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The Economics of Demand-Led Growth

The Economics of Demand-Led Growth

Challenging the Supply-side Vision of the Long Run

Edited by Mark Setterfield

The Economics of Demand-Led Growth is a collection of specially written essays that develop and apply the theory of demand-led growth. Long-run growth is usually portrayed as a supply-determined process. The contributions to this volume, however, are rooted in the theory of demand-led growth. In addition to general discussions of the role of demand in the long-run, the volume contains essays in the Kaldorian and Kaleckian traditions, and a section on the relationship between demand-led growth and structural change. The conclusion reached is that current neglect of the role of demand in analyses of long-run growth is unwarranted.

Chapter 8: Distribution, Demand and Growth in Neo-Kaleckian Macro-Models

Robert A. Blecker

Subjects: economics and finance, post-keynesian economics


Robert A. Blecker1 In economic theories that allow for aggregate demand to influence long-run growth, a crucial and unresolved question is how the distribution of income between wages and profits affects aggregate demand and the growth rate. A long tradition of ÔunderconsumptionistÕ thinking dating back to the early nineteenth century (surveyed by Bleaney, 1976) asserted that low wages (and high profits) would lead to chronically depressed consumer demand, which in turn would tend to cause overall economic stagnation unless offset by some other factors. However, another strand of thinking dating back to Ricardo and Marx recognizes that a high rate of profit can be a stimulus to capital accumulation or, in more modern terms, demand for investment. These alternative views have led to different perspectives about whether demand-determined growth is more likely to be wage-led or profit-led, and thus whether there is a conflict between growth and equity objectives in the formulation of economic policy. This chapter analyses the problem of distributional effects on aggregate demand and economic growth through the lens of macroeconomic models in the neo-Kaleckian tradition. Micha Kalecki was the first economist to construct formal models in which workers had a higher marginal propensity to consume than capitalists, and he often assumed for simplicity that workers spent all of their wages on consumption.2 He also analysed investment functions in which the rate of investment depended positively on retained profits, which he justified by the idea that internal funds could relieve the financial constraints on investment implied by...

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