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and Effective Demand

By  and Ramaa VasudevanDaniele Tavani and Ramaa Vasudevan


We present a simple three-class model in the Kaleckian tradition to investigate the implications of a dominant managerial class class for the dynamics of demand and distribution. Managers are hired by capitalists to supervise workers, but supervision results in surplus extraction and wage inequality. The adjustment of capacity utilization to accommodate goods market disequilibrium produces two distinct regimes with respect to the responsiveness of investment demand to profitability: a low investment–response regime, where effective demand is both wage–led and inequality–led; and a high investment–response regime, where demand is profit–led. In accordance with recent empirical evidence for the US, we then introduce distributive dynamics that hinge on inequality squeezing workers’ wage growth. We find that the low investment–responsiveness regime produces a stable demand–distribution equilibrium only if the wage squeeze effect is relatively small. On the other hand, an equilibrium in the high investment–response regime is saddle–path stable. The main distributional implication of the wage squeez

Topics: Effective Demand, Capacity Utilization, Wage Inequality, Stability. JEL Classification Codes
Year: 2012
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