Study guide: Inflation, State Capitalism and Ecology

📋 Course Outline

1. Microeconomics and Macroeconomics
2. Orthodox and Heterodox Approaches
3. Institutions and Fordist Development
4. The Fordist Growth Regime
5. Crisis and Financialization
6. Financialized Regulation and Its Fragilities
7. The Neo-Schumpeterian Reform Project
8. Austerity, Debt, and Multipliers
9. The Six Myths of Innovation
10. Innovation, Industry, and Finance
11. Financialization and Shareholder Value
12. Labor Market and Employment
13. Financial Crises and Instability
14. Inflation and Monetary Explanations
15. Inflation Concepts and Theories
16. Conflictual Inflation and Economic Policy
17. State Capitalism and Public Finance
18. Ecological Limits and Climate Risk

📖 1. Microeconomics and Macroeconomics

🔑 Key Concepts & Definitions

• Microeconomics: analyzes the choices and decisions of individual agents considered free and isolated in production, consumption, investment, and saving
• Macroeconomics: studies the functioning of economic systems by grouping agents into aggregates according to their main functions and analyzing the economic flows between them

★ Must-know

• Macroeconomics studies national production, overall consumption, investment, and the trade balance, while the state has a central role through budgetary and monetary policies, planning, information, and incentives.

• The central macroeconomic triptych is the production, distribution, and redistribution of wealth.

Further detail

• In 1936, Keynes published The General Theory of Employment, Interest and Money, a work regarded in the course as marking the birth of macroeconomics.

💡 Memory Hook

Individual agents in microeconomics versus the economic system in macroeconomics.

📖 2. Orthodox and Heterodox Approaches

★ Must-know

📌 Instrumentalism validates a theory by the accuracy of its predictions rather than by the realism of its assumptions, whereas realism seeks assumptions closer to the complexity of reality. - M. Friedman, F. Machlup, M. Allais

📌 Orthodox macroeconomics generally models a representative rational agent who maximizes utility or profit, whereas heterodox macroeconomics emphasizes social context, institutions, uncertainty, and limited procedural rationality.

• The cost paradox shows that reducing wages can reduce aggregate demand because workers are also consumers, causing lower sales and potentially lower profits for firms. - Michał Kalecki

📌 For the orthodox approach, the market is the best mechanism for allocating resources and the state mainly corrects market failures, whereas the heterodox approach considers markets potentially unstable and assigns the state a role in regulation and redistribution.

Further detail

• The five conditions of perfect competition are:

  • atomicity
  • perfect information
  • product homogeneity
  • free market access
  • factor mobility

• According to Alfred Marshall’s supply-and-demand framework, supply increases with price, demand decreases with price, and their intersection determines the equilibrium price.

💡 Memory Hook

Orthodox models simplify reality and trust markets; heterodox approaches emphasize institutions, uncertainty, and intervention.

📖 3. Institutions and Fordist Development

🔑 Key Concepts & Definitions

• Institution: Commons, 1931 - a collective action that controls, liberates, and expands the field of individual action
• Monetary regime: the set of rules governing the management of the payment and credit system
• Mode of regulation: the set of rules formed by the institutional structures that frame economic dynamics and constrain economic agents
• Mode of development: the combination of a regime of accumulation and a mode of regulation

📝 Essential Points

• The six institutional forms are:
  • the monetary regime
  • the competition regime
  • the wage relation
  • the form of the state and public goods
  • integration into international relations
  • the social relation to the environment

💡 Memory Hook

Institutions → regulation → accumulation → development.

📖 4. The Fordist Growth Regime

🔑 Key Concepts & Definitions

• Fordism: combines an intensive regime of accumulation based on mass consumption with an administered mode of regulation

★ Must-know

• 🔄 The Fordist virtuous circle runs through:
  1. high profits
  2. business innovation
  3. modernization of production
  4. productivity gains
  5. higher wages and purchasing power
  6. increased consumption
  7. higher production

Further detail

• The share of agricultural workers in Western countries fell from nearly 50% in 1870 to 25% in 1950 and 8% in 1973.

