Instability and structural dynamics in the macroeconomy : a policy framework

This chapter examines the link between the instability features of a profit-driven economy and the structural changes inherent to that type of economy. Moving from consideration of the profit motive as search and exploitation of price (or cost) differentials, the chapter considers the structural dynamic of this type of economy as a process driven by the generation of differentials that attract investment in real or financial activities. The chapter calls attention to the dual character of that dynamic depending on whether it takes place through the "horizontal" reshuffling of activities in the real economy or the "vertical" shifting of liquid funds between real and financial activities. Constraints and opportunities for policy-making arise from those dynamics. Combining attention to horizontal and vertical changes in economic structure, the chapter highlights the dual role of finance, which may alternatively trigger “patient” long-term investment in the real sphere or generate instability under conditions of increased financialization and market volatility. This open-endedness of structural dynamics has important implications for economic policy, which can only overcome the trade-off between incentive to invest and economic expansion by triggering structural changes along a path compatible with the investment of liquid funds in the real economy.