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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.
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Chapter 3: The Exogeneity of Investment: From Systemic Laws of Accumulation and Growth to Effective Demand Conditions

Challenging the Supply-side Vision of the Long Run

Joseph Halevi and Rééduane Taouil


Joseph Halevi and RŽduane Taouil INTRODUCTION This chapter argues that the concept of effective demand constitutes a major conceptual break not just with marginalist economics, but also with classical political economy. The nature of the break lies in the treatment of investment as an exogenous variable. Classical economics can be considered as the most coherent form of endogenous growth theory. This is especially true for MarxÕs theory of cyclical growth. As shown in the next section, Marx explained cyclical fluctuations in terms of changes in the reserve army of labour. Investment is, in this context, an endogenous variable, determined by the rate of profit. By giving primacy to capitalistsÕ expenditure, Kalecki distanced himself from Marx in a twofold manner. On one hand, he considered investment as a causal variable determining the level of profits; on the other, he viewed investment as being determined independently from savings. The third section discusses the way in which Kalecki treats investment as an exogenous variable. Firstly, we analyse KaleckiÕs approach to the trade cycle by pointing out the crucial distinction between output as determined by productive capacity and output as determined by the level of investment. Secondly, we study KaleckiÕs use of MarxÕs schemes of reproduction and argue that, unlike MarxÕs, they are never closed in terms of the allocation of investment goods. The absence of closure is not accidental: it reflects the view that there is no internal mechanism establishing how many investment goods will be produced...

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