The economic cycle

The circularity of the economic flow has the important implication that changes in the level of output will tend to be self-reinforcing or cumulative. That is, an initial increase (or decrease) will lead to further increases (or decreases) rather than to continuing or stable reproduction at the higher (or lower) level.

The circular flow

Within the circular flow narrowly conceived (the closed circuit), we do not attempt to identify a particular determinant from among the distinct elements of the process as a whole. Instead, we treat the economic process as a system of mutual and reciprocal determination. Revenue determines spending, which determines demand, which depletes inventories and thus stimulates produc­tion, which in turn generates revenue. The investment induced within this circuit is primarily investment in working capital, which follows the move­ment of the process as a whole.

Investment in fixed capital (plant and equipment) poses an additional prob­lem. Such investment is not so easily incorporated into the closed part of the circular flow (a relatively short-run phenomenon) because of its connection to the long-run growth path of the economy. In this section, we consider investment in fixed capital within the narrower time horizon of the circular flow. Some economists, such as Joan Robinson (1961), have argued that investment depends on expectations of profitability, which depend on recent profit experience. Linking investment to profit expectations and profit ex­pectations to recent (and current) profitability, forms a circle of causation, which can generate a cumulative process. The following briefly summarizes this process.

In order to see how a cumulative process might develop, we need to understand the two-sided relation between profitability and investment.

At the same time that profit expectations determine investment, investment also determines profitability. This results directly from the operation of the multiplier process (see Kalecki, 1965; Kaldor, 1960). In order to see this more clearly assume that (for whatever reason) an investor decides to purchase $1,000 worth of additional investment goods. Assuming that this stimulates the production of an additional $1,000 of such goods, the additional invest­ment stimulates the creation of an equivalent amount of additional revenue for firms and workers. Assuming, for simplicity, that the recipients of this revenue save 10 percent, the revenue created by the new investment will stimulate additional demand in the amount of $900. This additional demand will, in turn, deplete inventories and stimulate new production and new revenues. Expenditure of 90 percent of the latter will add an additional $810 to demand, revenue, and output. Because of the circularity of the process, the initial addition to demand multiplies itself and stimulates a final growth in demand greater than the amount originally invested. Total addition to demand is the sum of a geometric series: $1,000 + $900 + $810 + ■ ∙ ■ = $10,000. Economists refer to the mechanism that leads to the cumulative effect exemplified here as the “multiplier.”

Since the purchase of commodities generates incomes, and since incomes stimulate their recipients to purchase commodities, any initial addition to demand will multiply into a series of additions to demand. Since growth in demand depletes inventories of produced commodities held by firms, the growth in demand will also stimulate investment in working capital to renew inventories; this investment will stimulate demand and revenues, which will multiply again into a series of expenditures.

Following the argument of Kalecki (1965), assume that firms sell their products at a given price that exceeds their costs by a fixed margin. This profit margin equals the difference between price (total revenue received per unit of output sold) and the cost per unit of output. At different levels of output and sales, different rates of utilization of capital imply different amounts of profit. If the rate of profit is defined to be the ratio of total profit to the value of the capital stock, that rate increases with increasing levels of output (and sales) or capacity utilization.

Higher rates of investment thus imply higher (current) profitability. If expectations of profit depend on profitability, then higher (lower) rates of investment will stimulate more (less) robust profit expectations, which stimulate further reductions in investment. Thus, in addition to the circular causation built into the closed part of the circular flow, there is also an expectational loop that incorporates investment in plant and equipment (at least up to a point). This expectational loop develops because of the de­pendence of expectations on current conditions. The strength of the loop, and of the cumulative processes it implies, depends on the extent to which investment decisions are made within a short-period context. It emphasizes once again the link between instability, cumulative processes, and the short­run perspective.

The capital market and instability

Induced investment results from the necessity that capital stock be kept adequate to the needs of current production to meet current levels of demand.

The implications of the dominance of the short-period or long-period view­point in decision making plays a significant part in political economy. Not the least important of these implications is for the stability of the reproduction process. For this reason, we will consider the distinction between long and short period in somewhat greater detail.

