Plate iv in print

The Pendulum

Goodwin; the labor share and employment in a perpetual predator-prey cycle, distribution as a struggle that never comes to rest.

Let employment rise and labor, emboldened, claims a larger share; but the larger share starves the profits that drive accumulation, employment falls, labor's hand weakens, and its share recedes — so the division of the product does not settle but circles, a pendulum swung by the struggle itself.

— the argument of this plate, after Richard Goodwin, 1967

Both the orthodox theory and Kalecki's gave the labor share as a number — fixed by technology, or fixed by the degree of monopoly. Richard Goodwin asked a different question: not what the share is, but how it moves. His answer, one of the most elegant models in all of economics, set distribution in perpetual motion, showing the labor share and the rate of employment to chase each other endlessly around a cycle, driven by the struggle between labor and capital itself. Distribution, in Goodwin's hands, is not a resting point but a pendulum — and the force that swings it is neither productivity nor a fixed level of power, but the changing balance of power as the economy moves between boom and slump. The plate turns from the level of the share to its dynamics, and finds the division of the product to be a thing perpetually in motion.

Goodwin built his model on two quantities and a striking analogy. The two quantities are the employment rate — the fraction of the available workforce that holds jobs — and the labor share — the fraction of output that goes to wages rather than profits. The analogy is to the predator-prey systems of biology, in which the populations of, say, foxes and hares rise and fall in linked and lagging cycles: abundant hares feed a growing population of foxes; the swelling foxes eat the hares down; the dwindling hares then starve the foxes; the thinning foxes let the hares recover; and the cycle turns again, without end. Goodwin saw the very same structure in the struggle over distribution, with employment and the labor share as the two linked populations, each rising on what the other provides and then undoing it. The model is spare — a pair of equations capturing how each variable drives the other — but from that spareness comes a deep result: distribution and employment cycle together, perpetually, with no tendency to come to rest.1

1. Goodwin built his model on two quantities — the employment rate (fraction of the workforce in jobs) and the labor share (fraction of output going to wages) — and a biological analogy. In predator-prey systems, foxes and hares cycle in linked, lagging waves: hares feed foxes, foxes eat down hares, scarce hares starve foxes, few foxes let hares recover. Goodwin saw the same in the struggle over distribution, with employment and the labor share as the linked populations. Spare equations, deep result: the two cycle endlessly, never resting.

Trace the cycle from a point of high employment. When nearly everyone who wants work has found it, labor stands in a strong position: workers can press for raises, threaten credibly to leave for another job, resist wage cuts, and employers — competing against one another for scarce hands — must concede. So real wages rise faster than productivity, and the labor share climbs. This is the first half of the mechanism, and it is pure bargaining power: a tight labor market shifts power toward workers, and the share follows the power. The orthodox theory has no room for this, for to it the share is technology's verdict, wholly indifferent to how many happen to be employed. But in Goodwin's model, as in life, a worker is bolder when jobs are plentiful and timid when they are scarce, and the share that labor commands rises and falls with its leverage. Employment is not merely a measure of how much is produced; it is the lever of distribution.2

2. Trace the cycle from high employment. When nearly all who want work have it, labor is strong: workers press for raises, threaten to leave, resist cuts; employers competing for scarce hands concede. Real wages outpace productivity and the labor share climbs — pure bargaining power. The orthodox theory has no room for this, the share being technology's verdict, indifferent to employment. But a worker is bolder when jobs are plentiful; the share follows the leverage. Employment is the lever of distribution.
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Here the predator-prey logic bites. The rising labor share, won in the boom, comes directly out of profits: as wages take more of each dollar of output, profits take less. And profits are the engine of accumulation — the source of investment, the spur to expansion and to hiring. So the squeezed profits slow investment, slow the growth of the capital stock, and slow the creation of new jobs; employment, which had been high, begins to fall. Now the mechanism runs in reverse. As unemployment rises, labor's bargaining power ebbs; workers can no longer press for raises and must accept what is offered; wages fall behind productivity; and the labor share recedes. The receding share restores profits, the restored profits revive investment, the revived investment pulls employment back up — and the system climbs again toward the high employment where it started, poised to repeat the whole circuit. The labor share and employment trace closed loops, a perpetual orbit, and the engine of the orbit is this: labor's very success in the boom sows the downturn that takes its gains away.3

3. The predator-prey logic bites. The rising labor share comes out of profits — and profits drive accumulation. Squeezed profits slow investment and hiring; employment falls. In reverse: rising unemployment weakens labor, wages fall behind productivity, the labor share recedes, profits recover, investment revives, employment climbs back — and the circuit repeats. The labor share and employment trace closed loops. Labor's success in the boom sows the downturn that reverses it.

The model's lesson is that the division of the product has no resting place. There is no natural share to which the economy gravitates and settles; the share is the perpetually moving outcome of a struggle in which each side's advance calls forth the very forces that push it back. Neither labor nor capital can hold a higher share for long: when labor gains, the profit squeeze undermines the accumulation, and hence the employment, that gave labor its strength; when capital gains, the cheap and plentiful labor revives the accumulation that tightens the market and restores labor's hand. Distribution is a dynamic equilibrium of conflict — not the absence of struggle but its ceaseless continuation, an equilibrium of motion rather than of rest. This is the power answer carried to its dynamic conclusion: the share is set neither by productivity, as the orthodox theory held, nor even fixed at some level by a given degree of monopoly, as Kalecki had it, but is the ever-shifting front line of a war that neither side can win outright, and that neither can quit.4

4. The lesson: the division has no resting place. There is no natural share to settle at; the share is the moving outcome of a struggle in which each advance calls forth its own reversal. Neither side holds a higher share for long — labor's gains undermine the employment that won them; capital's gains revive the labor market that restores labor. Distribution is a dynamic equilibrium of conflict, motion rather than rest. The power answer made dynamic: the share is a front line neither side can win or quit.

Goodwin's model does one thing more that the volume should mark: it binds the share to the business cycle, and so binds this last aggregate to the others. The labor share rises and falls with employment, in step with the boom and the slump that The Cycle described — so the division of the product is not a thing apart from the great fluctuation of the economy but woven into it, the distributional face of the same oscillation. Yet a model of eternal cycles describes an economy that returns, again and again, to where it has been; and the most striking fact about the modern labor share is precisely that it has not returned. Over recent decades it has fallen, across the rich world, and stayed down — as if the pendulum had not merely swung through its arc but slipped from its mooring altogether. What could make the labor share fall not cyclically but durably, a one-way decline rather than a closed orbit, is the question the next plate takes up. The next plate is the decline.5

5. Goodwin's model binds the share to the business cycle, tying this last aggregate to the others: the labor share moves with employment, the distributional face of the same boom-and-slump The Cycle described. But eternal cycles return to where they began, and the modern labor share has not returned — it fell and stayed down, as if the pendulum slipped its mooring. What makes the share fall durably, not cyclically, is the next question. Next: the decline.

Goodwin set distribution in motion. Employment and the labor share, he showed, cycle together like predator and prey: high employment emboldens labor and lifts its share, but the rising share starves the profits that drive accumulation, so employment falls, labor's hand weakens, and the share recedes — which restores profits, revives employment, and turns the cycle once more. The division of the product has no resting place; it is the perpetually moving front of a struggle in which each side's advance calls forth its own reversal. This is the power answer made dynamic, and it ties the share to the business cycle that runs through the whole family of aggregates. But an eternal orbit returns to where it began, and the modern labor share has not returned — it has fallen, and stayed down. The next plate is the decline.