• In Fordism, the state supported productive investment, consumption through infrastructure and social protection, and macroeconomic stability, while the Bretton Woods system contributed to international stability.

• In France in 1955, public financing accounted for 46% of housing construction, while the nationalized sector represented 18.6% of GDP.

💡 Memory Hook

Productivity gains → higher wages → mass consumption → higher production.

📖 5. Crisis and Financialization

🔑 Key Concepts & Definitions

• Stagflation: the simultaneous occurrence of general price increases and stagnating or slowing economic growth
• Financialization: the growing use of debt financing by firms and states, producing greater risk-taking and a stronger required remuneration of borrowed capital, to the detriment of labor remuneration

★ Must-know

• The four contradictions of Fordism are:
  • the exhaustion of productivity gains
  • stronger worker bargaining power under near-full employment
  • inflation generated by wage struggles and price increases
  • the collapse of Bretton Woods

📌 The pre-Keynesian conception holds that deposits create credits and that prior saving is necessary for investment, whereas the Keynesian conception holds that credits create deposits and that investment generates saving.

• In the financialized regime, the valuation of shares becomes the key macroeconomic indicator governing investment and consumption, while the expected return on equity is set at 15% as a benchmark for success.

Further detail

• The French Banking Law of 1984 introduced a uniform legal definition of credit institutions and ended the specialization of banks by allowing universal banking.

💡 Memory Hook

Productivity slowdown and inflation → liberalization → financialized accumulation.

📖 6. Financialized Regulation and Its Fragilities

★ Must-know

📌 Under a financialized model, the financial sector's health replaces the wage relation as the dominant institutional form.

• A rise in financial profitability stimulates the stock market, increases consumption, stimulates investment, and offsets the initially negative effect of higher required returns on investment.

• The return on equity is expected to reach 15% to be considered successful, which pressures firms to generate substantial margins.

Further detail

• Under financialization, wage indexation to inflation ends, remuneration becomes more individualized, financial supplements to wages increase, bargaining is decentralized, and collective protections decline.

💡 Memory Hook

Financial profitability → stock-market confidence → consumption → investment

📖 7. The Neo-Schumpeterian Reform Project

🔑 Key Concepts & Definitions

• Productivity of labour: the ratio between value added and the quantity of labour, measured by the workforce or by the workforce multiplied by hours worked
• Liberalization: a set of measures intended to facilitate international trade by removing or limiting customs barriers such as tariffs and quotas, institutionalized through the GATT and later the WTO
• Destructive creation: J. Schumpeter - Joseph Schumpeter's concept of destructive creation describes capitalist evolution in which firms seek temporary monopoly positions through technological innovation, while imitation eventually spreads innovations and forces firms to innovate again.

★ Must-know

• The proposed structural-reform mechanism is that stronger competition pushes firms to innovate, innovation can increase production, and new firms can enter and create growth and employment.

Further detail

• The authors of Changer de modèle are Gilbert Cette, Philippe Aghion, and Élie Cohen; their book was published in 2014 after the financial crises of 2008 and 2010.

💡 Memory Hook

Competition → innovation → productivity → growth

📖 8. Austerity, Debt, and Multipliers

📝 Essential Points

📌 The Keynesian model estimates larger fiscal multipliers because households consume in the short term under price rigidity, whereas the neoclassical model assumes that households anticipate future tax increases and reduce consumption through Ricardian equivalence.

• Herndon, Ash, and Pollin found that Reinhart and Rogoff's analysis omitted data, calculated average growth rates incorrectly, and deliberately excluded data producing different results. - Herndon, Ash et Pollin, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff., 2014

• For countries whose public debt exceeds 90% of GDP, the corrected estimate found a positive growth effect of about 2.2%, rather than the recessionary effect of 0.1% claimed by Reinhart and Rogoff. - Herndon, Ash et Pollin, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff., 2014

• The real fiscal multiplier is estimated between 1.3 and 2.5, while the austerity cost in Europe between 2011 and 2013 was estimated at approximately 5% to 8% of GDP.

