Introduction
Post-Keynesian growth theory builds on the foundational principles of John Maynard Keynes but departs from mainstream economic models in key ways. Unlike neoclassical theories that emphasize equilibrium and supply-driven growth, Post-Keynesian models focus on demand-driven growth, income distribution, and institutional factors. In this article, I explore the theoretical underpinnings of Post-Keynesian growth theory, its mathematical framework, empirical applications, and its implications for policy-making in the U.S. economy.
Table of Contents
The Core Principles of Post-Keynesian Growth Theory
Post-Keynesian growth theory challenges the neoclassical assumption that markets naturally trend toward full employment. Instead, it argues that economic growth is primarily driven by aggregate demand, investment decisions, and income distribution. The main tenets include:
- Endogenous Demand-Driven Growth – Growth is driven by effective demand rather than exogenous technological progress.
- Role of Income Distribution – Wages and profits influence consumption and investment patterns, which, in turn, affect growth.
- Investment-Led Expansion – Investment plays a central role in determining economic output.
- Rejection of Equilibrium Thinking – The economy is seen as inherently unstable, requiring policy interventions.
Mathematical Foundations
The Kaleckian Growth Model
A cornerstone of Post-Keynesian growth theory is the Kaleckian growth model, which builds on Michał Kalecki’s work. The basic growth equation is:
g = \frac{I}{K}where:
- g is the economic growth rate
- I is investment
- K is capital stock
Investment is determined by expected profitability and capacity utilization. Let s represent the savings rate, \pi the profit share, and u the capacity utilization. Then, the growth rate can be rewritten as:
g = s \cdot \pi \cdot uThis equation highlights how changes in savings behavior, profit distribution, and capacity utilization affect growth.
The Kaldorian Model of Growth
Nicholas Kaldor proposed another Post-Keynesian growth framework where growth is driven by demand and productivity dynamics. His fundamental equation is:
g = \alpha (Y - Y^*)where:
- g is the growth rate of output
- \alpha is an adjustment parameter
- Y is actual output
- Y^* is potential output
Kaldor’s model suggests that an economy’s growth depends on how close it is to its potential output and how quickly investment adjusts.
Comparison with Neoclassical Growth Models
| Feature | Post-Keynesian Growth Theory | Neoclassical Growth Theory |
|---|---|---|
| Growth Driver | Demand-driven (investment and income distribution) | Supply-driven (capital and labor accumulation) |
| Role of Savings | Savings adjust to investment | Investment adjusts to savings |
| Stability | Inherently unstable, requiring policy intervention | Self-correcting equilibrium |
| Income Distribution | Affects growth through consumption and investment | Considered neutral in the long run |
Empirical Applications and Policy Implications
The U.S. Economy
The Post-Keynesian approach provides insights into U.S. economic growth patterns. For instance, rising income inequality reduces aggregate demand since lower-income groups have a higher propensity to consume. This contradicts neoclassical views that savings automatically translate into investment.
Consider the case of the U.S. post-2008 financial crisis. Policymakers implemented demand-side stimulus measures, such as increased government spending and tax cuts for lower-income groups. These measures align with Post-Keynesian principles, as they aimed to boost effective demand.
Policy Recommendations
- Fiscal Policy Activism – Governments should use fiscal policies to manage demand rather than relying solely on monetary policy.
- Progressive Taxation – Redistribution of income enhances growth by increasing consumption.
- Public Investment – Infrastructure and social spending stimulate long-term demand and productivity.
Example Calculation: The Impact of Wage Increases on Growth
Suppose wage share in GDP increases from 50% to 55%, raising workers’ consumption. If the marginal propensity to consume (MPC) is 0.8, the additional spending stimulates demand. Using the multiplier formula:
\text{Multiplier} = \frac{1}{1 - MPC} \text{Multiplier} = \frac{1}{1 - 0.8} = 5If wage increases inject $100 billion into the economy, total GDP impact is:
100 imes 5 = 500 ext{ billion dollars}This example illustrates how redistributive policies can enhance economic growth.
Conclusion
Post-Keynesian growth theory offers a powerful alternative to neoclassical models by emphasizing demand-driven dynamics, income distribution, and investment decisions. By analyzing real-world economic conditions, it provides a robust framework for understanding and addressing contemporary economic challenges. For U.S. policymakers, embracing this approach could lead to more effective strategies for sustaining economic growth and reducing inequality.
