The tendency of effective demand to lag behind the supply of full employment
Arturo Hermann is Senior research fellow at the Italian National Institute of Statistics (Istat), Rome, Italy.
Please cite the paper as:
Arturo Hermann, (2016), The tendency of effective demand to lag behind the supply of full employment, World Economics Association (WEA) Conferences, No. 1 2016, Capital Accumulation, Production and Employment:, 15th May to 15th July 2016
This paper has been included in the publication
“Capital and Justice”
Following our long-standing interest for the analysis of economic imbalances, in this work we concentrate our attention on the tendency of effective demand to lag behind the supply of full employment.
In fact, in the post Keynesian oriented analysis, much attention has been paid to the destabilizing effects of the “financial capitalism” of today. Along these lines, a number of important issues have been investigated, from labour market to banking policy, from market imperfections to international relations. Among them, an aspect which has received a good deal of attention has been the marked redistribution of income in favour of the wealthier classes that has occurred in the latest decades. This phenomenon has had an adverse effect on the effective demand because, as is known, the marginal propensity to consume tends to be higher with lower incomes. In these contributions, with the exception of the latter aspects, the role of effective demand has been perhaps put a bit in the background in the explanation of economic imbalances.
In fact, our overall impression is that the emphasis has been more on the effects of financialization on the economic system than on the effects of the chronic insufficiency of the effective demand (of full employment, however defined) on the emergence of financial-led economy.
We have organized the work as follows. In the first chapter, we will address the main aspects of Keynes’s theory of effective demand. We underscore its revolutionary import, together with some aspects of weakness which, in our view, are caused by some adherence of his theory to the neoclassical theory of labour market. In this light, we also briefly compare Keynes’s approach with the main theories of under-consumption.
In the second chapter we will outline a broad theory of effective demand by analysing more in detail the irreplaceable role of public spending and credit creation in sustaining effective demand, and profits for the entrepreneurs.
Then, in the third chapter we will address a number of structural factors that may contribute to render more complex and slow the dynamics of effective demand.
In the concluding chapter, we will focus attention on the policy implications of this analysis for the imbalances of today.