Analitical Derivation of the Cobb-Douglas Function based on the Golden Rule of Capital Accumulation

In this paper, the neoclassical model is extended for the general case of economic growth, which can be represented as the sum of cyclical and growth components. If the general formulation of the golden rule of capital accumulation is satisfied (the savings rate is equal to the capital income share), the production function takes the form of the Cobb-Douglas function. This function governs the economic growth both when the economy is growing along an equilibrium path and when the economy is departing from it (the correlation coefficient between U.S. GDP changes and calculated ones is equal to 0.91). When economy fluctuations are averaged along an equilibrium path, the Cobb-Douglas function reduces to condition, which is similar to Harrod-Domar one. The level of technology may be reasonably considered to express in terms of the wage level.neoclassical growth model; golden rula of capital accumulation; Cobb-Douglas function; Harrod-Domar condition

Virtual wealth is growing

Market price of a financial asset may not coincide with the value of the counterpart obligations in the balance sheet of the issuer of this asset. The difference between these values is an unsecured part of the asset’s value, which forms financial bubbles and virtual wealth. Present article shows that the actually observed US unsecured virtual wealth has been growing since the 1980s amid cyclical fluctuations due to stock market volatility

Law of conservation of real wealth and rising inequality

Nonfinancial and financial capital conflated in modern economy. Using accounting approach we separated them and compared the corresponding total values of nonfinancial capital and wealth. We consider these values to be equal. This statement is named “law of conservation of real wealth”: real value of aggregate wealth is equal to the total value of nonfinancial assets. The law holds automatically by virtue of balance sheet identity, if financial assets’ value equal to the counterpart obligations securing them. However such equality can be violated when securities freely circulating in modern financial markets lose their link with corresponding obligations. The resulting difference is equal to the divergence between the aggregate wealth and total value of nonfinancial assets, which indicates a violation of the law in nominal terms. We consider this divergence as excess unsecured component of wealth, whereas the real wealth continues to match the nonfinancial assets’ value. Such unsecured wealth can only arise due to discrepancy between savings and investment, along with difference between total Haig–Simons income (including capital gains) and expenditures in real sector. It makes impossible to display correctly flows simultaneously with stocks. Deviations of securities' value from corresponding obligations commonly accepted as temporary. However, along with cyclical fluctuations the unsecured US financial assets value has been steadily growing since the 1980s, exceeding $11 trillion in 2016. We consider the observed nominal violation of the law of conservation of wealth is a consequence of unlimited capitalists’ enrichment aspirations. Marketable securities are the tools they use to embody such desire; the effect enhanced by the procedures of corporate mergers and acquisitions. Yet, the unsecured wealth inflate financial bubbles; its growth turns out a sufficient condition for wealth and income inequality rising. Then the aggregate consumer demand growth is hindered, and appetite for capital investment decreases. Unsecured component of capitalists’ profit is absorbed by an (unsecured) increase in the value of financial assets; it is not a source of capital investment; on the contrary, high financial returns contribute to crowding out investment from the real sector. Productivity growth slows down. Thus, increase in inequality reduces both aggregate demand and supply, which inhibits economic growth. US statistics confirms the above trends which led to the global crisis of 2007-2008. It has not cured the economy; unsecured wealth continues to grow increasing inequality, which dumps output growth. Black swans in 2020 have inspired inevitable arriving of new crisis

Financialization increases inequality and leads economy to a dead end

Modern capitalists multiply their income and wealth largely due to revaluation of the financial assets, which often has no roots in the real sector of the economy. The assets’ market price may exceed the corresponding liabilities of their issuers. Such excessive part of the assets’ value is not secured by anything; it forms an unsecured component of their owners’ wealth. This unsecured component is one of the main reasons for the observed wealth-to-income growth. We have shown that the increase in unsecured wealth necessarily increases inequality. So, the large wealth-to-income ratio indicates inequality strengthening. The rising inequality leads to the impoverishment of the poorest households and inhibition of economic growth. This is facilitated by an imbalance between the total savings and investment which unsecured income causes. A part of the capitalists' huge savings is absorbed by the unsecured growth in the financial assets’ value and do not materialize as capital investments. In fine, the consequence of financialization is the growth of unsecured income and wealth, which entail the rising inequality due to the outstripping growth of the largest fortunes. This causes an imbalance in economic growth and drives the economy into a dead end

