Multiple attractors and global bifurcations in a Kaldor-type business cycle model

We consider a Kaldor-type discrete-time nonlinear business cycle model in income and capital, where investment is assumed to depend both on the difference between normal and current levels of capital stock, and on the difference between the current income and its normal level, through a nonlinear S-shaped increasing function. As usual in Kaldor business cycle models, one or three steady states exist, and the standard analysis of the local stability and bifurcations suggests that endogenous oscillations occur in the presence of only one unstable equilibrium, whereas the coexistence of three equilibria is characterized by bi-stability, the central equilibrium being on the boundary which separates the basins of the two stable ones. However, a deeper analysis of the global dynamic properties of the model in the parameter ranges where three steady states exist, reveals the existence of an attracting limit cycle surrounding the three steady states, leading to a situation of multistability, with a rich and complex dynamic structure.     

Capitalism and democracy at a crossroads: the civilizational dimension

This paper evaluates Schumpeter's grand vision as reflected in his Capitalism, Socialism and Democracy, and elaborates it in conjunction with the so-called “globalization” trends characteristic of the wake of the twenty-first century. In addition to the evolutionary nature of his methodology, the institutionalist dimension of Schumpeter's definitions are brought to light. A case is made for a fundamental process of “uncreative destruction” as far as the institutional setup of the economy is concerned. The contention of this paper is that there is ample support in Schumpeterian analysis for a counterpoint to the liberal thesis that envisages the worldwide spread of individualism, market economies, and democratic forms of government.     

A spectre is haunting the world – the spectre of global capitalism

Individual property rights are fruitful for economic development because they civilise self-interest by forcing it to serve the common good. The history of previous property rights “cycles,” however, shows that their ability to do this deterioriates over time because the laws of property fall under the control of those whom property is meant to discipline. Irresponsible ownership then intensifies inequality until a breaking point is reached. The present cycle is no exception, but its breaking point has been postponed by the growth of the democratically-inspired welfare state. Globalisation is now eroding the financial basis of this, because mobile capital can escape taxation, leaving labour to carry the burden. The main thrust of this movement is now found in the World Trade Organisation, whose control of intellectual property and commitment to free trade in money as well as goods, can only increase inequality between countries as well as within them. It represents individual property rights which are out of any form of social control, since there is no global mechanism for civilising self-interest. Schumpeter's sense of the impending demise of capitalism, if not of its replacement by socialism, may yet be vindicated.     

Schumpeter and the `Schmollerprogramm': integrating theory and history in the analysis of economic development

This essay addresses the historical and institutional aspects of Schumpeter's thought. It suggests that Schumpeter prepared a pluralist research agenda, formulated in accordance with the conceptual perspective of the German Historical School, as presented by major scholars such as Schmoller, Sombart, Spiethoff and Max Weber. Schumpeter's notion of development, with its emphasis on the correspondence of economic and socio-cultural evolution, is therefore to be viewed in the context of the comprehensive Schmollerian approach. Moreover the ethical-evolutionary components of Schmoller's ideas point at the vital role of the German Historical School in the elaboration of a modern evolutionary economics in Schumpeterian terms. The essay concludes that the Schmollerprogramm is going to inspire further developments in Schumpeterian economics, as the integration of theory and history continuously marks the research agenda of evolutionary approaches to economic development.     

Where Schumpeter was nearly right – the Swedish model and Capitalism, Socialism and Democracy<--RID="*"-->

In Capitalism, Socialism and Democracy Joseph A. Schumpeter concluded that socialism would eventually displace capitalism in Western democracies. This would come about as a result of the superior performance of capitalism. We extract six “stylized” propositions that are essential elements of Schumpeter's prediction about the fate of capitalism. These propositions are confronted with the development of the Swedish economy. The three main results of the analysis are: (1) The evolution of the Swedish economy closely followed Schumpeter's predictions until about 1980: Large firms became increasingly predominant in production and innovative activity, ownership of firms became more and more concentrated, individual entrepreneurship waned in importance, the general public grew increasingly hostile towards capitalism, and by the late 1970s explicit proposals for a gradual transfer of ownership of firms from private hands were launched. (2) Design of tax and industrial policies fueled a development of the economy along the lines predicted by Schumpeter. In general, the policies discouraged private wealth accumulation. In particular, the policies favored concentration of firms and concentration of private ownership. (3) The turning point away from the path to socialism coincides with real world developments that disclosed two major flaws in Schumpeter's analysis. First, the ever more obvious failure of socialism in Eastern Europe went against Schumpeter's assertion that socialism can work. Second, Schumpeter, who thought that modern technology would make the giant corporation increasingly predominant, did not foresee the revival of entrepreneurship that took place in the Western countries around 1980.     

