Co-Movement, Capital and Contracts: 'Normal' Cycles Through Creative Destruction

Abstract

We develop a unified theory of endogenous business cycles in which expansions are neoclassical growth periods driven by productivity improvements and capital accumulation, while downturns are the result of Keynesian contractions in aggregate demand below potential output. Recessions allow skilled labor to be reallocated to growth promoting activities which fuel subsequent expansions. However, rigidities in production and contractual limitations, inherent to the process of creative destruction, leave capital severely underutilized. A key feature of our equilibrium is the endogenous emergence of long term supply contracts between capitalist owners and producers.

Keywords: Contracts, investment, assets, technology, growth, business cycles, productivity, capital accumulation

JEL Classification: E0, E3, O3, O4