Optimal Equilibrium State in Two-Sector Growth Model

Abstract. The paper studies a two-sector growth model for two cases: with flexible technology and with fixed coefficients. Different states of economic equilibrium (steady states) are compared. We find that the price of investment goods with respect to the price of consumer goods should be changed if the equilibrium state has shifted. Therefore, the aggregate production function cannot be considered as a purely technical. We assume that the income distribution is determined by the direct proportionality between the profits and the investment. Then the resulting function of aggregate output is continuous and differentiable in the domain of definition, even if the technology is fixed. In the last case the function has diminishing returns of capital under Uzawa capital-intensity condition; the state of economic equilibrium is stable only when this condition is valid. We suggest that the optimal is an equilibrium state that maximizes the total profit. The model with fixed coefficients predicts the possible existence of such an optimum.Keywords. Economic growth, Two-sector growth model, Optimal equilibrium state, Uzawa capital intensity condition, Profit maximization.JEL. O41, E10, D00

Law of conservation of real wealth and rising inequality

Nonfinancial and financial capital conflated in modern economy. Using accounting approach we separated them and compared the corresponding total values of nonfinancial capital and wealth. We consider these values to be equal. This statement is named “law of conservation of real wealth”: real value of aggregate wealth is equal to the total value of nonfinancial assets. The law holds automatically by virtue of balance sheet identity, if financial assets’ value equal to the counterpart obligations securing them. However such equality can be violated when securities freely circulating in modern financial markets lose their link with corresponding obligations. The resulting difference is equal to the divergence between the aggregate wealth and total value of nonfinancial assets, which indicates a violation of the law in nominal terms. We consider this divergence as excess unsecured component of wealth, whereas the real wealth continues to match the nonfinancial assets’ value. Such unsecured wealth can only arise due to discrepancy between savings and investment, along with difference between total Haig–Simons income (including capital gains) and expenditures in real sector. It makes impossible to display correctly flows simultaneously with stocks. Deviations of securities' value from corresponding obligations commonly accepted as temporary. However, along with cyclical fluctuations the unsecured US financial assets value has been steadily growing since the 1980s, exceeding $11 trillion in 2016. We consider the observed nominal violation of the law of conservation of wealth is a consequence of unlimited capitalists’ enrichment aspirations. Marketable securities are the tools they use to embody such desire; the effect enhanced by the procedures of corporate mergers and acquisitions. Yet, the unsecured wealth inflate financial bubbles; its growth turns out a sufficient condition for wealth and income inequality rising. Then the aggregate consumer demand growth is hindered, and appetite for capital investment decreases. Unsecured component of capitalists’ profit is absorbed by an (unsecured) increase in the value of financial assets; it is not a source of capital investment; on the contrary, high financial returns contribute to crowding out investment from the real sector. Productivity growth slows down. Thus, increase in inequality reduces both aggregate demand and supply, which inhibits economic growth. US statistics confirms the above trends which led to the global crisis of 2007-2008. It has not cured the economy; unsecured wealth continues to grow increasing inequality, which dumps output growth. Black swans in 2020 have inspired inevitable arriving of new crisis

The Golden Rule of Capital Accumulation and Global Recession. Aggregate Production Function and the Cambridge Capital Controversy.

