Bedtime Reading: Demand in the Long Run

There is a strand of economic theory concerned with the operation of Keynes’ principle of effective demand in the long run. In this tradition, a central role is given to demand in analyses of accumulation and growth under capitalist conditions, in contrast with the neoclassical New Keynesian approach which attempts to confine the influence of demand on output and employment to the short run. The latter approach, being reliant on adjustments of demand to supply-determined rates of growth via the price mechanism, has been undermined by the capital debates.

A recent paper by Sergio Cesaratto provides a helpful overview of the various positions so far adopted in the debate:

Neo-Kaleckian and Sraffian controversies on accumulation theory

In a couple of places, Cesaratto alludes to compatibilities between the analysis of demand-led growth and neo-chartalist and circuitist approaches to money. Monetary questions are not a focus of his paper (money and finance being left out of the analysis), but it is nevertheless interesting, in relation to money and finance, to note the significant role attributed in demand-led growth models to autonomous non-capacity-creating demand. When such models are extended to incorporate government and external sectors, autonomous non-capacity-creating demand includes government expenditure and exports in addition to credit-financed private-consumption expenditure.

Significant contributions to the literature on demand-led growth can be found in the reference list provided by Cesaratto. A 1995 paper by Frankin Serrano is particularly relevant as background to Cesaratto’s argument:

Long period effective demand and the Sraffian supermultiplier

A somewhat different perspective has been put forward by Attilio Trezzini. For example:

Growth without normal capacity utilization

See also a recent paper by Matthew Smith:

Long period effective demand and the Sraffian supermultiplier


31 thoughts on “Bedtime Reading: Demand in the Long Run

  1. Hey Pete

    Great seeing you posting again.

    And to me, this is a particularly welcome post, too. As it happens, I’ve been pondering on some of these subjects, lately:

    “In this tradition, a central role is given to demand in analyses of accumulation and growth under capitalist conditions, in contrast with the neoclassical New Keynesian approach which attempts to confine the influence of demand on output and employment to the short run.”

    I am not so much interested on who is right or wrong, but on who said what, why and when.

    In your opinion, what was Keynes’ view? Regardless of whether he was right or wrong, what was more important for Keynes? Investment or consumption?

    Who coined the label “confidence fairy”?

  2. There is one article on scribd. How can I download or print it? I am not doing my bedtime reading with any computer related device 🙂

  3. Magpie, I think it is debatable, but my understanding is that Keynes did consider the principle of effective demand to be applicable to the long run. However, by inversely relating investment, via the marginal efficiency of capital, to the rate of interest, he left the door open for others to maintain that in the long run investment would adjust to full-employment saving.

    There seem to be two ways to proceed. Either long-run analysis can be eschewed, with the economy through time being seen as a succession of short runs, or the functional relationship between investment and the rate of interest can (correctly) be dropped and the principle of effective demand extended to the long run. Without expressing a preference one way or the other between these two options, the latter approach is legitimate in light of the capital debates, which demonstrated that there is no basis for imagining the price mechanism will adjust demand to some supply-determined level of productive capacity, even in the long run.

    I’m not sure it’s so much about what is more important, consumption or investment, but the different roles that are played by induced and autonomous demand. In the long run, investment can be conceived as induced by the level of economic activity, while much of private consumption expenditure (though not autonomous consumption) can be regarded as induced by income (just as in the short run). If firms confront persistently high levels of demand, then, taking technology as given, there will be a competitive impetus to expand capacity through investment (an accelerator-type argument). Failing to do so may result in losing market share to competitors.

    Notice that, from this perspective, weak demand reduces the impetus to invest. Just as importantly, it can be argued that the impetus to innovate and invest in technical advances is also weakened due to the prevalence of weak employment conditions and depressed wages. I think this makes sense. Downturns, in my opinion, are not so much about innovation as centralization of capital. It is an opportunity to buy up existing real assets on the cheap and beat down workers, not so much a strong motivator of investment.