Schumpeter and the revival of evolutionary economics: an appraisal of the literature

During the last two decades we have seen a revival of interest in the works of Joseph Schumpeter and “evolutionary” ideas in economics more generally. A professional society honouring Schumpeter's name has been founded, and linked to it we have had for more than fifteen years now a professional journal devoted to this stream of thought. However, it has been argued that, despite these developments, the link between Schumpeter's own work and the more recent contributions to evolutionary economics is in fact rather weak. This paper considers this claim. Based on an analysis of Schumpeter's contribution to economics the paper presents an overview and assessment of the more recent literature in this area. It is argued that although there are important differences between Schumpeter's work and some of the more recent contributions, there nevertheless remains a strong common core that clearly distinguishes the evolutionary stream from other approaches (such as, for instance, so-called “new growth theory”). RID="*" ID="*" Many people have contributed to this paper in various ways. Jon Hekland at the Norwegian Research Council started it all by asking me to make an overview of the contribution from “evolutionary economics” to our understanding of contemporary economies. Several people helped me on the way by supplying written material, comments and suggestions, and I am indebted to all of them. Brian Arthur, Stan Metcalfe, Keith Pavitt, Erik Reinert, Paolo Saviotti and Bart Verspagen may be particularly mentioned. A preliminary version was presented at the conference “Industrial R&D and Innovation Policy Learning – Evolutionary Perspectives and New Methods for Impact Assessment” organised by the Norwegian Research Council (“SAKI”) at Leangkollen, Asker, April 18–19.2002. I wish to thank the discussant, Tor Jakob Klette, and the participants at the conference for useful feedback. Moreover I have benefited from comments and suggestions from the editors and referees of this journal. The final responsibility is mine, however. Economic support from the Norwegian Research Council (“SAKI”) is gratefully acknowledged.     

The Macroeconomic Effects of Taxation in a Federal Europe

The signing of the Maastricht Treaty in 1992 has created a dilemma for fiscal policy at both a theoretical and a policy level. The conflict between the increasingly important stabilising role for fiscal policy post-Maastricht and the pursuit of fiscal harmonisation requires a re-examination of the theoretical framework within which policy discussion should take place. Orthodox tax incidence theory cannot adequately analyse the macroeconomic effects of taxation and the paper proposes an alternative post-Keynesian approach based on the tax and business cycle theories of Kalecki. To illustrate the applicability of a Kaleckian approach to taxation in a Federal system, the paper presents a discussion of the macroeconomic effects of State and local taxation in the US. It is also shown to be necessary to study the structure of State government receipts, the expenditure functions of State governments, the State government budget stance and the nature of intergovernmental relations in order to identify macroeconomic effects.     

The hunt for S-shaped growth paths in technological innovation: a patent study*

Since the works by the business cycle theorists in the 1930s, no attempts have been made to study empirically the long term evolution paths of individual technologies starting with long time series. This is an empirical exploration and confirmation of the now almost assumed image or metaphor of the way technology develops; that it follows an S-shaped growth path which is commonly associated with a similar shaped diffusion function of entrepreneurial activity. The paper also confirms the diversity of technology dynamics and explores how technological cycle takeoffs appear to be clustered within certain historical epochs. The results have implications for our understanding of the evolution paths of individual technologies, and of the evolution of technological systems and waves of innovation. By use of computational statistics, logistic growth functions are fitted to US patent stocks, 1920–1990, at a detailed level of aggregation, including chemical, electrical/electronic, mechanical, transport and non-industrial technologies. Some practical considerations when developing an empirically testable model of innovation cycles are addressed in the paper as well.     

