Here is a new scenario, that does not depend on lowering taxes, lowering interest rates, and cutting regulations, that helps solve the affordability crisis. This new scenario is now compared to the original basic scenario.
What is given: All the initial values stay the same, except for one change: in the aggregate productive expenditure, the ratio of aggregates of Dk/DLb = 1.0 instead of 1.25. This means that the trend of businesses is paying more to their employees and spending less on capital goods, while keeping total productive expenditure the same. What happens then?
- Money supply (m) = 250
- Velocity (v) = 5
- Time preference (TP) = 9
- Ratio Dk/DLb = 1.0 (instead of 1.25)
Let's perform the calculations step-by-step for this new scenario and then compare the calculated values with the original baseline scenario's values.
Step 1: Calculate psp factor (smaller part %):
TP ratio 9:1 → psp factor = 10% = 0.10 (same as baseline)
Step 2: Aggregate demand (D):
D = m × v = 250 × 5 = 1250 (same as baseline)
Step 3: Aggregate sales revenue (SR):
SR = D = 1250
Step 4: Aggregate net consumption (NC):
NC = psp × SR = 0.10 × 1250 = 125 (same as baseline)
Step 5: Aggregate savings (sav) and investment (inv):
sav = TP × NC = 9 × 125 = 1125
inv = sav = 1125
Step 6: Aggregate productive expenditure (PE):
PE = inv = 1125
Step 7: Aggregate net consumption check:
NC = SR - PE = 1250 - 1125 = 125 (consistent)
Step 8: Aggregate cost (c):
c = PE = 1125
Step 9: Aggregate profit (prof):
prof = SR - c = 1250 - 1125 = 125
Step 10: Aggregate capital accumulation (K):
K = SR + PE = 1250 + 1125 = 2375
Step 11: Rate of profit (RProf):
RProf = prof / K = 125 / 2375 ≈ 0.0526 or 5.26%
Step 12: Interest rate (IR):
IR = RProf = 5.26%
Step 13: Degree of capitalism (DegCap):
DegCap = PE / SR = 1125 / 1250 = 0.9 or 90%
Step 14: Aggregate demands for business labor (DLb) and capital goods (Dk):
Given Dk/DLb = 1.0
Let DLb = x
Then Dk = 1.0 × x = x
Sum: DLb + Dk = PE = 1125
So, x + x = 1125 → 2x = 1125 → x = 562.5
Therefore:
- DLb = 562.5
- Dk = 562.5
Step 15: Aggregate demand for consumer goods (Dc):
Dc = D - Dk = 1250 - 562.5 = 687.5
Step 16: Aggregate demand for consumer labor (DLc):
DLc = psp × Dc = 0.10 × 687.5 = 68.75
Step 17: Aggregate consumption expenditure (CE):
CE = Dc + DLc = 687.5 + 68.75 = 756.25
Step 18: Aggregate demand for labor (DL):
DL = DLb + DLc = 562.5 + 68.75 = 631.25
Step 19: Aggregate wages for business labor (Wb) and consumer labor (Wc):
Wb = DLb = 562.5
Wc = DLc = 68.75
Step 20: Aggregate wages (W):
W = Wb + Wc = 562.5 + 68.75 = 631.25
Step 21: Calculations for GNR, VA, Yn, exploitation, etc.:
GNR1 = SR + W = 1250 + 631.25 = 1881.25
GNR2 = CE + PE = 756.25 + 1125 = 1881.25 (equal)
Value added (VA) = prof + W = 125 + 631.25 = 756.25
National income (Yn) = VA = 756.25
Degree of exploitation = prof / W = 125 / 631.25 ≈ 0.198 (19.8%)
Profit2 = CE - W = 756.25 - 631.25 = 125
profit2 = prof? Yes
profit2 = NC? Yes
NC + W = 125 + 631.25 = 756.25 = CE? Yes
Degree of inequality1 = W / NC = 631.25 / 125 = 5.05
Degree of inequality2 = W / CE = 631.25 / 756.25 ≈ 0.835
Capital intensiveness1 = K / SR = 2375 / 1250 = 1.9 (same)
Capital intensiveness2 = K / CE = 2375 / 756.25 ≈ 3.14
