The Shareholder Primacy (SP) economy of is fundamentally different from the Stakeholder Capitalism (SC) economy of the postwar era.

Today's economy is not capitalism operating in a different environments but different species of capitalism

I have previously written about how business/economic culture evolves between shareholder primacy (SP) and stakeholder capitalism (SC) archetypes and presented a model characterizing this evolution. The economies to which these cultural archetypes are adapted are different from each other. By analogy to biology we can say that the economy associated with SP versus SC culture are different species of economy. The SP economy, which I call neoliberalism, is what we have today. The SC economy is what we had over 1937-81, which I will call Keynesianism.

The two economies have different inflationary properties
Both neoliberal and Keynesian economies are examples of market capitalism. They are often seen as the same, but as I will show here, they are distinctly different basic characteristics. For example, the two economics have different propensities to inflation. Inflation in Keynesian economics can be characterized in terms of the Phillips curve, and the NAIRU parameter. NAIRU is the level of unemployment at which inflation is unchanging. If unemployment falls below NAIRU the economic is said to be overheating and inflation should appear after a lag of up to a year or so. If it rises above NAIRU, the economy is slowing down, heading towards recession, and inflation should begin to fall withing a few months or less. NAIRU reflects the residence time of money in the economy, that is how long it hangs around before being spent. A correlation between the two can be used to estimate NAIRU as a continuous function over time.

In the decades after WW II, a practice of gradually increasing deficit spending developed and NAIRU rose in tandem (see Table 1). High NAIRU means higher unemployment levels are needed to keep inflation under control. Higher unemployment means a lack of worker bargaining power and reduced prospects for wage growth. It was Democratic policy under the FDR dispensation that allowed the Keynesian economy to evolve. Continuation of this dispensation was dependent on the continued delivery of wage growth to their working class base. The rise in deficit spending ultimately resulted in the replacement of the FDR with the Reagan dispensation. With the new dispensation came new economic policy that selected for SP economic culture, and evolved the neoliberal economy of today.

Table 1. Average deficit, NAIRU, unemployment and inflation rates (in %) over time

After 2000, the Phillips curve no longer holds and NAIRU values can longer be identified. NAIRU values estimated using the pre-2000 correlation with money residence time are no longer meaningful. For example, over 2015-19 NAIRU averaged 6.3% due to high levels of deficit spending while unemployment rate averaged 4.4% suggesting highly inflationary conditions existed, yet inflation was only 1.9%. An even more extreme case occurred with the pandemic. Deficits ran at 15% and 12% during the pandemic years of 2020 and 2021 which was followed by inflation rates of 7 % and 6% in 2021 and 2022, with a peak of 9% in June 2022. In contrast the country ran deficits of 12% and 17% over the pandemic years of 1918 and 1919 during which inflation ran at 20% in 1918 and 15% in 1919 with a peak of 24% in June 1920. Deficits less than a tenth higher during the pandemic a century earlier produced an inflationary response 2.6 times higher.

Dick Cheney noted in 2002 that “Reagan provided deficits don’t matter” and with that statement the Bush administration proceeded to prove the case with their fiscal policy. Cheney was wrong about Reagan, deficits still mattered very much in the 1980’s and preventing the inflation they would otherwise generate required keeping millions of workers unemployed (see Table 1). But he was right than they no longer mattered in the 21^st century, so their plan to cut taxes and run deficits was not going to require they run the high unemployment policy Reagan did, which might affect their reelection chances.

Business cycle length is different also
Table 2 shows that business expansions have grown longer over time, while recession length has not. During the four decades before the Great Depression business cycles were short and roughly corresponded to Kitchin cycles which are thought to be driven by inventory fluctuations. Expansions lengthened during the 1929-1970 Keynesian era. Business cycle length shortened during the stagflationary collapse of the Keynesian economy in the 1970’s and then lengthened with the shift to neoliberal policy after 1980. Average cycle length increased to more than six years, approaching the length of Juglar cycles. Juglar cycles are investment driven, characterized by periods of optimism with a “hot” economy--as indicated by high asset valuations and/or price inflation. Eventually, rising interest rates or an asset price crash induces a recession and the business cycle is complete.

Table 2. Economic expansion has grown longer over time.

The post-2000 economy is fully SP, with an average business cycle length of about 9 years, fully in the 7-11 year range of Juglar cycles. The figures in Table 2 count the two month NBER recession in 2020 as a normal recession, when it was anything but. The month before the pull back the stock market had set a new all-time high, indicating that the economy then was far from recession. The demobilization of a sixth of the workforce by quarantine rules forced a reduction in economic activity, which rapidly recovered as soon as businesses were permitted to reopen. As for the stock market it was up more than 15% in 2020. In many ways we remained in the expansion that began in 2009.

If we assume this, then we are still in the business cycle that last peaked in 2007, 18 years ago. I have previously argued that financial crisis is a normal feature of SP culture, the 2008 crisis was not a fluke and so, will happen again. Before the New Deal, when financial crises were a normal thing, they were semi-periodic, with a spacing of 14-22 years (average 18). If we are indeed in the same business cycle which comes to an end in the next few years then there would imply today’s business cycle is a Kuznet cycle. These were historical cycles linked to boom bust cycles in housing investment/construction leading to periodic financial crisis.

