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Profit Squeeze and Keynesian Theory

Profit Squeeze and Keynesian Theory

Chapter:
(p.153) 4 Profit Squeeze and Keynesian Theory
Source:
The Golden Age of Capitalism
Author(s):
Stephen A. MarglinAmit Bhaduri
Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198287414.003.0004

This chapter explains the importance of the macroeconomic ‘climate’, especially the investment climate, in generating different economic regimes according to differences in the relationship between real wages and investment and hence employment. It examines the impact of wage change on economic growth and employment. It clarifies that wage reduction will lower consumption demand. In addition, a fall in wages always lowers aggregate demand through the effect on consumption; and stimulating investment raises aggregate demand. In the ‘stagnationist’ regime, higher real wages do not lead to higher unemployment and are necessary to promote a process of wage-led growth. On the other hand, in the ‘exhilarationist’ case, investment effects dominate, and higher real wages do lead to higher unemployment and interfere with investment-led growth, so that wage restraint becomes the preferred policy stance.

Keywords:   macroeconomic climate, investment climate, economic regimes, real wages, investment, employment, stagnationist regime, exhilarationist regime, Keynesian theory

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