Demand-Led Growth Theory in a Classical Framework: Its Superiority, Its Limitations, and Its Explanatory Power

CSWP 29 (March 2018)

Author Matthew Smith

Keywords Growth; J.M. Keynes; Classical Economics; Economic History; Development

JEL O40; B51; N00

The main purpose of this paper is to show that the Keynesian-Kaleckian demand-led theory of growth proposed within the classical framework of prices and distribution as articulated by Sraffa (1960), is superior to the neoclassical supply-driven theory in explaining economic growth. After showing the fundamental theoretical problem with the neoclassical supply-driven approach to growth, we expound a demand-led model of growth that abandons ‘steady-state’ and, instead, adopts an ‘historical approach’ in which the data is specified for historical periods of time. The model incorporates the contribution of technical progress to demand-led growth and, thereby, provides the basis to identify the most important political, social, and institutional developments that historically explain growth and economic development since the advent of capitalism. Our historical analysis shows how demand-led growth theory can provide the foundation for a new and more coherent interpretation of the history of economic development.


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