In economics, the long period refers to the planning period appropriate to investment in capital equipment. Such equipment (1) produces a stream of products over an extended series of production cycles and (2) cannot be easily sold; it therefore requires a long-run commitment on the part of its purchaser or owner. This second point deserves a brief further comment. Plant and equipment tend to be technically specific to the production of a particular product or narrowly defined and related set of products. This, together with the tendency of technical change to make existing (used) equipment uncom­petitive with new equipment, narrows the market for older capital stock. Since the secondary market in such stock is poor, its purchaser must at least anticipate owning and using it over an extended period.

In the long run, we can contemplate adjusting to our (possibly changing) circumstances by making changes in the amount and type of our plant and equipment. In the short run, we cannot adjust in this way. In the short run, we can change the rate of utilization of plant and equipment (and our as­sociated purchases of material and labor inputs), but our (overhead) costs remain largely beyond our control. This means that, if we adopt a short-run planning period, our plan will not involve changes in our stock of plant and equipment. An important corollary of this is that if we have little or no plant and equipment (or other overhead costs) then we will always find ourselves planning in the short run. It turns out that this conclusion plays an important part in the Keynesian argument for the instability of capitalist economies. The more agents find (or place) themselves in situations that encourage them to adopt the short-period perspective, the more unstable the market outcomes to which they contribute.

In the Keynesian view, the organization of a private enterprise economy incorporates a tension between the public good served by accumulation of capital and the reason private individuals hold their wealth in liquid form. The argument that such a tension exists sharply distinguishes the Keynesian approach from those of its predecessors. The classical economists (including Marx) tend to assume that the end of private wealth accumulation is well served by private ownership of the means of production on the part of in­dividuals. They assume that private wealth accumulation means the growth of society’s productive capacity and thus serves a social purpose. The Keynes­ian argument attacks this core idea.

While the social purpose is best served by the accumulation of means of production (plant and equipment), the private ends of individuals are best served by holding wealth in a liquid form that can be easily used to acquire the things capable of satisfying their wants.

The dilemma has an institutional resolution in the development of the private corporation. The corporation owns society’s capital stock as its private property. Yet its institutional ends are sufficiently distinct from those of the individual to make, under certain circumstances at least, the ownership of means of production the relevant means to its ends. The corporation thus solves the problem of who will own society’s producing capacity. It simul­taneously helps to solve the problem of providing the individual with a way of holding and accumulating wealth in liquid form. The individual can own shares in corporations, leaving the corporation as the owner of the means of production themselves. These shares are highly liquid and thus better serve the ends of the individual than would ownership of plant and equipment.

For the Keynesian theory, this solution to the problem of who will own society’s capital stock as private property is more a shifting of the problem to a new plane than a real solution. What it does is transfer the difficulty to the realm of financial circulation. Much of the Keynesian theory explores the way this resolution of the dilemma of private ownership of means of production generates instability in the accumulation process. We will briefly explore the Keynesian argument in the following pages.

The dilemma referred to above can be restated in the language of the short run and the long run. Those who adopt a short-run perspective will need to hold their wealth in a liquid form that does not involve any long-run com­mitment to a particular productive enterprise.

Keynes argues that the shift from the long- to the short-period perspective significantly undermines the stability of the capitalist economy (Keynes, 1936rch. 12; see also Levine, 1984). He attributes this shift to the develop­ment of the market in securities, which, he argues, provides investors with an increasingly attractive alternative to investment in plant and equipment. According to Keynes, the “outstanding fact” concerning investment decisions “is the extreme precariousness of the basis of knowledge on which our es­timates of prospective yield have to be made” (1936:149). This fact places a premium on investments that demand only a short-period commitment. The stock market provides investors with the alternative of investments of this type.

Profit-seeking agents face a choice of the form of their capital investments. One option, productive capital, fixes capital invested for the productive life­time of the equipment while restricting the return to profit realized for the sale of the stream of products. This option also commits large amounts of capital to a single form and makes the return contingent on the vicissitudes of the market for a particular product (or limited product line). A second option, financial assets, fixes the form of investment (a particular stock or bond) for only so long as the investor desires. As Keynes puts it:

[T]he stock exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week. (1936:151)

The ready movement of investments in financial assets from one kind to an­other has important implications. In particular it places a premium on short­term capital gains (the difference between the price at which the asset is bought and sold) as the source of profit rather than on the sale of produced commodi­ties. This emphasis on capital gains in the buying and selling of easily liqui­dated assets encourages cumulative movements in asset prices. Professional investors devote their energies not to “making superior long-term forecasts of the probable yield of an investment over its whole life, but [to] foreseeing changes in the conventional basis of valuation a short time ahead of the general public” (Keynes 1936:154). Profit goes to those best able to anticipate “what average opinion expects the average opinion to be” (p. 156).