Debt, growth and inflation in large European economies: a vector auto-regression analysis

This paper attempts to empirically test the hypothesis that whether debt matters in the EU. This has been performed by examining the potential adverse effects of debt in large European economies on investment, inflation and growth. Using the hybrid cointegration and vector autoregressive models, the findings, based on the period 1970–97, suggest that debt causes significant adverse effects on investment, but its impact on growth is not clear-cut. Moreover, debt appears to be inflationary in most cases in the long run, though produces no clear short run pattern on inflation.     

The corporation as a tax shelter: Evidence from recent Israeli tax changes

Shifting of income between the corporate and the personal income tax bases in response to tax incentives is the premise of the literature on taxation and organizational form. Empirical evidence of income shifting is, however, merely circumstantial. Using a unique panel of high-frequency VAT data from Israel, we trace the footprints of income shifting through incorporation by high-income individuals who convert their labor income into less-taxed dividends. A rise in the personal income tax rates resulted in more than 4500 companies–a 5% addition to the corporate sector–being registered in the 12 months following the tax change, mainly by self-employed professionals in the industries of business activities and health services; behavioral response to taxation was found only in the top percentile of the income distribution.     

Democracy and capitalism: Are they compatible in the long-run?

Starting from a discussion of Schumpeter's analysis of the relationships of capitalism, socialism and democracy, it is shown that, in a complex society, democracy is only compatible with a decentralized market economy with safe property rights. But in time democracy shows a tendency to weaken the capitalist system by more and more regulations and an ever-increasing share of government (including the social security system) in GDP. This tendency is a consequence of political competition because of the development of interest groups and the presence of rationally uninformed voters. It leads to a weakening of efficiency, investment, innovation and thus to lower growth rates of GDP. But in time forces opposing this development arise. First, because of the negative consequences of growing government the welfare and regulatory state is bound to move into a crisis in the long run. Thus innovative politicians have a chance to win the support of a majority of voters for reform projects, who perceive finally the ever-increasing burden of higher taxes and regulations and realize that these burdens are not worth the benefits bestowed on them. In doing so, they may face, however, the competition of ideologies. Second, there are other states with lower taxes and less unnecessary regulations which show higher growth rates of GDP, and gain thus relative advantages in international political and military competition since they can command greater resources with the passage of time. To maintain their relative international power position, reforms are thus considered as necessary by rulers. This may be helped by pressure resulting from comparisons of the standards of living done by their citizens.     

Endogenous fluctuations in the demand for education

Abstract. Enrollment rates to higher education reveal a quite large variation over time which cannot be explained by productivity shocks alone. We develop a human capital investment model in an overlapping generations framework that features endogenous fluctuations in the demand for education. Agents are heterogeneous in their beliefs about future wage differentials. An evolutionary competition between the heterogeneous beliefs determines the fraction of the newborn generation having a certain belief. Costly access to information on the returns to education induces agents to use potentially destabilizing backward looking prediction rules. Only if previous generations experience regret about their human capital investment decisions, will agents choose a more sophisticated prediction rule that dampens the cycle. Access to information becomes key for stable flows to higher education. RID="*" ID="*"We would like to thank Cars Hommes, Florian Wagener, seminar participants at the University of Amsterdam, participants of the workshop on ‘Skill Needs and Labor Market Dynamics’ at the Wissenschaftszentrum Berlin für Sozialforschung (WZB) for helpful discussions, and an editor of this Journal and three anonymous referees for their comments. Tuinstra's research is supported by the Netherlands Organisation for Scientific Research (NWO) under a MaG-Pionier grant. Neugart acknowledges financial support from the German Ministry of Education. Parts of the research were done while Tuinstra was visiting the WZB and when Neugart was visiting CeNDEF. Correspondence to: The research for this paper was done while the first author was affiliated with the Wissenschaftszentrum Berlin für Sozialforschung.     

