979
• Argomento: Economía
• Categoria: Econometría

Growth, Employment, Inequality, and the Environment deals with the fundamental economic problems of our time: employment, inequality, the environment, and quality of life. These exciting new volumes are the first of their kind in which these problems are analyzed using a unified theory framework.

PART I

The Long Run: Growth and Distribution

CHAPTER 1

Toward a Unified Theory of Capitalism

The principal aim of this book is to understand the production and distribution process in the countries of the First World and the Third World, which constitute the capitalist system, considered separately first, and then as a whole. To that end, this study presents three partial theories of capitalism: epsilon, omega, and sigma, which are discussed in volume 1 of this book in chapters 4–7. The partial theories when considered separately do in fact explain the basic short-run features of the First World and Third World.

Good partial theories, however, do not necessarily imply a good unified theory. Consider, for instance, the general theory of relativity and the quantum theory in physics. The former explains the large physical world, whereas the latter explains the small subatomic physical world. Thus, they explain these two physical worlds, when considered separately, but they cannot explain the physical world taken as a whole. These theories are contradictory to each other, that is, they both cannot be true at the same time; hence, a unified theory of physics—the theory of everything—is the fundamental problem being researched on today (Hawking, 1996).

A similar challenge appears in this book now. The task before us is to construct a unified theory of capitalism. This chapter starts the construction of the unified theory by summarizing the findings of the partial theories. Then the set of primary assumptions that is consistent with that of the partial theories is formulated. Finally, the dynamic model of the unified theory is constructed, which attempts to explain the economic growth process in the capitalist system, which has the following endogenous variables: output growth and distribution.

Partial Theories: A Summary

According to income levels, the capitalist system is categorized into the rich and the poor, which are called First World and Third World, respectively. How does each type of capitalist society function?

A scientific explanation of the capitalist system started with the construction of partial economic theories. Several assumptions were been made for that purpose. First, the capitalist system is composed of three types of societies. The criteria to make this distinction are based on differences regarding two initial conditions: factor endowments and initial inequality. The former separates societies that are overpopulated from those that are underpopulated; the latter separates those that began to function as capitalist economies with highly unequal societies from those that functioned with a lesser degree of inequality. Second, the essential factor underlying the differences in the initial inequality is the distribution of political entitlements among individuals, which separates societies that are socially homogeneous (having one class of citizens) from those that are not (having several classes of citizens). Three abstract capitalist societies have been constructed in the form of partial theories of the system, which include:

Epsilon society: underpopulated and socially homogeneous, intended to explain the First World.

Omega society: overpopulated and socially homogenous, intended to explain the Third World with weak or no colonial domination legacy.

Sigma society: overpopulated and socially heterogeneous, intended to explain the Third World with strong colonial domination legacy.

From a historical perspective, as shown in chapter 2 (volume 1), the Third World countries can be divided into two groups: those that have a strong legacy of European colonial domination and those that do not. While the omega theory intends to explain the latter type of countries, the sigma theory refers to the former type. Empirically, the majority of Third World countries correspond to the sigma type society. The First World is composed of the European countries and some countries of the New World (Australia, Canada, New Zealand, and the United States), which, strictly speaking, were not colonies, but were rather settlement systems. Epsilon theory seeks to explain the First World.

The three partial theories have been submitted to the falsification process using static short-run models and confronting them against the four short-run empirical regularities on production and distribution, as listed in chapter 2 (volume 1). Epsilon theory predicts the two empirical regularities of the First World: Fact 1, the existence and persistence of unemployment, and Fact 4, the relation between nominal and real variables (chapter 4, volume 1). Omega theory predicts the two empirical regularities of Third World countries in general: Fact 2, existence and persistence of unemployment and underemployment, and Fact 4 (chapter 5, volume 1). Finally, sigma theory has been able to predict the three empirical regularities of Third World countries with strong colonial legacy: Fact 2, Fact 4, and Fact 3, which refers to existence and persistence of income inequality between ethnic groups—a colonial legacy (chapter 6, volume 1).