    Although unrelated to the Sraffian analysis, I think this also gels with Marx’s ‘law of the tendential fall in the rate of profit’, which suggests that over an expansionary phase capitalists seek ways to shed labor per investment dollar, raising the organic composition of capital and reducing the rate of profit on past investments. In other words, there is a competitive impetus to innovate when demand is strong and growing more rapidly than capacity. Crisis then brings a collapse in capital values, which facilitates the buying up of assets on the cheap for those capitalists who survive the process. By reducing the organic composition of capital, the collapse in capital values also bolsters the rate of profit, but this seems unlikely to kick start sustained recovery unless autonomous demand is sufficient to ensure a competitive impetus to invest.

    From either perspective, I think it therefore makes sense to regard strong demand conditions as conducive to strong investment both in accordance with the accelerator principle and for the purposes of technical progress.

    It is not addressed in the papers linked to, but at the micro level the type of investment is obviously also critical, particularly in terms of environmental sustainability. For example, if credit-financed private-consumption expenditure encourages unsustainable forms of economic activity, then although there may be a competitive impetus to invest, it will not be in socially desirable directions. The government will then need to modify the types of activity that are undertaken either through policies to encourage particular forms of private consumption and investment, or through its own consumption and public investment decisions.

    “Confidence fairy” — isn’t that a recent creation of Krugman to ridicule the “expansionary contractionists”?

  4. Hi Peter,

    “Crisis then brings a collapse in capital values, which facilitates the buying up of assets on the cheap for those capitalists who survive the process.”

    My experience is that hasn’t happened this time (primarily because I was waiting for it to happen this time and have found nothing worth buying), which is a bit of a blow to that theory.

    One of the reasons I got into this analysis was because the level of failures didn’t seem to be as high as the crisis warranted. The level of forebearance appears to be very high indeed.

    So there is some other feedback mechanism in place that has heavily dampened the effects of the downturn.

  5. Interesting observation, Neil. A cursory glance at the timing of merger waves on Wikipedia seems to back up your point, mergers and acquisitions appearing to increase during the boom periods.

    I may have fallen into the trap here of thinking in terms of the cost side to the exclusion of revenues. You’ve given me some food for thought.

  6. @Peter

    Thanks, Pete. Great reply. You’ve just given me a lot to think about.

    There’s, however, something that I found missing in that account (which I understand is quite popular): what about the psychological elements that Keynes valued so?

    And I don’t mean only Chap. 12 (The State of Long-Term Expectation) and the animal spirits thing.

    If you check, Keynes uses a lot the word “prospective”. For instance, in the definition of the marginal efficiency of capital (Chap. 11). Prof. Robert Wolff believes (and I agree with him) that these expectations are subjectively assessed (so that, for instance, the marginal efficiency of capital mixes objective variables, that can be measured, and subjective variables, that cannot)

    This could leave the door open to the “confidence fairy”:

    “This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; — it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.”


    And speaking of which: yes, I, too, associate that label to Krugman, with the same connotations. But I haven’t seen him defining it clearly anywhere. So I am not sure Krugman is the first to use it.


    @ Neil Wilson

    I understand Andrew Kliman believes capital destruction may be hampered by Government intervention. Here’s a short paper on that (I believe he has some newer, but I couldn’t find it):

  7. @Peter,

    Incidentally, I believe Kalecki was referring to the confidence fairy when he wrote (Political Aspects of Full Employment”):

    “2. We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.”

  8. “I understand Andrew Kliman believes capital destruction may be hampered by Government intervention.”

    That is kind of the point.

    Leaving the system to clear ‘naturally’ destroys vast swathes of capital via a demand collapse domino effect. Most of that would be sound.

    The trick is coming up with a circulation maintenance system that gets rid of as much malinvestment as possible while leaving sound stuff standing.

    More neutron bomb, than carpet bomb.