When profit can be made by anticipating movements in asset prices, move­ments in asset prices will also depend on the state of expectations concerning price changes. The more we expect prices to rise (fall), the more we act in ways that make prices rise (fall). Demand for assets increases with the ex­pectation that their prices will rise and this same demand brings about a rise in price. Behavior of investors in such markets brings about cumulative movements in asset prices. Profit-oriented speculative behavior encourages price instability.

If this happens, the implications for the economic circuit can be severe, and for two reasons:

Money flows away from investment in productive capital and into the buying and selling of financial assets (the financial circulation). Investment in real capital falls, demand for labor falls, revenues decline, a downward spiral results.

The money flowing into the financial circulation contributes to speculative movements in asset prices. Speculation feeds instability in the financial sector, which can, if allowed to proceed beyond certain limits, harm the process of reproduction and accumulation. “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” (Keynes, 1936:159)

This second point increases in importance with the increasing dependence on the financial circulation as a source of funds to maintain production and finance investment. Cumulative movements within the financial circulation can disrupt the ability of financial institutions to support the activities of producers (and consumers): the supply of credit needed for acquisition of both fixed and working capital. Bank failures, credit crunches, and depre­ciation of financial assets can significantly disrupt the circular flow. This is the way in which cumulative processes in the financial sector mean instability for the market as a whole. (For more detailed discussion, see Galbraith, 1954; Minsky, 1975; and Kindleberger, 1978.)

The ownership of long-lived assets (productive capital) is the basis for economic well-being and security in a private enterprise economy. A private enterprise economy requires that private persons own the capital stock as their property (if only indirectly). As Keynes puts it, “there is no such thing as liquidity of investment for the community as a whole” (1936:155). The corporation, as we have seen, is a mechanism for reconciling the necessity that the capital stock be privately owned with the fact that the motivations and time horizons of private persons are inconsistent with its ownership (see Minsky, 1975:ch. 4). The corporation plays a primary role in assuring the presence in the market of an agent with a long-period view. The corporation (1) has an image of the future and of its place in that future consistent with ownership of long-lived equipment, (2) is motivated to maintain an institu­tional identity into the future, and (3) has purposes that are served by the production of commodities (at least normally).

Because the corporation sustains an institutional identity into the long run, it represents a stabilizing influence on the economy. By focusing its attention on making profit from the production of commodities, the firm commits itself to the work of securing an environment suitable to assuring the return on its investment over the period of its lifetime. It thus concerns itself with the stability of its market (and possibly of its market share), the stability of its work forces, and the stability of its price-cost structure. In the next section, we consider some of the larger implications of this behavior.

At the same time that firms lend stability to the market, they also contribute to the development of the market in shares (the “financial circulation”) which, while ultimately tied to the success of the firm in producing and selling commodities over the long run, develops independently of that connection. The destabilizing effect of the independent movements within the financial circulation also result from the growth of corporations. Keynes and his fol­lowers (such as Minsky) focus on the destabilizing implications of the op­position between ownership of the firm and ownership of society’s capital stock.

In terms of those considerations that affect the likelihood that agents will adopt a long-period perspective, the holders of shares appear decidedly different from the corporations they own. Shareholders do not value the preservation of an institutional identity tied to production and sale of com­modities, a particular location (or set of locations) in the market, or more generally, a determinate and enduring location in the overall social division of labor. Instead, they value liquidity of investment and the spreading of the investment over a wide range of firms and industries (diversification). In a sense individual shareholders operate from a different and narrower definition of their private interests. The interest of the shareholder does not extend beyond his private wealth-position: The monetary value of his portfolio of financial assets at a point in time. Firms have a much broader interest in the security of their markets, the reputation of their products, the stability of their costs (including their labor costs), the value of the stocks they have issued in the past and that are now held by their juridical owners, and so on. This does not mean that firms act in the public interest (they may or may not). It means that they represent, within the sphere of private ownership and private interest, an important component of the process of social repro­duction. Unlike that of shareholders, the private interest of the firm incor­porates the execution of a social imperative.

