E2 Basic economic elements

Topic

The fundamental economic elements of a society—the substrate of "Economy," the subject matter that the resource regime track carries along fully whenever that track shifts to a new segment—are capital, labor, production, real wages, the profit rate, debt, and trade. These fundamental economic elements do not operate in isolation; they combine to determine whether the economy expands, stagnates, or enters one of its anomalous states.

The profit rate is one of the two variables that trigger changes in the fundamental economic elements. When the profit rate falls consistently below a certain threshold, that sustained decline sparks an investment contraction: capital ceases to flow into production at its previous pace because the profit rate no longer compensates for the investment risk.

The aggregate leverage level is the second variable that triggers changes in the fundamental economic elements; this is the same aggregate economic leverage tracked via the debt-to-GDP ratio. When this aggregate leverage level exceeds debt-servicing capacity, it precipitates a debt crisis—crossing the unsustainability threshold identified as the trigger for such a crisis.

Thus, the profit rate and the aggregate leverage level represent two independent pathways through which the fundamental economic elements can enter a state of anomaly: one involves capital and production, occurring when the profit rate falls and investment contracts; the other involves debt, occurring when aggregate leverage exceeds debt-servicing capacity and a debt crisis is triggered. Monitoring both the profit rate and the aggregate leverage level is essential because none of the other fundamental economic elements—labor, real wages, or trade—is sufficient on its own to anticipate which of the two anomalies is approaching.

ID:4630