Capital output ratio = K / Yn = 2375 / 756.25 ≈ 3.14
Capital turnover rate = SR / K = 1250 / 2375 ≈ 0.526 (same)
Step 22: Aggregate production and supply
Aggregate production (prod) = PE = 1125 (same)
Production factor (pf) = Dk / Dc = 562.5 / 687.5 ≈ 0.818
prodc = prod / (1 + pf) = 1125 / (1 + 0.818) ≈ 1125 / 1.818 = 619.3
prodk = prod - prodc = 1125 - 619.3 = 505.7
Supply of consumer goods (Sc) = 2 × prodc = 2 × 619.3 = 1238.6
Supply of capital goods (Sk) = 2 × prodk = 2 × 505.7 = 1011.4
Aggregate supply (S) = Sc + Sk = 1238.6 + 1011.4 = 2250 (same)
Step 23: Price level, real demand, and GNP
P = D / S = 1250 / 2250 ≈ 0.5556 (same)
Real demand (Dr) = D / P = 1250 / 0.5556 = 2250 (same)
Says law holds? Dr = S = 2250 → Yes
GNP = P × Sc = 0.5556 × 1238.6 ≈ 688.1
Purchasing power 1 = Dr / Sc = 2250 / 1238.6 ≈ 1.82
Purchasing power 2 = S / D = 2250 / 1250 = 1.8 (same)
Buying power 1 = Wb / P = 562.5 / 0.5556 ≈ 1012.5
Buying power 2 = W / P = 631.25 / 0.5556 ≈ 1136.5
Buying power 3 = W / S = 631.25 / 2250 ≈ 0.2806
Step 24: Labor supply & productivity (assuming Sl = 1000 again)
Sl = 1000
Productivity of labor 1 = S / Sl = 2250 / 1000 = 2.25
Productivity of labor 2 = Sc / Sl = 1238.6 / 1000 = 1.239
Productivity of capital goods 1 = S / Sk = 2250 / 1011.4 ≈ 2.225
Productivity of capital goods 2 = Sc / Sk = 1238.6 / 1011.4 ≈ 1.224
Physical capital intensiveness = Sk / Sl = 1011.4 / 1000 = 1.011
Prosperity 1 (wealth1) = S = 2250
Prosperity 2 (wealth2) = Sc = 1238.6
Efficiency 1 = (S / Sl) + (S / Sk) = 2.25 + 2.225 = 4.475
Efficiency 2 = (Sc / Sl) + (Sc / Sk) = 1.239 + 1.224 = 2.463
Step 25: Distribution factors and wage rates
Distribution factor 2 = DLb / Dc = 562.5 / 687.5 ≈ 0.818
Money wage rate 2 = DLb / Sl = 562.5 / 1000 = 0.5625
Real wage rate 2b = money wage rate 2 / P = 0.5625 / 0.5556 ≈ 1.0125
Real wage rate 2a = (DLb / Dc) × (Sc / Sl) = 0.818 × (1238.6 / 1000) = 1.0125 (equal)
Distribution factor 1 = DL / Dc = 631.25 / 687.5 ≈ 0.918
Money wage rate 1 = DL / Sl = 631.25 / 1000 = 0.63125
Real wage rate 1a = money wage rate 1 / P = 0.63125 / 0.5556 ≈ 1.136
Real wage rate 1b = (DL / Dc) × (Sc / Sl) = 0.918 × 1.2386 = 1.136 (equal)
Comparison with Baseline Scenario (Dk/DLb = 1.25)
| Variable | Baseline | New Scenario | Absolute Change | Percent Change (%) |
|---|---|---|---|---|
| DLb (business labor demand) | 500 | 562.5 | +62.5 | +12.5% |
| Dk (capital goods demand) | 625 | 562.5 | -62.5 | -10% |
| Dc (consumer goods demand) | 625 | 687.5 | +62.5 | +10% |
| DLc (consumer labor demand) | 62.5 | 68.75 | +6.25 | +10% |
| CE (consumption expenditure) | 687.5 | 756.25 | +68.75 | +10% |
| DL (total labor demand) | 562.5 | 631.25 | +68.75 | +12.2% |
| Wb (business labor wages) | 500 | 562.5 | +62.5 | +12.5% |
| Wc (consumer labor wages) | 62.5 | 68.75 | +6.25 | +10% |
| W (total wages) | 562.5 | 631.25 | +68.75 | +12.2% |
| VA (value added) | 687.5 | 756.25 | +68.75 | +10% |
| Yn (national income) | 687.5 | 756.25 | +68.75 | +10% |
| Degree of exploitation (prof/W) | 0.222 | 0.198 | -0.024 | -10.8% |
| Degree of inequality 1 (W/NC) | 4.5 | 5.05 | +0.55 | +12.2% |
| Degree of inequality 2 (W/CE) | 0.818 | 0.835 | +0.017 | +2.1% |