The narrow commitment of shareholders can lead to behavior conflicting with the achievement of the broader ends of the corporations they own. The basis for ownership of capital equipment by the firm is the expectation that the products that equipment can produce will satisfy the wants of consumers or of other producers. The basis for ownership of shares is the expectation that they will contribute to the growth of the value of the portfolio of assets held by their owner. Such ownership always has a strong tendency to become speculative in the sense discussed previously. When this happens, the his­torical value of the firm as reflected in the price of its shares diverges both from the historical value of its capital stock and (of more importance) from the expected value of the returns to the productive use of that stock over its lifetime. This divergence is rooted in the private ownership of capital and in the latent and overt opposition between the logic of private ownership and the logic of large-scale production. This opposition has both beneficial and harmful effects on the circular flow.

We can trace the peculiarities of the Keynesian approach, when contrasted with the neoclassical, to the premise that expectations of demand rather than costs of production drive investment decisions. This premise has significant implications for the argument over the self-regulating market. In this section, we explore those implications further, first with regard to the wage contract, then with regard to saving.

The labor market stands at the center of the issue posed for political economy by instability. It is central for two reasons. First, the labor market is the mechanism through which most individuals in a capitalist economy acquire their livelihood. As Lindblom puts it, in a capitalist economy “live­lihood is at stake in exchange” (1977:47). Second, the wage contract links demand by products to wages and employment. As we have seen, the cir­cularity of the economic process in a private enterprise economy results from the fact that employment both depends on and determines demand. In this section we explore this centrality of the labor contract and suggest some implications for political economy.

The success of a capitalist economy depends in part on its ability to provide individuals with their livelihoods through a series of voluntary contracts. From the side of the worker, this requires that the demand for labor be sufficient to provide employment at a wage adequate for that worker to purchase the needed consumption goods given their market prices. Economic instability endangers this outcome. It means that periodically the demand for labor will not be sufficient to provide the needed employment and there­fore the needed incomes. Instability is no small matter viewed from the worker’s standpoint.

This observation suggests an important question we have not so far ad­dressed. When the demand for labor falls short of the level required to provide employment for those able and willing to work, can the unemployed make decisions and take actions likely to bring about the adjustments necessary to call forth a higher level of employment? If the answer is yes, then we will be encouraged toward a favorable judgment of market self-regulation. If the answer is no, the argument in favor of the free market will be undermined. One of the virtues claimed for the self-regulating market is that it facilitates all mutually beneficial transactions, and in so doing assures that society’s productive potential will be fully exploited. Failure of the market to provide employment for those able and willing to work is a failure to exploit their potential productive contribution. When those unemployed are willing but unable to make adjustments that will call forth demand (for example, ad­justments in the wage), then the market mechanism has failed to secure the full range of transactions needed to realize society’s productive potential. In narrower terms, the labor market has failed to bring about the adjustment between supply and demand needed to assure an adequate level of em­ployment.

In the neoclassical model of the economy, the responsiveness of demand to price assures that markets will clear. For this to work in the labor market, the worker must be able to influence the demand for labor by influencing its price, thus finding employment by offering to work for less. The Keynesian approach argues that workers do not have the capacity to influence employ­ment in this way (see Keynes, 1936xh. 19, and Kalecki, 1969).

The first limitation workers face in their attempt to increase demand for their labor by reducing its cost is their lack of control over that cost. This lack of control results from the fact that the wage bargain controls the money wage rate and not the relationship between money wages and prices. The latter, measured for example by the profit margin, indicates to the employer the impact of the wage bargain on profitability. If we think of the real wage as the money wage adjusted for changes in the price level, then changes in the real wage imply changes in the cost of labor to employers and in their profit margins; changes in money wages do not. Given that workers bargain over money rather than real wages, the impact of the wage bargain on money wages need not imply impact on the real cost of labor.