  9. Right, you don’t preserve capital by destroying it. The fallacy of the “malinvestment” account is the old excluded middle, either an enterprise can survive a consolidation or it can’t and if it can’t then its “malinvestment.” The problem with this thinking is that a lot going concerns that are ordinarily profitable get wiped out in a debt-deflation due not only to economic contraction but also credit contraction. Only those with deep pockets can survive, and many of the deep pockets are supporting actual malinvestment.

  10. @Neil Wilson

    I guess this means that your point has received empirical support and that the data Kliman uses as evidence could also be used by you.

  11. Magpie, good comments. I agree that the psychological aspects are of practical importance and incorporating them into analysis adds insight. Although the models discussed in the papers linked to in the post don’t incorporate this aspect, my understanding is that they are intended to be open and compatible with such considerations. Likewise, the models don’t explicitly incorporate money or finance but are intended to be open to different approaches to money, provided such approaches are compatible.

    I like that the models embody the view that even in the absence of uncertainty, there would be no tendency for demand to adjust to a supply-determined level of capacity, but instead it is capacity that is adjusted to demand, the latter being determined by the autonomous components in conjunction with various socio-institutional features of the system influencing savings propensities, etc. This is consistent with the absence of a general tendency, demonstrated in the capital debates, toward the full utilization of the neoclassical ‘factors of production’.

    I am not necessarily advocating this approach ahead of others, although I do find it interesting. In a monetary production economy, an understanding of money seems key, hence my attraction to MMT and circuitism (and the TSSI). Even so, it definitely seems significant to understand that, even abstracting from money and the government sector, demand deficiency is a general feature of a market-based economy and not self-correcting via price adjustments, including in the long run.

  12. … there would be no tendency for demand to adjust to a supply-determined level of capacity, but instead it is capacity that is adjusted to demand ….. demand deficiency is a general feature of a market-based economy and not self-correcting via price adjustments, including in the long run. [peterc]

    I don’t have the logic of the good folk that comment here peter, but in the ‘old world’ way of describing things: “desire is a river that ever flows – it is when it floods or is misdirected we have problems” and “a few golden balls are rolled through the world – most people chase them.”

    I think that is what makes us morons (enjoyed the post above)! We have the intelligence, but we don’t use it. We use up our 25,550 days in the pursuit of dissatisfaction.

    So I guess desire is a ‘supply’ that creates its own ‘demand’? Capacity is the realm of frustration because we never know how to fulfill demand (those few golden balls, largely in the hands of the 1% have never stopped the river from flowing). The discussion is always about imbalances and inequities in capacity control. Not saying we don’t need everything we have; just that competition is not actually ‘logical’? That is, we do not look deeper into the nature of desire. Or ourselves.

    I think ‘idiot’ is more apt: ‘ID’ + iota. Deficiency of self-knowledge ….that to me, is the ocean towards which the river runs?

    Maybe that’s what Sandy is – a symbolic reminder …

  13. I find this bit really insightful and useful, too, to my own purposes:

    “I like that the models embody the view that even in the absence of uncertainty, there would be no tendency for demand to adjust to a supply-determined level of capacity [my comment: private investment], but instead it is capacity that is adjusted to demand, the latter being determined by the autonomous components in conjunction with various socio-institutional features of the system influencing savings propensities, etc. [my comment: private consumption]”

    So, in these models it is private consumption that in definitive matters!

    Then you say: “I am not necessarily advocating this approach ahead of others, although I do find it interesting.”

    I also tend to favor this approach. But perhaps the “confidence fairy” fans could claim to favor the opposite approach (investment more important) based on their own interpretation of what Keynes said.

    And, as far as I can see, on the basis of Keynes’ work (which is the matter I am trying to elucidate), this could be a perfectly defensible position.

    IN other words: If the austerians’ position were to be challenged, it would have to be on different grounds. It would not do just citing Keynes; they could reply by simply producing the quote I offered above.

    Ironically, while Krugman could be misinterpreting Keynes, the austerians could be actually missing a good talking point (which I do not intend to provide to them!).

