What Is the Goodwin Model?

The Goodwin model is a macro-economic theory developed by the US economist Richard Goodwin. He developed the model in 1967 while teaching at the University of Cambridge in the UK, and it predicts cycles of economic activity based on the input values of employment rates, and productivity levels for labor and capital investment. The model has derivations from Marxist class struggle theories, as well as predator-prey behavior in nature, and deals with cycles that occur in economies as employment and wage factors fluctuate.

Principles behind the Goodwin model are based on a zero-sum, non-linear approach to growth. Basically, this states that, for whatever gains one aspect of an economy or other element of a system makes, an equal value loss will offset it elsewhere to prevent instability and growth or decline of the system overall. This is a principle upon which Marxian economics is founded, where, as the value and influence of labor increases, the value and influence of the capitalists that fund it decreases, and vice versa. Goodwin proposed that simple trade-offs like this existed as a natural course of economic cycles. The lower the level of unemployment, for example, the more workers would have influence in demanding higher wages, which would, in turn, reduce the profit and control of capitalists over labor and lower the incentive to expand business.

These trade-offs in business cycle theory are also reflected in the Phillips curve that the Goodwin model uses for its calculations, proposed by the New Zealand economist William Phillips in 1958. The Phillips curve states that there is a direct relationship between unemployment rates and inflation, and that, as one rises, the other tends to fall. Like the Goodwin model itself, the business cycle principles proposed by the Phillips curve tend to have more validity in the short term than they do in the long term, and are more valid in theory than in practice.

Goodwin's theory of economic growth also drew upon the Harrod-Domar model as a method to get beyond these balancing forces in the cycle. Sir Roy F. Harrod and Evsey Domar proposed in 1946 that growing economies are not inherently balanced, but increase in quantity and quality of output as external capital investment is applied to disrupt normal behavior. Most economic cycles that are seen as idealistically balanced and stable are in fact a cause for locking many nations into perpetual states of poverty, where savings, capital investment, and technological innovation are low.

The weakness of the Goodwin model approach to system behavior is in the fact that it clearly delineates opposing elements of a system as inherently antagonistic. Goodwin's class struggle model, like Marxian economics or predator-prey relationships, assumes that two primary elements of a system struggle against each other in a predictable environment free of other complex influences. Wage-earning workers are pitted against capitalist investors, or predators against prey. While these theories have some validity in terms of how complex systems interact, they tend to break down when mitigating factors or unseen influences change the behavior of the primary elements in the system.

One good example where the Goodwin model and others like it have failed to predict economic trends is in the recent worldwide economic downturn that took place as of 2008 due to speculation in the housing market and for other reasons. This economic downturn has resulted in widespread increases in the unemployment rate in many industrialized nations, making labor cheaper and plentiful for capitalist interests to expand business. Despite this opportunity, as of 2011, capitalists have not responded by increasing hiring and have instead restricted capital investment at a time that would seem ideal for growth from a labor pool perspective.