There may be no expedient by which labor as a whole can reduce its real wage to a given figure by making revised money bargains with entrepreneurs. (Keynes, 1936:13, italics in original)

If the employer treats the wage he pays as a cost of production, changes in that cost may imply changes in the price of the product. And, if this implication follows, a general fall in money wages as a part of an effort by workers to increase employment will bring down the price level rather than increasing demand for labor.

If, however, prices do not fall with wage costs so that, in Kalecki’s lan­guage, the degree of monopoly or profit margin rises, a fall in money wages will lower real wages and the real cost of labor to employers. Whether this leads to an increase in employment depends on the relative impact on pro­duction and investment decisions of two factors: (1) the lower cost of pro­duction and (2) the lower level of demand for products that results from lower real wages. Thus, if lower costs do not stimulate investment, a lower real wage means that the level of demand forthcoming from current pro­duction and investment decisions will be lower. The fall in demand can, through its influence on production and investment decisions, lead to a lower level of employment. When levels of production and investment are sensitive to demand rather than costs, workers cannot influence (except perhaps per­versely) their level of employment by influencing the nominal price of labor (the money wage).

If this is indeed the case, then a capitalist market economy poses a dilemma for those who depend on the wage contract for their livelihood. The failure of demand that deprives them of their livelihood is neither of their own making nor responsive to their actions. In the language of the neoclassical approach, they suffer from a negative external effect (see Baumol, [1952] 1965). Without employment, they cannot purchase the goods they need. If they cannot purchase those goods, firms cannot make profit by selling them.

It is, then, beyond the power of the parties to the wage contract, acting in their capacities as private agents, to correct the failure of the market and bring about the exchanges that would be in their interest. By doing what is rational from an individual standpoint, they create an aggregate condition that defeats their purposes. What is rational at the microeconomic level becomes irrational at the macroeconomic level.

It is in the interest of both employers and employees that something be done to stabilize the employee-employer relation to assure the livelihood of the worker, and with it adequate demand for the firm’s products. Strategies arise on two levels for coping with the problem posed by the wage contract (see Piore and Sabel, 1984). At the microeconomic level, changes in the terms of the wage contract can lend stability to labor markets benefiting both employer and employee. At the macroeconomic level, demand management by the state can maintain levels of demand and employment by countering the instability born of the unregulated and uncoordinated decisions of private agents.

The Keynesian analysis of the labor market centers on the implications of the wage bargain for demand. Because of this, it sees the possibility that decisions by and contacts between agents (workers and employers) will have perverse effects. The Keynesian analysis of saving develops in a similar di­rection. It also highlights the potential for conflict between the rationality of the individual agent and that of the system as a whole. We turn now to a brief summary of that conflict.

In the last chapter of The General Theory, Keynes explores the broader implications of his ideas. This exploration of the “social philosophy” toward which the theory might lead focuses on the problem of saving and especially on the “belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity” (1936:372). Keynes thought that the argument of The General Theory could be used to undermine one of the most fundamental and long-standing jus­tifications for the inequalities of income and wealth we associate with capitalist economy, especially under a regime of laissez-faire:

Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed. (1936:373)

Keynes goes on to note that other arguments (having to do with incentives) could support a degree of inequality, but not that degree traditionally claimed on grounds of the demands for financing investment.

In the “older” view, accumulation is limited by the supply of savings from the community (or, in the classical approach, by the magnitude of the profit or surplus). The level of savings in turn depends (in important part) on the distribution of income. Unequal distribution supports community saving. In the classical theory this inequality was structural; it was an inequality in ownership of the means of production. The capitalist class does the saving by transforming its surplus into new capital. The more profit placed into the capitalist’s hands, the greater the social saving, the greater the accumulation of capital:

Accumulate, accumulate. That is Moses and the Prophets!... Therefore save, save, i.e. reconvert the greatest possible portion of surplus-value or surplus-product into capital. Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoi­sie.... (Marx, 1967a:595)

In the classical model, the division of society into classes was, among other things, a mechanism for social savings. This savings was more or less auto­matically used to create new capital. Accumulation was understood to be constrained and determined by the magnitude of the surplus. Inequality thus plays a decisive part in economic progress.