  14. On an altogether off-topic subject: whatever happened to The Stubborn Mule blog? (

    Sean (aka Stubby, the mule) is an MMTer (although he writes on a variety of subjects, not always or even mainly MMT). He’s also a general nice guy and intelligent poster.

    If other MMTers reading this know what happened, please let me know.

  15. “I suspect that the confidence fairy will be one of my lasting contributions to economic discourse” – Krugman

    “Conservative economists and their friends like to trot out a mythical being whenever they want to make arguments that favor an economy built for the wealthy at the expense of ordinary people. This imaginary being, known as the Confidence Fairy, is only happy when capitalists are given free rein to do whatever they want – even if it brings us to the brink of a global economic meltdown.” – Paul Davidson

  16. I see opportunity as the key concept for growth.

    Opportunities multiply as they are seized.
    Sun Tzu (circa 300BC)

    The basic process is that economic actors will search their opportunities and the process of search creates new knowledge. Some of this knowledge accumulates over the long term. This production schema isn’t like static production models. The accumulation of knowledge is natural and part of the production process when there is even a moderate amount of freedom to search. The process of search is also inherently asymmetric and therefore the economy has inherent disequilibrium embedded at the level of micro economic behaviour. This is not something that’s adequately modelled by aggregates.

    Growth is one of the problems at hand for those who advocate fiscal stimulus. The problem is how to use the state to maximise opportunity, searching, information gain and long term growth. State intervention has traditionally been based on planning which reuses existing information. Planning clearly has a place, but planning and search are fundamentally different processes. Hayek, Friedman and many on the right define freedom as a lack of restraint by government but how can someone be considered free if they are so economically marginalised as to have no opportunities in the lawful economy. Freedom should be properly understood as the set of opportunities because lack of government restraint would only allow the powerful few to constrain the opportunities of the many. Nobody is free to do more than the opportunities available to them. If I define freedom as individual opportunity then I should be able to say when the state looks after freedom then the economy should look after itself (after Keynes, “Look after unemployment and the Budget will look after itself”).

    People who want power attempt to maximise their own opportunities at the expense of others. Capitalists often try to destroy capitalism in this way because growth happens when opportunities are maximised for the majority. In the long run, growth is an increase in knowledge, an increased ratio of virtual to physical. This is also a problem for capitalists because knowledge has always been a cultural commons. In the long run it can’t be owned. There is a major land grab of intellectual capital going on at the moment as corporations attempt to fence in the intellectual commons using patent law. There are strong countervailing powers in this area but collective rights have been eroded by small drips in other areas and dysfunctional intellectual property rights could become as big a problem for capitalism as the inadequacies of the monetary system. When considering the long term, there are major institutional issues to be resolved.

    Tom Hickey has previously suggested that the monetary system should work like homeostasis. If this were the institutional context then demand deficiency would be meaningless. The tendency for long term demand deficiency is a result of inadequate institutions that we could collectively decide to change.

    Shouldn’t Baron Kaldor be central to a discussion on growth and Keynes?

  17. Some great discussion here. Thanks, everyone.

    Hacky, this sentence especially resonated with me:

    In the long run, growth is an increase in knowledge, an increased ratio of virtual to physical.

    And if we take this view, growth need not be damaging to our environment.

  18. “In the long run, growth is an increase in knowledge, an increased ratio of virtual to physical.”

    This is Bucky Fuller’s point. Physical resources are finite, metaphysical resources are infinite. Application of knowledge through innovation increases productivity, allowing humans to “do more with less.” This is why we are the dominant species on the planet.

    But “a little knowledge is a dangerous thing.” Humans are capable of scaling up their impact on the planet with out scaling up knowledge in a distributed fashion, so that if knowledgeable people are not in charge or if all consequences have not been anticipated, the increasing rate of complexity may outrun the adaptability rate and rage of return on coordination. This may force period of consolidation and even retrenchment.