💡 Memory Hook

Keynesian multipliers support demand, whereas austerity amplifies recession

📖 9. The Six Myths of Innovation

🔑 Key Concepts & Definitions

• Innovation: an observable change that can involve a new product, production process, use of existing products or equipment, market, or organization of the firm

★ Must-know

• Mazzucato identifies six myths: innovation is measured by R&D; SMEs innovate more; venture capital likes risk; patent filings prove a knowledge economy; Europe's innovation problem is commercialization; and lower regulation and taxes stimulate investment. - Mariana Mazzucato, The Entrepreneurial State: debunking public vs. private sector myths, 2013

📌 R&D is a necessary but insufficient condition for innovation because its positive relationship with development is strongest in rapidly growing firms operating in highly competitive segments and connected through alliances. - Demirel et Mazzucato

Further detail

• Public programs such as SBIR and ATP represented 20% to 25% of American business financing, with public funds two to eight times larger than venture-capital funds.

💡 Memory Hook

R-P-C-B-E-R: R&D, SMEs, capital risk, patents, Europe, regulation

📖 10. Innovation, Industry, and Finance

🔑 Key Concepts & Definitions

• Industrial policy: public intervention intended to support firms, industries, or activities through measures such as mergers, nationalization, taxation, tariffs, innovation support, and public procurement
• Financialization: the growing use of debt financing by firms or governments, increasing risk and the required remuneration of capital at the expense of labour remuneration

★ Must-know

📌 Industrial firms had an R&D intensity of 11% in 2017, whereas service firms had an R&D intensity of 0.7%.

📌 Direct business financing uses shares and bonds issued on financial markets, whereas indirect financing uses bank credit supported by deposits from households and other firms.

📐 Formula - The aggregate financialization indicator is calculated as $I = \frac{D + CB}{PIB}$, where D is public and private debt and CB is stock-market capitalization.

• In France, the financialization indicator rose from 140% of GDP in 1975 to 360% of GDP in 2015.

Further detail

• Between the periods shown, domestic business R&D expenditure fell by 12.62% in manufacturing and rose by 12.67% in services, but the increase in services did not compensate for the manufacturing decline.

• Mazzucato argues that the core technologies embedded in Apple's innovative products resulted from decades of federal support for innovation.

💡 Memory Hook

Industry: 11% R&D intensity; services: 0.7%

📖 11. Financialization and Shareholder Value

🔑 Key Concepts & Definitions

• Shareholder value: the objective of increasing the wealth of shareholders and is used as an indicator of a company's economic health.
• Liquidity: the ability to convert a security into money without delay, cost, or capital risk, and depends on market depth and mobility between financial-market segments.
• Investment fund: an organization that gathers equity capital, potentially supplemented by borrowing, to buy financial or real-estate assets, commodities, and other assets with the aim of reselling them later at a higher price.

★ Must-know

• In France, the financialization indicator increased from 140% of GDP in 1975 to 360% of GDP in 2015.

📌 Shareholders influence firms directly through voting rights, with one share corresponding to one vote and 51% of the shares allowing control of the company's direction, or indirectly by threatening to sell their shares and lower the stock price.

Further detail

• In Europe, internal financing represents 69% of financing, while net share issuance represents 13%.

💡 Memory Hook

Financialization → shareholder pressure → short-termism

📖 12. Labor Market and Employment

🔑 Key Concepts & Definitions

• Employment precarization: the deterioration of working conditions, producing greater job instability and fewer social and professional protections through temporary contracts, reduced social protection, lower wages, and fewer benefits.

• Phillips-Lipsey curve: describes a decreasing and nonlinear relationship between unemployment and wage growth in its original 1958 version, later extended to the relationship between unemployment and inflation.

★ Must-know

📌 In neoclassical theory, voluntary unemployment results from rejecting unsatisfactory work conditions, whereas involuntary unemployment is imposed despite the worker's willingness to work.

