Introduction:

This chapter attempts to provide a theory of crisis based on the interaction between income distribution and growth in capitalist economies in which power relations and uncertainty are important features of the economy. Although it is beyond its scope to defend the view that the theory presented provides an explanation of the current crisis, it is hoped that it is able to capture some of its major aspects and offer a broad perspective for getting out of it.

The theory is presented using a series of models which have the common feature of using a method which is particularly suitable for taking power relations and uncertainty into account in macroeconomic analysis. This method is very different from that adopted in mainstream macroeconomic theory, especially in its new neoclassical synthesis version, which has no role for power relations whatsoever, and which sees the future in terms of probabilistic risk rather than fundamental uncertainty.

Power and uncertainty are taken into account in a simple way. Uncertainty is used in the sense of fundamental ontological uncertainty, that is, that we simply do not know about the future which is relevant for decision-making by private decision makers – individuals and groups – and the government. In the face of such uncertainty, decision-makers may form subjective probabilities to guide their decisions, but they may have varying degrees of confidence in these estimates and give them varying weights. Their behaviour will take the form of following conventions, although with the possibility of sudden kaleidic shifts in such conventions, postponing decisions by remaining liquid, and by entering into long-term contracts and institutions which regularise behaviour. Given these conditions it seems to be highly problematic to use the 'rational choice' framework as an ontological assumptions, or even use optimisation as an epistemological approach. This paper will use the alternative epistemological approach of starting with accounting relations and adding relations between relevant variables to examine the state and evolution of economies, rather than basing explanation and behavioural relations on optimising choices. The relationships between these variables – which are context-dependent, in the sense of possibly varying across space and time – incorporate important relevant institutional and behavioural considerations which also embody power relationships between different social groups and classes which determine distribution of income (among other things) between them and how policies and institutions change over time. This is a vaguer, but arguably more useful way of examining power relations and their consequences than mainstream economic ideas on market power and the relative bargaining power of different groups in cooperative bargaining situations. The approach taken draws more on the traditions of Keynes on uncertainty, Marx and the old institutionalists on power relations, and on Kalecki, the post-Keynesians and the structuralists.

The rest of the chapter proceeds as follows: The next section examines a basic Kaleckian-post-Keynesian growth model in which the rate of economic growth is affected by income distribution to examine how rising inequality can explain economic stagnation. Section 3 extends the model to introduce a third class of managers or high-skilled workers who can provide a major source of consumer demand. Section 4 examines the role of consumer debt, returning to a two-class framework to show how growing consumer debt can explain an increase in growth despite increasing inequality, and explores whether such a growth process is sustainable in the long run. Section 5 examines a simple model to incorporate asset market issues to analyse how rising inequality can cause financial crises which can precipitate the onset of economic crisis. Section 6 summarises the overall implications of the four models to underscore the need for distributional equality for stable long-run growth.