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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 10: The Kaleckian Growth Model with Target Return Pricing and Conflict Inflation

Challenging the Supply-side Vision of the Long Run

Marc Lavoie


Marc Lavoie1 INTRODUCTION The Kaleckian model of growth is a demand-led model of growth. The rates of accumulation and the rates of profit and capacity utilization are determined by effective demand. In all variants, as in the old post-Keynesian models of growth ˆ la Robinson and Kaldor, an increase in the propensity to save leads to a reduction in all of the above mentioned variables Ð the so-called paradox of thrift. Also, as first argued by Rowthorn (1981), increases in real wages may lead to accelerating accumulation. These features have been obtained at some cost, however: in these models, in contrast to what most economists would expect, neither the equilibrium rate of capacity utilization nor the equilibrium rate of profit are equal to their normal values. Several authors, be they Sraffians or Marxists, have claimed that long-run models in which the rate of utilization is not equal to its normal value lack logical consistency. For these authors, only fully adjusted positions are logically consistent in a long-run analysis. In other words, in one-sector models, only equilibria where the realized and normal rates of profit are equal, and where the realized and normal rates of capacity utilization are equal, are admissible. Only these equilibria are final, because otherwise there would exist economic forces that would change the long-run equilibrium configuration. One response to this critique has been to redefine the long run. Hence Chick and Caserta (1997) label as medium-run models or provisional equilibria those models that achieve an equilibrium rate of growth...

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