Edited by Mark Setterfield
Chapter 11: Reconciling the Growth of Aggregate Demand and Aggregate Supply
Amitava Krishna Dutt* 1 Introduction Theories of economic growth can be classified into two main types according to whether they view economic growth as being determined by the expansion of aggregate supply or that of aggregate demand. The former have generally dominated growth theory. The classical economists – including Smith and Ricardo – emphasized aggregate supply by viewing growth as being determined by capital accumulation and technological change, both of which augment the economy’s capacity to produce more goods; aggregate demand was not an issue because of what has subsequently been called Say’s law, that is, aggregate supply created its own aggregate demand.1 There were dissidents, of course: Malthus recognized the possibility of a general glut and Marx recognized the possibility of realization crises: insufficient demand for goods (perhaps because of low wages) could lead to production beyond what could be “realized” through sales. However, Marx did not develop an actual theory of crisis as a result of the lack of aggregate demand, let alone a theory of growth that emphasized the role of aggregate demand. Instead, he continued in the classical tradition of emphasizing capital accumulation and technological change (with labor being in unlimited supply from the reserve army of the unemployed at a real wage determined by the state of class struggle or by subsistence, broadly defined). It was not until the development of the theory of aggregate demand by Kalecki (1971) and Keynes (1936) that the role of aggregate demand in the growth process came to be clearly recognized....
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