So far, these theories resemble well the realities they intend to explain. However, there are many more empirical regularities of capitalism to be explained, Facts 5–7. This will be undertaken in the following chapters.

In light of the partial theories’ results, some additional comments on the nature of these three groups of capitalist countries are presented here. As to differences among these groups of countries in the short run, the following are worth mentioning:

a. Capitalist societies show a class structure in epsilon and omega, but they include an underclass in sigma, the second-class citizens.

b. Capitalist societies operate with devices for labor-effort extraction, which differ according to the type of society. Unemployment plays that role in epsilon and underemployment in omega and sigma.

c. In overpopulated societies, capitalism includes subsistence sectors. The role of subsistence sectors is to make capitalism socially viable in such a context.

d. In capitalist societies, people act motivated by self-interest. However, they behave differently in each type of society, which is due to the presence of different institutions. Capitalists use different devices for labor-effort extraction, as mentioned before. Governments supply universal public goods in epsilon and omega, but also include local public goods with differences in quantities and qualities for the different classes of citizenship in sigma. Workers react differently when there is excess labor supply and an excessive degree of inequality and thus generate different degrees of social disorder.

e. Market and democracy, the basic institutions of capitalism, operate distinctly in different types of capitalist societies. The market system operates as if it has solved a system of equations based on which prices and quantities are determined in all societies, but the particular system of equations that need to be solved vary by the type of society. In particular, the conditions of labor market equilibrium are different in an epsilon society compared to those in omega and sigma societies. Democracy operates through voting rights in all cases, but the degree of participation of citizens in public policies is higher in epsilon and omega than in sigma.

f. In conclusion, the three societies that constitute the capitalist system operate differently. Social actors are guided in their actions by a common motive (self-interest), but they behave differently, according to the type of society in which they live. There are qualitative differences among these societies, especially between epsilon and sigma.

As to similarities, the following are easily drawn from the theoretical models:

i.	General equilibrium with excess labor supply is the outcome in all types of capitalist societies. The form of the excess labor supply varies according to the type of society: unemployment in epsilon society and underemployment in omega and sigma societies. However, excess labor supply plays the same role in all societies: it is the device for labor-effort extraction, which ensures high labor productivity and high profits. Labor markets operate with efficiency wages, which implies inequality among homogeneous workers: the market real wage rate (always above the Walrasian wage rate) is always above the real average income of the unemployed or underemployed. Inequality among homogeneous workers is the general labor-discipline device. Hence, excess labor supply (and the corresponding inequality among homogeneous workers) is essential for the functioning of capitalism.
ii.	General equilibrium with excess income inequality, and the corresponding social disorder, is another trait of capitalism. The higher the initial inequality, the higher the level of income inequality and social disorder. Therefore, income inequality and social disorder are higher in sigma than in the other societies.
iii.	The exogenous variables that explain production and distribution in the short run are common to the three types of societies and include: factor endowments, initial inequality in the individual distribution of economic and political assets, and international terms of trade and international interest rates.

The three partial theories explain the short-run functioning of the three corresponding types of capitalist countries that constitute the capitalist system. Up to now, they are valid partial theories. The task ahead consists of constructing the corresponding unified theory of the capitalist system.

Foundations of the Unified Theory of Capitalism

In the construction of a unified theory, we follow the Moore Principle, named after E. H. Moore, an American mathematician. According to this principle, the existence of analogies between central features of partial theories leads to the existence of a unified theory, which will represent the central features of those partial theories (cited in Samuelson, 1947, p. 3).

In order to become a unified theory, therefore, the partial theories must give rise to common central features, as Moore’s principle requires. In terms of the alpha-beta method, the “central features” correspond to alpha propositions; hence, the requirement is equivalent to finding a common set of alpha propositions in epsilon, omega, and sigma theories. This common set, if it exists, would then constitute the alpha propositions of the unified theory; ...

Indice dei contenuti

• Cover
• Title
• Part I   The Long Run: Growth and Distribution
• Part II   The Very Long Run: Economic Growth and the Environment
• Part III   The Political Economy of the Unified Theory
• Bibliography
• Index