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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 13: Endogenous Demand in the Theory of Transformational Growth

Challenging the Supply-side Vision of the Long Run

George Argyrous


George Argyrous INTRODUCTION Neoclassical economics takes as given the tastes and preferences of consumers, and seeks to determine the set of relative prices that will reconcile these given tastes and preferences with the limited resources and technological capacity available to satisfy them. At the micro-level, demand is exogenous since the tastes and preferences of consumers are given from the outset. At the macro-level, the sum of these preferences Ð aggregate consumer demand Ð adjusts passively to changes in prices at the micro-level, so that aggregate demand equals aggregate supply. The focus is thereby shifted onto aggregate supply and its components, as in both the Solow growth model and the neoclassical endogenous growth theory. Demand is essentially exogenous. Post-Keynesian theory, on the other hand, treats aggregate effective demand as a variable that determines the growth part of the economy. Yet within the post-Keynesian literature there remains a lacuna in the explanation of effective demand: what determines its evolution? This is particularly worrisome given the often-stated desire to use history rather than equilibrium as the methodological guidepost for analysis. Despite this desire, a historically based theory of the growth of markets has not been fully developed. The theory of transformational growth (TG), on the other hand, provides such a historically based theory of the growth of demand. Moreover, the forces it identifies to explain the growth of demand are endogenous to the growth process itself. TG identifies feedback loops between the growth of individual markets and aggregate expansion in general, and these feedbacks provide...

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