# The (net) capital account makes its entry

Up to La Marca (2005,2010), open-economy Kaleckian models dealt only withthe balance of trade, without including in their analyses the necessary counterpart to imbalances in foreign trade: the accumulation of external assets orliabilities, and the flow of corresponding interest or dividend payments.The articles by La Marca are, to the best of my knowledge, the first attempts to includenet foreign assets/liabilities as a dependent variable with feedback effects withincome distribution and capacity utilisation, the traditional proxy for aggregatedemand in Kaleckian models. Both models are very similar, and we will focuson the 2010 paper. Before describing the model in full and its corollaries, there are twocharacteristics that put the model in context. First, like traditional Kaleckianmodels, there is no convergence in the long run to any measure of a ‘normal’rate of capacity utilisation. Second, and very important to keep in mind for therest of this chapter, the net accumulation of foreign/assets and liabilities dependson the performance of the current account, and notably on the trade balance.There is no ‘capital flows driving the current account’ story in this model. The model is composed of households, firms, government and the rest ofthe world. The only financial assets/liabilities are equities (assets of households,liabilities of firms) and net foreign assets/liabilities (held by firms and the rest}}

of the world). Government budget is balanced at all times. As per almost all Kaleckian models, La Marca’s has a distribution block and an aggregate demand (capacity utilisation) block, to which he adds a block describing the dynamics of net foreign asset/liabilities. Let’s go block by block.

Kaleckian models typically assume an imperfect-competition, mark-up- over-costs setting.^{3} Costs in La Marca’s model comprise wage-labour and imported inputs.The profit rate is a residual of sales over costs, and it is equal to the profit share times capacity utilisation.The profit share and the real exchange rate are negative related to the wage share. In truth, rising wage costs are passed *partially* to prices (exchange rate) and partially into lower profits (via mark-up reduction), according to the price-elasticity of exports.To sum up the distribution block, we must show how the wage share itself moves.

La Marca adopts a Phillips curve-type of approach. Workers target a wage share that moves with changes in capacity utilisation, with a certain adjustment speed. Equations (1) and (2) reproduce Equations (8) and (9) of La Marca (2010):

V)/ represents the wage share, and (//' the target wage share, which varies with changes in capacity utilisation *u,* fixed labour productivity / and the capital to labour supply ratio *k,* also constant in the model.

Capacity utilisation adjusts to discrepancies between planned investment, savings and the current account. In a traditional Kaleckian fashion (after Bhaduri & Marglin 1990), planned investment depends on the profit share and capacity utilisation. Equation (3) reproduces Equation (11) of La Marca (2010):

Where *g* is the investment rate, oc is the sensitivity of investment to changes in the profit share tt and capacity utilisation, and у is an exogenous investment component. Savings are composed of different items, in turn. Households save out of wage income, out of dividend payments, and out of capital gains (their equity holdings). Firms have retained earnings, a proportion of their profitability and interest revenues/payments. If we lump together retained earnings plus the saved portion of dividends plus the saved portion of capital gains, we obtain the following Equation (4), which replicates Equation (13) of La Marca (2010):

Where *(7* is the savings rate normalized by the capital stock, *s _{p}* is the combined (households and firms) propensity to save out of firms profits and

*s*is the propensity to save out of wage income. Firms profits include production related profitability and interest revenues (payments) on external assets (liabilities), measured by the rate of return

_{h}*j*, accumulated net assets/liabilities

*b*and the real exchange rate £.

Capacity utilisation then adapts to close the gap between planned investment, savings and the current account, that is excess demand. The latter includes exchange-rate-sensitive and insensitive components within the net exports. Grouping the exchange-rate sensitive components under *z* (notably, price-sensitive imports and exports, and the domestic value of interest returns/ payments), capacity utilization changes at the following rate (which replicates Equations (15) and (16) of La Marca (2010)):

or

The parameters that make their first appearance are £*a* (the exchange-rate sensitive component of imports, used as intermediate inputs) and *Efix* (the exchange-rate sensitive component of exports, with a price-elasticity *T]).* It is assumed that *s _{p}* is sufficiently larger that

*a,*assuring the stability of the dynamic

equation. It is easy to see that, if *s* is smaller than one, then — is positive. *That*

*ab*

*means that if the economy is a net creditor (b >0), capacity utilization will increase, and nice versa if the country is a net debtor, i.e. in this open-economy setting the model only allows for a debt-burdened regime,* unlike Hein (2014), for instance. Later we will review variants that allow for the existence of both debt-led and debt-burdened regimes

The profit-led or wage-led character of the system depends on the reaction of investment, savings and the trade balance to changes in the wage-share. A high price-elasticity of exports *Tj* makes the system more profit-led. But there is an additional impact, coming from the net creditor-debtor position of the economy. If the economy is a net-creditor, then a real appreciation (coincident with greater wage-share) reduces the stream of income denominated in domestic currency from interest revenues, and a depreciation (falling wage- share) increases that same flow. *That means, if b is positive, the economy is more likely to be profit-led, and vice versa.*

But how do net assets/liabilities evolve? As mentioned before, net asset/liabil- ities accumulation in La Marca’s model is a flmction of the imbalance between domestic savings, investment, net exports and interest revenues/payments. After compiling and substituting the relevant variables and equations, foreign-priced assets/debt is ruled by the following equation, which replicates Equation (18) of La Marca (2010):

It is easy to see that, as long as savings react stronger than investment to

*db*

increments in capacity utilisation, — will be positive. It is also readily clear

*an*

that a condition for stability is that *g > s _{p}j*, so that increasing foreign assets stimulate investment more than savings, and the imbalance is reverted.This condition also causes that, for sufficiently high-levels of

*b*and

*iff*, —— is positive.

*dlff*

La Marca focuses his attention on the case of an export-led economy, which is expected to be a net creditor and a profit-led demand regime. With these conditions, and with the classical savings pattern of no savings by workers and *s _{p}* = 1 by firms, the model is able to replicate Goodwin (1967)-type cycles, with interactions between capacity utilisation and the wage-share, which further impact on the exchange rate and net external asset accumulation.

La Marca (2010, 146) stresses that different outcomes can be obtained with different extensions of the model, that incorporate other social and economic institutions and policy orientations. In this sense, the model sets a precedent for further work, which took some time to develop.