The Goodwin model predicts economic cycles based on employment rates and productivity levels, derived from Marxist theories of class struggle and predator-prey behavior. It assumes opposing elements of a system are inherently antagonistic, but fails to predict economic trends in complex systems like the 2008 global economic crisis.
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 economic activity cycles 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 non-linear, zero-sum approach to growth. Basically, this states that for any gain that one aspect of an economy or another element of a system produces, an equal loss in value will compensate for it elsewhere to avoid instability and growth or decline of the overall system. This is a principle on which Marxist economics is based, where as the value and influence of labor increases, the value and influence of the capitalists who finance it decreases and vice versa. Goodwin proposed that simple exchanges like this exist as a natural course of business cycles. The lower the level of unemployment, for example, the more workers would influence the demand for higher wages, which in turn would reduce profit and capitalists’ control over labor and diminish the incentive to expand business.
These trade-offs in business cycle theory are also reflected in the Phillips curve that the Goodwin model uses for its calculations, proposed by New Zealand economist William Phillips in 1958. The Phillips curve asserts that there is a direct relationship between unemployment rates and inflation and that, as one rises, the other tends to fall. Like the Goodwin model itself, the business cycle principles proposed by the Phillips curve tend to have more validity in the short term than in the long term, and are more valid in theory than in practice.
Goodwin’s theory of economic growth also drew on the Harrod-Domar model as a method of overcoming these balancing forces in the cycle. Sir Roy F. Harrod and Evsey Domar proposed in 1946 that growing economies are not inherently balanced, but increase the quantity and quality of output as foreign capital investment is applied to disrupt normal behavior. Most economic cycles seen as ideally balanced and stable are in fact a cause to trap many nations in perpetual states of poverty, where savings, capital investment and technological innovation are all low.
The weakness of the Goodwin model approach to system behavior is that it clearly delineates 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 of other complex influences. Salaried workers are pitted against capitalist investors or predator against prey. While these theories have some validity in terms of how complex systems interact, they tend to break down when mitigating factors or unseen influences alter the behavior of primary elements in the system.
A good example where the Goodwin model and others like it failed to predict economic trends is the recent global economic crisis that occurred in 2008 due to speculation in the real estate market and for other reasons. This economic crisis resulted in widespread increases in the unemployment rate in many industrialized countries, making labor cheaper and more plentiful for capitalist interests to expand business. Despite this opportunity, starting in 2011, capitalists have not responded by increasing hiring and have restricted capital investment at a time that would seem ideal for growth from a labor perspective.
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