Supply and Demand in the Theory of Long-run Growth
25Inspired by these developments, it has now become conventional to writethe history of modern growth theory in terms of a seamless development of supply-oriented, neoclassical growth analysis, which begins with Solow (1956)and leads directly to NEG theory.
The work of Harrod, together with the laterCambridge growth theory of Robinson (1956), Kaldor (1955–6, 1957) andPasinetti (1962), and more recent Kaldorian (see, for example, Kaldor 1970,1985; Thirlwall, 1979; McCombie and Thirlwall, 1994) and Kaleckian (see, forexample, Rowthorn, 1982; Dutt, 1984; Blecker, 2002) contributions are ignoredaltogether.
The upshot of all this is that growth is now commonly representedas an unambiguously supply-side process. Hence Stern (1991, p. 123) deﬁnesgrowth theory as being ‘about the accumulation of physical capital, the progressof skills, ideas and innovation, the growth of population, how factors arecombined and managed and so on … [and] therefore, principally, about thesupply side.’ There is no hint that demand may play a role in either thedevelopment or subsequent utilization of the productive forces he names.
2. Demand-led Growth
The contributions to this symposium challenge the supply-side vision of growth.Demand-led growth theory identiﬁes a twofold impact of demand on growthrates. First, there exists a potential for effective demand failures, even in the longrun. Second, demand conditions inﬂuence the development of productive re-sources (and hence the potential output of the economy) over time. Demandmatters, therefore, not just because of its chronic inﬂuence on the utilizationrates of productive resources (and hence the proximity of the actual to thepotential output path of the economy), but also because of its impact on thequantity and productivity of inputs, and hence the potential output path itself.
2.1. Demand and the Utilization of Productive Resources in the Long Run
According to demand-led growth theory, there is no supply-determined equilib-rium towards which the level of output inevitably and inexorably converges.
This observation is borne out by even the most cursory examination of contemporary textbooksongrowththeory.See,forexample,Barro&Sala-i-Martin(1995),Aghion&Howitt(1998)andJones(1998).
NEG theory can be thought of as part of a colonizing project, in which economic theory, and socialscience more generally, are being re-written (with the aid of the sort of revisionist history describedabove) in the image of neoclassical economics and its singular methodological emphasis on theatomistic, optimizing, individual agent (Fine, 1999, 2000). Some mainstream economists haverecently begun to acknowledge, celebrate and encourage this imperialism (see, for example, Lazear,2000).Harrod’s exclusion from contemporary histories of growth theory is rendered somewhat ironicby the fact that, in NEG theory, the engine of endogenous growth is Harrod’s constant marginalcapital—output ratio (see, for example, Hussein & Thirlwall, 2000). This, coupled with the fact thatKaldor is the true modern progenitor of endogenous growth theory (Palley, 1996b; Hussein &Thirlwall,2000),cementstheideathatthekeydifferencebetweenneoclassicalandKeynesiangrowththeories is their treatment of demand, and not assumptions about technical properties of therelationship between inputs and outputs.