Inequality can still play this role in the absence of the classical structural model. So long as those with higher incomes save a greater portion of their incomes and so long as inequality creates high-income groups, it will stimulate saving. And, again, so long as saving brings about investment, the argument for investment becomes an argument for saving, which becomes an argument for inequality.

The classical economists fink saving to investment more or less by as­sumption. The class that does the saving is by nature parsimonious and eager to invest. The neoclassical economists develop their theory on a plane that leaves class differences out of account. They employ a different mechanism linking saving to investment: the rate of interest. The neoclassical economists develop an elaborate argument centering on the role of the interest rate in matching saving and investment (see Fisher, 1930). By making the interest rate a crucial determinant of the demand for new capital (the amount in­vested), the neoclassical economists introduced a mechanism that made in­vestment respond to the supply of funds (saving). Put somewhat loosely, a greater supply of funds would, other things equal, imply a lower interest rate (a greater supply means a lower price). A lower interest rate implies a lower cost of investing, which implies more investment.

This line of thought parallels that applied to the labor market in the neoclassical approach. Changes in the price of labor should affect demand for labor just as changes in the cost of finance should affect demand for capital. In both cases agents respond to changes in input costs rather than demand expectation when making investment decisions. It makes a difference whether we think investment is constrained by the supply of funds (savings) or by expectations of demand for the products the new capital will produce. Prior to Keynes and Kalecki the former was the dominant view. Keynes and Kalecki argue that the interest rate and supply of savings play a relatively minor role in determining or stimulating accumulation.

If investment decisions are unresponsive to changes in the supply of sav­ings, then encouraging saving by the community has perverse effects. The higher the level of saving out of income, the lower the level of demand for products out of that income, and, other things equal, the lower the levels of output and employment. Given the circularity of economic processes, the higher the proportion of current income saved in a Keynesian world, the lower is current demand for output; the effect on the circular flow translates into lower levels of income and therefore, perversely, a lower overall amount of savings.

In a Keynesian world, a decision to save neither implies nor stimulates a decision to purchase capital goods (that is, real investment). Where his pred­ecessors saw the trade-off between saving and consumption as one between acquisition of means of production and acquisition of means of consumption (of the community), Keynes saw that trade-off as one between current con­sumption (and thus demand) and a leakage from the circular flow that did not stimulate any equivalent demand. The more the community attempts to save, the worse off it is both in the present and future. This “paradox of thrift” undermines a main support for the argument from political economy in favor of the income inequalities that result from the operations of unreg­ulated markets.

In a capitalist economy that operates in the way the Keynesian theory predicts, both the wage bargain and the saving decision can have perverse effects. In both cases problems arise because investment decisions center on demand expectations rather than costs of production. Piore and Sabel sum­marize the problem well:

In a mass-consumption economy, the natural response of prices to many kinds of disturbances has the perverse effect of producing contractions of economic activity, rather than relaunching growth. Investment is not directly responsive to declining wages and interest costs as long as industry already has substantial excess capacity; and the fall in wages under the pressure of unemployment undermines the demand for consumption goods, creating exactly the kind of excess capacity that deters the revival of investment spending. Because investment is so sensitive to consumer in­come, it is thus possible that the mass-production economy will respond to a wage decline in a fashion precisely opposite to that of a competitive economy. (1984:77)

The idea that the demand side of the accumulation process becomes dominant in later stages of capitalist growth is also a main theme of what has come to be referred to as the “regulation theory” (for brief accounts of this theory see DeVroey, 1984, and Noel, 1987).

The regulation theory distinguishes two phases, or regimes, of capitalist accumulation on the basis of the relations between production decisions and the determinants of aggregate demand. In the first phase, wages are expe­rienced primarily as a cost and accumulation as a process of building a producing apparatus to meet an expanding demand. In the second phase, demand becomes the dominant concern, with an implied emphasis on the sales effort and the wage as a determinant of demand. The growing concern with demand encourages the state to play a more active role in demand management. The involvement of the state at the macroeconomic level par­allels growth of collective bargaining arrangements and associated changes in the nature and conduct of the wage contract. These changes can have the consequence of stabilizing incomes and demand.