Competitive selection, self-organisation and Joseph A. Schumpeter

Post-Schumpeterians have tended to use biological analogies to understand economic evolution, in contrast to Schumpeter himself. In this paper it is argued that the biological analogies used tend to be outdated and that Schumpeter espoused an intuitive understanding of the evolutionary economic process that is closely related to modern conceptions of self-organisation, suitably adapted for application in socioeconomic systems. Using a self-organisation approach, competition can be understood without recourse to biological analogy, in terms of general systemic principles that operate in the presence of variety. Viewing economic evolution in terms of complex adaptation in self-organising systems yields nonequilibrium and nonlinear perspectives that parallel Schumpeter's own intuitions, reinvigorating them as the basis of evolutionary economic thinking in the new Millennium.     

Technology transfer in United States universities

This paper examines the role of offices of technology transfer (OTT) in 12 U.S. universities in 1998 in commercializing research results in the form of patents, licenses, and start-ups of new companies. We study the organization and place of OTTs within the university structure, the process of technology transfer, and the staffing and funding of the office. Data were collected through a mail questionnaire followed up through telephone interviews. We also conducted a statistical analysis of data for 170 U.S. universities, hospitals, and research institutes for the period 1991–1996. Our findings suggest that technology transfer from universities to the commercial sector needs to be understood in its broader context. The primary purpose of a technology transfer program is for the university to assist its researchers in disseminating research results for the public good. Success in this endeavor is only partially reflected in income generated for the university or the number of business start-ups. The degree of success depends not only on the nature of the interface between the university and the business community but also on the receptivity in the surrounding community as well as the culture, organization, and incentives within the universities themselves.     

Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada

We study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies. Because income of corporate groups is not consolidated for tax purposes in Canada, firms may use financial techniques, such as lending among affiliates, to reduce subnational corporate taxes. A simple theoretical model shows how income shifting affects real investment, government revenues, and tax base elasticities, depending on whether firms must allocate income to provinces or not. We then analyze data from administrative tax records to compare the behavior of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable income in each province. The evidence suggests that income shifting has pronounced effects on provincial tax bases. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for “income shifting” firms is 4.9, compared with 2.3 for other, comparable firms.     

The taxation of passive foreign investment: lessons from German experience

Abstract The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited.     

Wage-earners' investment funds: theory,simulation and policy

A wage-earners' investment fund raises income from taxation and uses it to acquire shares on behalf of wage-earners. The policy relevance of such a fund is discussed and a simple model developed. The model is used to simulate the development of a fund over the short-run and its effect on certain central economic variables such as the profit-rate. Simulations are used to analyse the effects of varying the key policy parameters.     

Income Taxation Rules and Stability of a Small Open Economy

This paper examines the stability of a small open economy under alternative income taxation rules. Using a one-sector real business cycle model with external increasing returns, we show that if the income tax schedule is linear, the small open economy will not generate equilibrium indeterminacy, but it exhibits a diverging behavior under certain conditions. In this case, an appropriate choice of nonlinear tax on the factor income may recover the saddle-point stability. We also reveal that if the taxation on the interest income on financial assets is regressive, then the small open economy may exhibit equilibrium indeterminacy. In this situation, a progressive tax rule on the interest income can contribute to eliminating sunspot-driven fluctuations.     

A two-sector Kaleckian model of growth and distribution with endogenous productivity dynamics

This study extends a two-sector Kaleckian model of output growth and income distribution by incorporating endogenous labour productivity growth. The model is composed of investment goods and consumption goods production sectors. The impact of a change in wage and profit shares on capacity utilisation and output growth rates at the sectoral and aggregate levels are identified. The study reveals short-run cyclical capacity utilisation rates and productivity growth dynamics. Even if the short-run steady state is stable, the capital accumulation rate in the consumption goods sector must decrease more than that in the investment sector for long-run stability. When simultaneous rises in profit shares in both the sectors affect long-run aggregate economic growth differently at a steady state, the distributional interests between the same class in different sectors may hamper the long-run economic growth. A policy message is that the effect of income distribution on industrial output growth is not always beneficial. These phenomena are specific to two-sector models and cannot be observed when using conventional aggregate growth models.