    Moreover, the application of knowledge is power. As power increases, so does the threat of extinction due to abuse of power.

    So we have a double-edged sword here.

  19. I don’t believe in the Landauer limit or the Bekenstein bound. These theories don’t take into account the context of changing a bit. In a highly complex state machine, changing state by a bit represents a change in the context of all bits in the system. The amount of information encoded in the bit depends on the complexity of the context. Information encoded in a bit depends on the entropy in the context or the unexpectedness of the change of context state, i.e. the change in the whole resulting from a change in a part.

    I also believe in unrestricted comprehension in mathematics. It’s quite easy to build paradoxes in physical form. Excluding them from mathematics would restrict the extent that maths can model the physical world.

    The implication of these two beliefs is that there are still large areas of mathematics and physics that are unknown. There are a lot of great thinkers who have told humanity that it doesn’t know as much as it thinks it knows (paradoxically). Some of the greatest economists, mathematicians and scientists have made this point. As soon as they’re gone people start busily papering over the cracks and weaving the illusion of certainty which is just a psychological comfort. I think Peter phrased it about right, “growth need not be damaging to our environment” in the same way that deficits aren’t necessarily bad (or good). Growth could be bad or good. It all depends.

    Having said that, I’m one of the biggest growth bugs around. I like all the growth theories. I suspect the inspiration for this blog was to reconcile the paradox of thrift with growth theories. My view is that growth theories have a completely different definition of saving. It’s possible to talk about long term over a thousand years or over a billion years. Over these periods of time accumulation is always information. Physical implementations decay over long periods and we don’t know of a monetary system that has been stable enough to last for a thousand years. Information is the only form of accumulation that can last over the long term. I don’t see a problem in reconciling MMT with growth theories because I think of it as a Wittgenstein type language problem.

    That may have been a bit long winded to follow. I’m pretty much agreeing with people, including Buckminster Fuller.

  20. I would also say that economists’ understanding of “growth” is skewed by the utilitarian/rationality model that has captured mainstream economics. I look at it as “the one who dies with the most toys wins” model. It presumes that economics is amoral, that is, value-free. It’s based on a narrow view of human nature that doesn’t accord with scientific findings in other fields or perennial wisdom. It’s not representational. It’s major excuse is computational convenience.

    Most significantly, it’s ignorant of the metaphysical dimension that virtually all great minds celebrate and great hearts aim for — what we call “the human spirit” and its works. There is huge scope for genuine growth rather than a cheap imitation of it by piling up stuff produced to meet manufactured wants rather than actual needs, including self-actualization. (See Abraham Maslow on management.)

    “It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question.” — J. S.Mill, Utilitarianism

  21. The quote from Mill is surprising, considering he was one of the prime movers of utilitarianism. I suspect the comment is directed at the hedonistic school of utilitarians. In the 18th and 19th century utilitarianism was a new hammer and people were looking for nails to hit. It’s certainly overused in economics.

    My view on meta layers is a bit different, but I agree that meta processes have not been considered scientific and now this view is changing. People are understanding that meta processes can be understood in a scientific way. I’ll write up my views on meta evolution at some point but I’m sorry that I haven’t got time at the moment.

  22. Hey Peter, can you please tell Magpie I am on comment moderation over at his site?


  23. The ‘animal spirits’ problem is an example of innate behaviour that has evolved in response to the problems described by population ecology.

    In my view this behaviour evolved as a heuristic that maximises information gain in response to unpredictable environmental factors. We attempt to “make hay while the sun shines”. In economics this is an inappropriate heuristic because the economy is an environment that we’re largely in control of. The innate heuristic does explain why self defeating austerity is popular in crisis.

    Also, there is no long run normal. Normal is for static models.

  24. Better late than never, I suppose.

    Sorry Trixie, only now I saw your comment above; the comment you left on the moderation list, well, it disappeared.

    I was an unintended rudeness. Sorry!

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