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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 11: Conflict, Inflation, Distribution and Terms of Trade in the Kaleckian Model

Challenging the Supply-side Vision of the Long Run

Mario Cassetti


Mario Cassetti INTRODUCTION Recently, a new generation of models of growth and distribution, inspired by the Kaleckian tradition, has emerged.1 As noted by Lavoie (1992, 1995), these models differ from the standard Cambridgian growth models in two respects. First, they assume an oligopolistic environment, that is, firms have discretionary power and set their margins above production costs in order to generate funds for investment. Also, unions negotiate money wages with a view to achieving a ÔfairÕ or historic share of total real income. Second, the new models treat capacity utilization as endogenous, even in the long period. As a result, the real wage rate and the rates of capacity utilization, accumulation and profit are correlated both in the short and in the long period. There is also a substantial difference between the standard Cambridgian and later Kaleckian models as regards the role of changes in income distribution. Such changes are confined to full employment (Kaldor, 1961) or full capacity situations (Robinson, 1962) in the earlier post-Keynesian models, where KeynesÕs multiplier theory has two different uses. In the short period, the principle of effective demand is put to work to determine real income and employment, given the distribution of income. In the long period, it is applied to the determination of prices relative to wages, that is, to changes in the distribution of income, given the level of capacity or of employment. In this situation, an increase in investment results in an increase in the profit share and in savings....

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