A new macroeconomic model is presented, which makes it possible to take a fresh look both at the long-term equilibrium growth process and at short-term deviations from it. Its key hypothesis is investment-to-profits equality. This hypothesis has classical roots and corresponds to the Ricardian and Marx approach and coincides with Phelps’ Golden Rule of capital accumulation as well as with Uzawa’s classical hypothesis. Under this assumption the long-term output growth rate is determined by the rate of capital accumulation, which in turn is equal to the net profit rate. The profit rate value is the result of a trade-off between workers and proprietors. The relationship between aggregate output and inputs is analytically derived in this paper where the variable values are measured not in physical units, but in the current monetary cost. It has the Cobb-Douglas functional form but is neither neoclassical production function nor technical relationship, which could specify the maximum output obtainable from a given set of inputs. The exponent of capital in the resulting function is equal to the investment rate, whose current value is not constant in time. So the output is no longer an unalterable function of inputs, and its shape can vary. The ‘production function’ shift parameter, which is commonly associated with the level of technology, may be expressed in terms of the wage level. The reasons for the 2007–2008 global recession have been clarified

Закон сохранения реального богатства и рост неравенства

Nonfinancial and financial capital conflated in modern economy. Using accounting approach we separated them and compared the corresponding total values of nonfinancial capital and wealth. We consider these values to be equal. This statement is named “law of conservation of real wealth”: real value of aggregate wealth is equal to the total value of nonfinancial assets. The law holds automatically by virtue of balance sheet identity, if financial assets’ value equal to the counterpart obligations securing them. However such equality can be violated when securities freely circulating in modern financial markets lose their link with corresponding obligations. The resulting difference is equal to the divergence between the aggregate wealth and total value of nonfinancial assets, which indicates a violation of the law in nominal terms. We consider this divergence as excess unsecured component of wealth, whereas the real wealth continues to match the nonfinancial assets’ value. Such unsecured wealth can only arise due to discrepancy between savings and investment, along with difference between total Haig–Simons income (including capital gains) and expenditures in real sector. It makes impossible to display correctly flows simultaneously with stocks. Deviations of securities' value from corresponding obligations commonly accepted as temporary. However, along with cyclical fluctuations the unsecured US financial assets value has been steadily growing since the 1980s, exceeding $11 trillion in 2016. We consider the observed nominal violation of the law of conservation of wealth is a consequence of unlimited capitalists’ enrichment aspirations. Marketable securities are the tools they use to embody such desire; the effect enhanced by the procedures of corporate mergers and acquisitions. Yet, the unsecured wealth inflate financial bubbles; its growth turns out a sufficient condition for wealth and income inequality rising. Then the aggregate consumer demand growth is hindered, and appetite for capital investment decreases. Unsecured component of capitalists’ profit is absorbed by an (unsecured) increase in the value of financial assets; it is not a source of capital investment; on the contrary, high financial returns contribute to crowding out investment from the real sector. Productivity growth slows down. Thus, increase in inequality reduces both aggregate demand and supply, which inhibits economic growth. US statistics confirms the above trends which led to the global crisis of 2007-2008. It has not cured the economy; unsecured wealth continues to grow increasing inequality, which dumps output growth. Black swans in 2020 have inspired inevitable arriving of new crisis

Виртуальное богатство растет

Market price of a financial asset may not coincide with the value of the counterpart obligations in the balance sheet of the issuer of this asset. The difference between these values is an unsecured part of the asset’s value, which forms financial bubbles and virtual wealth. Present article shows that the actually observed US unsecured virtual wealth has been growing since the 1980s amid cyclical fluctuations due to stock market volatility

Analitical Derivation of the Cobb-Douglas Function based on the Golden Rule of Capital Accumulation

In this paper, the neoclassical model is extended for the general case of economic growth, which can be represented as the sum of cyclical and growth components. If the general formulation of the golden rule of capital accumulation is satisfied (the savings rate is equal to the capital income share), the production function takes the form of the Cobb-Douglas function. This function governs the economic growth both when the economy is growing along an equilibrium path and when the economy is departing from it (the correlation coefficient between U.S. GDP changes and calculated ones is equal to 0.91). When economy fluctuations are averaged along an equilibrium path, the Cobb-Douglas function reduces to condition, which is similar to Harrod-Domar one. The level of technology may be reasonably considered to express in terms of the wage level