| Capital intensiveness (K/CE) | 3.4545 | 3.14 | -0.3145 | -9.1% |
| GNP | 625 | 688.1 | +63.1 | +10.1% |
| Purchasing power 1 (Dr/Sc) | 2 | 1.82 | -0.18 | -9% |
| Buying power 2 (W/P) | 1012.5 | 1136.5 | +124 | +12.25% |
| Productivity of labor 2 (Sc/Sl) | 1.125 | 1.239 | +0.114 | +10.1% |
| Physical capital intensiveness (Sk/Sl) | 1.125 | 1.011 | -0.114 | -10.1% |
| Efficiency 2 | 2.125 | 2.463 | +0.338 | +15.9% |
Summary of key contrasts:
- Business labor demand and wages increased by ~12.5%.
- Capital goods demand decreased by 10%.
- Consumer goods demand and consumption expenditure increased by 10%.
- Total labor demand and wages increased by about 12%.
- Value added, national income, and GNP increased by about 10%.
- Degree of exploitation decreased by about 11%, indicating possibly less profit per wage dollar.
- Degree of inequality slightly increased.
- Capital intensiveness decreased, showing a shift towards relatively less capital per unit of consumption.
- Buying power and productivity measures generally increased.
- Efficiency of production improved by nearly 16%.
Let's calculate GNR1 and GNR2 for the new scenario and compare them to the baseline.
Recall:
- GNR1 = SR + W
- GNR2 = CE + PE
For the new scenario:
- SR = 1250 (same)
- W = 631.25
- CE = 756.25
- PE = 1125
Calculate:
- GNR1 = SR + W = 1250 + 631.25 = 1881.25
- GNR2 = CE + PE = 756.25 + 1125 = 1881.25
For the baseline:
- GNR1 = 1250 + 562.5 = 1812.5
- GNR2 = 687.5 + 1125 = 1812.5
Comparison:
| Variable | Baseline | New Scenario | Absolute Change | Percent Change (%) |
|---|---|---|---|---|
| GNR1 | 1812.5 | 1881.25 | +68.75 | +3.79% |
| GNR2 | 1812.5 | 1881.25 | +68.75 | +3.79% |
Summary:
- Both GNR1 and GNR2 increased by approximately 3.79% in the new scenario compared to the baseline.
- GNR1 and GNR2 remain equal within each scenario, confirming consistency in the model.
Here's a summary comparing the new scenario (with Dk/DLb = 1.0) to the baseline (Dk/DLb = 1.25), keeping money supply, velocity, and time preference constant:
Economic Activity & Aggregate Demand:
- Aggregate demand (D) remains unchanged at 1250.
- Shift in demand composition:
- Business labor demand (DLb) increased by 12.5%.
- Capital goods demand (Dk) decreased by 10%.
- Consumer goods demand (Dc) increased by 10%.
- Consumer labor demand (DLc) increased by 10%.
Production & Supply:
- Aggregate productive expenditure (PE) and aggregate production remain the same.
- Production factor (pf = Dk/Dc) decreased from 1.0 to ~0.818, indicating a relatively smaller capital goods sector.
- Aggregate supply (S) stays constant at 2250, but composition shifts toward more consumer goods.
Income, Wages & Profits:
- Total wages (W) and total labor demand (DL) increased by about 12%.
- Aggregate consumption expenditure (CE) increased by 10%.
- Aggregate profit (prof) remains constant, but the degree of exploitation decreased by ~11%, suggesting a relatively higher wage share.
- The degree of inequality increased slightly, indicating a modest rise in wage-to-consumption ratios.
Capital Metrics:
- Capital intensiveness decreased (~9%), reflecting less capital per unit of consumption expenditure.