Before the New Deal there were lesser and greater economic crises Besides the Kuznets panics in 1819, 1837, 1857, 1873, 1893, 1907 and 1929, there were lesser ones that together with the major panics defined the Juglar cycle. Within the Juglar cycles were the ordinary Kitchin cycles. Keynesian economics provided tools through which policymakers could smooth out the cycles. For example, New Deal policies such as unemployment insurance and SNAP, act as economic stabilizers. This and better inventory management eliminated the Kitchin mechanism by the 1960’s. Other Keynesian policy such as illegal stock buybacks and high marginal tax rates served to prevent asset bubbles, inactivating the Kuznets mechanism and making financial crises a thing of the past. This left the Juglar as the primary business cycle. The primary issue was inflation rising during an expansion, forcing interest rate hikes until the economy went into recession.

That the business cycles after 1960 were shorter than the old Juglar cycles was largely due to the lack of fiscal discipline that drove NAIRU upwards and made a low-unemployment/high wage economy impossible to run for another length of time before rising inflation forced policymakers to induce a recession. This changed with the onset of neoliberal policy around 1980. Neoliberalism features a “wealth pump” that redirects income that used to go to workers into building higher asset valuations, what I call “ziggurats of finance.” The positive institutional flows of money into the ziggurat act as financial stabilizers, reducing the strength of the driver of non-inflationary Juglar cycles. As mentioned above, the inflation-resistant nature of the neoliberal business cycle eliminates this Juglar cycle driver. Thus, the only still active cycle mechanism is recession following a stock market crash, such as in 2000, also

Neoliberalism eliminates the mechanism that prevents financial crises. It was only in the mid-1990’s when the economy became majority SP that the Kuznets mechanism was reactivated and we got the first of the modern panics in 2008. There are two interpretations one can draw from this. One is we have reconstituted the pre-1929 cycle structure, just without the Kitchin cycle component. Here were would have big recessions every other decade, reflecting the Kuznets real estate cycle with smaller ones mid-way between reflecting Juglar cycles. Since 2008 there has been only one Kuznets downturn. with another expected before the end of the decade, and two Juglar downturns in 2001 and 2020. But if we rule out 2020 as artificial, then what we may have is a new economy of extremely long expansions that only end with a financial crisis and severe recession. That is, the wealth pump has eliminated the Juglar boom and bust cycles altogether, producing a lengthening of the business cycle to Kuznets length.

Economic performance with respect to workers is different as well

Table 2 shows that while business expansions got longer, recessions did not, meaning the economy is in expansion mode for the vast majority of the time. Average real wage growth over the period covering in Table 2 was 2.0%. Also shown in the table is the fraction of the time real wage growth ran at this 2% rate or higher. The longer periods of expansion have not necessarily resulted in more opportunity for wage increases. Though the pre-1929 economy was in expansion mode only 55% the time, 70% of that time wages were growing. Since 2000 the economy has been in expansion over 90% of the time, but wages were growing less than a fifth of the time. The situation was not all that much better in the three decades before 2000, when wages grew a little more than a quarter of the time the economy was in expansion. Compare this to the 73% of expansions showing above average wage growth for the ninety years before 1970. There is a reason why long-term real unskilled wage plots (see Figure 1) show a rising trend for almost two centuries and then flat afterward. Economic policy changed, first in response to seemingly out-of-control inflation and then in response to a new political order calling for the subordination of Labor to Capital.

Figure 1. Real unskilled earnings relative to a value of 64 for the peak year in 2020.

Summary and conclusions

The present neoliberal economy run in accordance with shareholder primacy culture is fundamentally different in how it works and what “utility” it seeks to maximize than the Keynesian economy run under stakeholder capitalism. These differences justify considering them as different economic species. And they are, in turn, different from the species of economy that preceded them. Each as evolved from its predecessor as biological species evolve. But the process involved is cultural not biological evolution. Biological operates by natural selection, a random, mindless process that has no direction. Cultural evolution only happens with people and is not a mindless process, though it often operates in the background and in ways that are not always understood when they are happening.

The reason why wage growth in Figure 1 accelerated between 1930 and 1975 was not the result of mindless external forces but the result of a conscious effort on the part of New Deal policymakers who were trying to achieve this result, which they achieved by creating the SC economy. Income shares are zero sum. If more is to go to workers, less will be left for owners. Compare the income profiles over the 1930-80 period in these figures for the working class and the rich. Outside of the 1930-80 period, incomes for the rich rose at about the same rate (2.8%) as did incomes for the working class (3.2%) inside the 1930-80 period. Similarly outside that period working class wages rose at 1.0%, about the same as the 1.3% rate at which incomes for the rich rose inside the 1930-80. That is, during the 1930-80 period the rich and the working class traded places and the rich did not like that one bit.

So when stagflation resulting from Keynesian policymaker failure destroyed faith in the New Deal political order, the rich and their Republican allies were able to restore things to “the way things oughta be” as Rush Limbaugh put it. And this they achieved by creating the SP economy. The reason why the economy doesn’t work for ordinary people is because its not supposed to—it is designed to work for elites. The reason why it worked for your grandfather or great grandfather is because it was designed to do so—not because of some deus ex machina reaching out of the sky to boost the fortunes of the American working class. These good times were the result of the political order established by the New Dealers,