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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 5: A Neo-Kaldorian Perspective on the Rise and Decline of the Golden Age

Challenging the Supply-side Vision of the Long Run

Mark Setterfield and John Cornwall


Mark Setterfield and John Cornwall INTRODUCTION The focus of this chapter is the generalized slowdown in output and productivity growth rates in the advanced capitalist economies since 1973. Our purpose is to construct a neo-Kaldorian model capable of explaining this growth slowdown. Our approach rests on the notion that capitalism is not self-regulating, because it does not automatically create either sufficient demand or the institutional structures necessary for rapid Ð much less full employment Ð growth. The model posits that capitalistic growth occurs in discrete episodes, and that each episode can be characterized in terms of a historically specific Macroeconomic Regime (MR). These MRs comprise a process of income generation embedded within a historically specific institutional framework, which together give rise to the conditional steady-state output and productivity growth outcomes characteristic of a growth episode.1 The conditionality of these steady states arises from the fact that institutions, although relatively inert and enduring, are not immutable Ð they can and do change over time. Any equilibrium is thus conditional on the reproduction over time of a specific institutional structure. The resulting model is neo-Kaldorian in the sense that it modifies a traditional Kaldorian growth schema, based on cumulative causation, by introducing institutional considerations. These are modelled as discrete parameter changes, thereby allowing us to characterize the episodic nature of capitalist growth. Our ultimate aim is to apply the model in order to explain the Golden Age (1945Ð73) and Age of Decline (post-1973) as distinct and relatively enduring growth episodes.2 This is a task...

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