📌 For post-Keynesian economists, employment is determined by demand for goods: higher wages increase consumption and demand, which can increase labor demand as long as the real wage remains below productivity per worker.

Further detail

📐 Formula - The course expresses the inflation–unemployment relationship through wage and price growth as $\frac{\Delta P}{P} = \frac{\Delta W}{W}$.

• In France in 2024, 86.9% of employed individuals were employees.

💡 Memory Hook

Neoclassical market logic contrasts with Keynesian effective demand

📖 13. Financial Crises and Instability

🔑 Key Concepts & Definitions

• Financial crisis: a serious dysfunction of the financial sphere that destabilizes the financial system and can produce deflationary effects on the real economy.
• Financial instability hypothesis: Minsky - states that financial systems alternate between stability and instability because changing financial behaviors generate economic cycles of expansion and recession.

★ Must-know

• 🔄 Fisher's debt-deflation mechanism proceeds through these stages: (Erving Fisher):
  1. optimistic borrowing
  2. over-indebtedness
  3. pessimistic deleveraging
  4. asset liquidation
  5. falling prices
  6. rising real value of debt

📌 Keynes distinguishes measurable risk, which can be assigned probabilities, from radical uncertainty, which cannot be reliably calculated because future economic events cannot be predicted probabilistically. - Théorie générale

• Minsky distinguishes three types of finance:
  • covered finance
  • speculative finance
  • Ponzi finance

Further detail

• The share of labor in national income fell by 10 percentage points in Europe and 5 percentage points in the United States from the 1980s onward.

• In 2007, the richest 1% held half of the shares distributed, while the richest 5% held 80%.

💡 Memory Hook

Confidence → debt → liquidation → deflation

📖 14. Inflation and Monetary Explanations

🔑 Key Concepts & Definitions

• Inflation: an economic disequilibrium characterized by a general, lasting, cumulative, and more or less strong increase in prices or by lengthening delivery times.

📝 Essential Points

• Inflation is categorized as:

  • latent below 3% per year
  • open between 3% and 6%
  • galloping above 6%

• Inflation benefits debtors because it reduces the real value of their debt, whereas it harms creditors because the money repaid is worth less in real terms.

📐 Formula - The quantity theory of money expresses the relationship between money and prices as $M \times V = P \times T$. - M. Friedman

📖 15. Inflation Concepts and Theories

📝 Essential Points

• The main causes presented are: demand inflation when demand exceeds supply, monetary inflation when the money supply grows faster than produced goods, imported inflation linked to foreign currency inflows, exports and associated costs, budgetary inflation caused by public spending financed through money creation

📐 Formula - The quantity theory of money is summarized by $M \times V = P \times T$, where M is the money supply, V is the velocity of money, P is the general price level, and T is the volume of transactions. - M. Friedman

• The three approaches explain inflation through:
  • excess money
  • excess demand
  • the institutional and political configuration of firms’ margins under imperfect competition

💡 Memory Hook

Money, demand and institutions offer three distinct explanations of inflation.

📖 16. Conflictual Inflation and Economic Policy

★ Must-know

📌 Inflation can benefit debtors because it reduces the real value of their debt, whereas it harms creditors because the money repaid is worth less than when it was lent.

📌 Monetarists defend adaptive expectations, whereas new classical economists defend rational expectations, challenging the idea that policy can permanently arbitrate between inflation and unemployment through the Phillips curve.

• In the conflictual inflation model, workers seek higher real wages while firms seek a targeted wage share, and firms resolve the distributive conflict by raising prices and passing costs on to consumers.

• The IMF estimated that the main contribution to recent inflation came from rising profits, and INSEE confirmed that only the top decile, D9+, benefited from inflation while the other deciles paid for it.

📌 Raising policy rates makes investment more expensive and slows the economy, while price controls limit firms’ margins and income indexation protects workers from the loss of purchasing power caused by inflation.