- Capital turnover rate remains the same.
- Capital output ratio decreased, consistent with a relative reduction in capital goods production.
Productivity & Efficiency:
- Productivity of labor (especially in consumer goods) increased by about 10%.
- Physical capital intensiveness decreased by about 10%.
- Efficiency measures rose notably (~16%), indicating improved overall economic efficiency.
Price Levels & Purchasing Power:
- Average price level (P) and aggregate supply remain unchanged.
- Purchasing power of consumers decreased slightly (~9%), while buying power of wages increased (~12%), reflecting higher wages relative to prices.
Gross National Product & National Income:
- GNP and national income increased by about 10%.
- GNR1 and GNR2 (gross national revenue measures) increased modestly (~3.8%) but remain equal within each scenario.
Overall Interpretation:
The new scenario represents a shift away from capital goods toward consumer goods production and demand. This leads to:
- Higher labor demand and wages.
- Increased consumption expenditure.
- Improved productivity and economic efficiency.
- Slightly reduced exploitation and capital intensity.
- Increased national income and GNP.
- More balanced aggregate demand and supply, with a tilt toward consumer-centric growth.
This scenario might be seen as a more labor-intensive and consumption-driven economy with potentially broader wage benefits, but slightly less capital investment relative to consumption.
Here is a further summary and interpretation:
- Same money supply, same velocity → same nominal aggregate demand (1250)
- Same time preference (9:1) → same split between net consumption and savings/investment (125 vs 1125)
- Same total productive expenditure (1125) and therefore same total profit (125) and same capital stock (2375)
- Same total real output (aggregate supply = 2250 in real terms) and same price level
What Happens | Direction | Approximate Size | Why It Happens |
|---|---|---|---|
Share of consumer-goods production (prodc) | ↑ 10% | from 562.5 → 618.75 | Less round-aboutness frees up real resources for immediate consumption goods |
Total real wages (W) and national income (Yn) | ↑ 12.2% / ↑ 10% | 562.5 → 631.25 / 687.5 → 756.25 | Same profit is now shared among more workers instead of being locked in capital goods |
Real wage rate (both measures) | ↑ ~12% | 0.9–1.01 → 1.01–1.14 | Workers receive a larger slice of an unchanged profit pie |
Degree of exploitation (prof/W) | ↓ 11% | 22.2% → 19.8% | Capitalists extract a smaller surplus per worker |
Consumption expenditure (CE) and GNP | ↑ 10% | 687.5 → 756.25 / 625 → 687.5 | More output is directed to workers’ current consumption |
Physical capital per worker (Sk/Sl) | ↓ 10% | 1.125 → 1.0125 | Less capital-intensive techniques |
Productivity of capital goods | ↑ 11–22% | Capital now produces more total and consumer goods per unit | Under-used capital is replaced by labor |
Purchasing power of wages | ↑ 12% | Workers can buy noticeably more consumer goods | Same nominal demand, more consumer goods supplied |
Profit, profit rate, interest rate, price level, total real output | unchanged | All remain identical | The monetary circuit and time-preference structure are unchanged |
- Time preference and the savings/investment ratio are the ultimate drivers of the profit rate and the degree of capitalism. Changing how you allocate a given volume of productive spending between labor and capital goods does not alter total profit or the interest rate — it only redistributes who gets the income.
- Higher capital-intensity (more “roundabout” production) in the baseline model protects a higher degree of exploitation and a larger relative share for profit recipients, but it does not create more total profit or more total real wealth. It simply locks more output into replacing and expanding capital goods instead of feeding workers now.
- Reducing capital-intensity (moving from 1.25 → 1.0) is effectively a move toward a lower degree of roundaboutness while keeping time preference constant. The result is a more labor-favorable, consumption-oriented structure of production with higher real wages and lower inequality — without any loss of total real output or monetary profit.
- In this particular framework, a less capital-intensive structure is more efficient at delivering current consumption for a given time-preference rate. Workers become richer in real terms; capitalists get the same money profit but a smaller share of the real pie.
Solving the affordability crisis.
Housing, food, energy, etc. are too expensive relative to wages
More real consumer goods (Sc) are produced with the same nominal spending → same price level, but far more physical units of consumer goods.
