The Dynamic Inefficiency of Capitalism

Abstract

A new paradigm for capitalism is woven from Marx's dynamic conflict and Keyne's disjunction between the saving and investment decisions, in which capitalism is viewed as a differential game between workers, who may save or consume, and capitalists, who may consume or invest. A simple model incorporating this view is constructed and solved, and the solution is compared with the social optimum. It is shown that there is a clearly defined dynamic welfare loss, arising from the separation of saving and investment decisions. The suboptimality conclusion is shown to be very robust, surviving the addition of much complexity to the simple basic model.