What is the Goodwin model?

Businessman making thumbs up

The Goodwin model is a macroeconomic theory developed by the American economist Richard Goodwin. He developed the model in 1967 while teaching at the University of Cambridge in the UK, and it predicts cycles of economic activity based on input values ​​of employment rates and productivity levels for labor and capital investment. The model derives from Marxist theories of class struggle as well as predator-prey behavior in nature, and deals with the cycles that occur in economies as employment and wage factors fluctuate.

The principles behind Goodwin’s model are based on a zero-sum nonlinear growth approach. Basically, this states that for any gains made by one aspect of an economy or another element of a system, an equal loss of value will offset it elsewhere to prevent instability and the growth or decline of the system as a whole. This is a principle on which Marxist economics is based, where as the value and influence of work increases, the value and influence of the capitalists who finance it decrease and vice versa. Goodwin proposed that simple tradeoffs like this existed as a natural course of business cycles. The lower the level of unemployment, for example, the more workers would have a say in claiming higher wages, which in turn would reduce the capitalists’ profit and control over labor and lessen the incentive to expand business.

These trade-offs in business cycle theory are also reflected in the Phillips curve that Goodwin’s model uses for its calculations, proposed by the New Zealand economist William Phillips in 1958. The Phillips curve states that there is a direct relationship between unemployment rates and inflation, and that as one rises, the other tends to fall. As with Goodwin’s own model, the business cycle principles proposed by the Phillips curve tend to have more short-term validity than long-term validity and are more valid in theory than in practice.

See also  What are the different types of aquaculture farms?

Goodwin’s theory of economic growth also drew on the Harrod-Domar model as a method of going beyond these equilibrium forces in the cycle. Sir Roy F. Harrod and Evsey Domar proposed in 1946 that growing economies are not inherently balanced, but increase in the quantity and quality of output as foreign capital investment is applied to disrupt normal behavior. Most business cycles that are seen as idealistically balanced and stable are in fact a cause for locking many nations into perpetual states of poverty where savings, capital investment and technological innovation are low.

The weakness of the Goodwin model approach to system behavior lies in the fact that it clearly delineates the opposing elements of a system as inherently antagonistic. Goodwin’s model of class struggle, like Marxist economics or predator-prey relationships, assumes that two primary elements of a system fight each other in a predictable environment free from other complex influences. Wage workers are pitted against capitalist investors, or predators against prey. While these theories have some validity in terms of how complex systems interact, they tend to fail when mitigating factors or unseen influences change the behavior of the primary elements of the system.

A good example of where the Goodwin model and others like it failed to predict economic trends is the recent global economic crisis in 2008 due to speculation in the real estate market and for other reasons. This economic crisis has resulted in widespread increases in the unemployment rate in many industrialized nations, making labor cheaper and more abundant for capitalist interests to expand business. Despite this opportunity, as of 2011, capitalists have not responded by increasing hiring and have instead restricted capital investment at a time that would seem ideal for growth from a labor perspective.

Leave a Comment