Further detail

• The model identifies the following determinants of aspirations:
  • productivity gains
  • inflation
  • the unemployment rate
  • the exchange rate
  • financial costs
  • raw-material prices
  • wage inflation
  • shareholder-value maximization

💡 Memory Hook

Unequal bargaining power → wage and price decisions → inflation.

📖 17. State Capitalism and Public Finance

🔑 Key Concepts & Definitions

• State capitalism: The expansion of public interventions through sovereign funds, development banks, state-owned enterprises, industrial policies or economic nationalism.
• Rent: Income derived from owning assets that are scarce under conditions of limited or absent competition.

📝 Essential Points

• In France, social-security spending has remained between 10% and 15% of public expenditure, while the employers’ financing share fell from about 60% to 30%.

• The highest marginal income-tax rate fell from 65% to 45%, while the standard corporate-tax rate fell from 50% to 25%.

• Public subsidies to private firms rose from a maximum of 10% of investment during the Fordist period to 15–19% between the 1980s and 2007, then 20–33% between 2008 and 2020.

• French public debt rose from about 50% of GDP before the 2008 crisis to 80% after the crisis and almost 120% of GDP after COVID-19.

💡 Memory Hook

Social security → taxation → subsidies → public debt.

📖 18. Ecological Limits and Climate Risk

🔑 Key Concepts & Definitions

• Planetary boundaries: Thresholds humanity should not exceed in order to preserve safe environmental conditions and avoid abrupt, difficult-to-predict planetary changes.
• Rebound effect: The rebound effect is an increase in consumption caused by reducing the limits on using a technology; in the extreme case described by Jevons’s paradox, greater resource efficiency can increase total resource consumption.
• Cost-effectiveness analysis: Compares a laissez-faire scenario with a regulated scenario and seeks to minimize policy costs while meeting an environmental objective fixed by specialists.

• Cost-benefit analysis: Compares the costs of decarbonization with the climate damages avoided and seeks to maximize net benefits.
• Market-regulating state: Chalmers Johnson - seeks efficiency through competition and the most effective use of available resources, without addressing fundamental issues such as the relationship with the environment
• Rational planning state: Chalmers Johnson - fixes concrete social and economic objectives and defines efficiency as the capacity to achieve a politically established goal, such as reducing greenhouse-gas emissions

📝 Essential Points

• The nine planetary boundaries are:

  • climate change
  • biodiversity loss
  • land-use change
  • chemical pollution
  • disruption of nitrogen and phosphorus cycles
  • ocean acidification
  • atmospheric aerosols
  • ozone-layer depletion
  • freshwater use

• Six of the nine planetary boundaries have already been crossed, and crossing an irreversible tipping point can accelerate the crossing of other boundaries.

• The Paris COP21 established an objective of limiting warming to +1.5°C, but the current trajectory is toward approximately +3°C.

📌 A black swan is a rare, high-impact event underestimated by conventional probability distributions, whereas a green swan is a more probable and potentially irreversible environmental shock. - N. N. Taleb

• The DICE model is a dynamic integrated climate-economy model developed by William Nordhaus and used to analyze the intertemporal trade-off between consuming more now and investing for lower emissions and future consumption.

• Orthodox economic models often treat nature and capital as substitutable, while the course argues for a hierarchical complementarity in which ecological resources are necessary conditions for economic activity.

📌 Because environmental damage can be uncertain and irreversible, the precautionary principle requires setting ecological ceilings sufficiently below known planetary boundaries.

• Chalmers Johnson distinguishes between a market-regulating or rational market state and a rational planning state.

📌 Divesting from a few polluting companies does not necessarily reduce environmental damage because the assets may be bought by unlisted companies or by firms less sensitive to public demonstrations.

📌 An effective dismantling of polluting structures requires continuous and durable divestment rather than a one-time transfer of assets.

💡 Memory Hook

A planetary dashboard with nine thresholds, some already crossed, leading toward irreversible tipping points.

📊 Synthesis Tables

Orthodox and Heterodox Macroeconomics

Main Innovation Myths and Corrections