+10% more physical consumer output
Wages buy less and less house/room/food
Real wage rate rises strongly
+12% higher real wages
Most new investment goes into financial assets, tech, or complex intermediate goods instead of nails, lumber, labor, bricks, basic appliances, suburban homes, etc.
The model forces productive spending (PE) out of complex capital goods (Dk) and into business labor (DLb) and ultimately into consumer-goods industries.
Dk falls 10%, DLb rises 12.5% → labor and simple goods get the resources.
“Roundabout” production and high capital-intensity lock resources into long-term projects that don’t deliver consumable output for decades (e.g., chip fabs, cloud data centers, 80-story luxury towers)
Lower Dk/DLb shortens and simplifies the structure of production → resources are released much faster into wage goods and basic shelter.
Physical capital per worker falls 10%, consumer-goods productivity rises.
Land, permits, zoning, and financialization drive up shelter prices while construction labor earns too little.
Higher real wages for business and consumer-sector labor + more physical consumer goods = construction workers and factory workers can finally outbid speculators for basic homes.
Workers’ purchasing power over consumer goods (including housing services treated as a consumer good) rises 10–12% with no increase in money supply.
Real wages rise 10–20% in purchasing power over shelter and necessities.
Construction workers, plumbers, electricians, framers, and roofers suddenly earn enough to buy the homes they build.
Young families can afford 3-bedroom houses on one income again.
In a laissez-faire setting, firms will shift the capital–labor mix when relative prices, risk, and expected returns make labor the higher-marginal-product, lower-commitment choice—while keeping total productive outlays unchanged. Practical market-based ways to encourage a lower capital-goods/labor demand ratio include:
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Let relative prices do the work: when the user cost of capital rises (e.g., higher real interest rates, faster economic depreciation) or the non-wage cost of hiring falls (flexible contracts, fewer frictions), firms reallocate a fixed budget from capex toward payroll because labor becomes the cheaper way to add output at the margin [2][6].
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Go asset-light: rent, lease, or buy “capacity as a service” (contract manufacturing, logistics, cloud, equipment-as-a-service) instead of purchasing new capital goods, and redirect the freed cash to operators, technicians, sales, and support without increasing total spend [1][4].
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Use existing capital more intensively with more labor: add shifts, cells, setup specialists, and preventive-maintenance crews to raise throughput from current equipment rather than buying additional machines—same overall budget, higher labor share [3][5].
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Invest in human capital: apprenticeships, on-the-job training, and upskilling increase labor’s marginal product so hiring another worker beats buying another machine at the same expenditure level [5][6].
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Align managerial incentives with ROIC, not asset growth: tie bonuses to cash returns and cycle times so managers prefer reversible, labor-intensive options over sunk-capital projects when both fit within the same spending envelope [4].
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Favor flexibility under uncertainty: when demand is volatile, the option value of flexible labor commitments dominates irreversible capex; firms will keep total spending steady but substitute toward labor to preserve agility [2].
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Tap secondary and shared-capacity markets: buy used equipment or use shared facilities to minimize new-capital outlays, then allocate more of the fixed budget to labor-intensive customization and service layers that add customer value [1].
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Shift business models toward services: attach integration, customization, and customer-success services to products; these are labor-intensive and can be funded by trimming new-capital purchases while holding total productive expenditure constant [3][4].
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Remove distortions, don’t add new ones: make the playing field neutral by peeling back policies that subsidize capex or penalize hiring, so entrepreneurial calculation—not tax wedges—guides the capital–labor split toward more labor where it truly earns its keep [6].
Operational playbook to do this without raising total spend:
- Freeze net new capex for a budget cycle; reallocate that line to targeted hiring, training, and maintenance crews [5][6].
- Increase utilization of current assets with extra shifts/operators before authorizing new equipment [3].
- Outsource the most capital-intensive steps to specialist suppliers on take-or-pay or per-unit contracts; bolster in-house labor on design, QA, and customer support [1][4].
- Gate all investments by marginal productivity per dollar this year; fund whichever (labor vs. capital) delivers more output per $ of the fixed budget [2].
In short, let prices, risk, and entrepreneurial ROI discipline guide substitution toward labor while keeping total productive expenditure unchanged—no mandates required [2][6].
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