Demand-led growth

The demand-centric theory is built on the foundation of work by thinkers such as John Maynard Keynes, Michał Kalecki, Petrus Verdoorn, and Nicholas Kaldor; and is expanded on through research by organizations like the ILO and the Levy Economics Institute of Bard College.

[1] The second school gives preference to the notion of profit-led growth, which maintains the rationale that the profit-seeking behavior of individual firms is the primary source of increased total output; although many who follow this school of thought do acknowledge the possibility that negative effects on consumption that result from a higher profit share will be felt in the long run.

To offer an example, a study by Robert A. Blecker, professor of economics at American University, found that both labor share and general economic activity in the United States were lower in the neo-liberal era than in the post-WWII era, while still maintaining that a higher profit share is associated with faster GDP growth, higher capacity utilization, and more rapid capital accumulation in the short run.

Several economists believe that most economies are profit-led in the short run, however, they challenge the long term viability of the theory by suggesting that it could be a race to the bottom.

[5] This theory commands slower-paced growth and is more viable in the long run, however, it relies heavily on technological change to redistribute wages and labor in order to continue along the cumulative causation trend.

This can occur in many ways, a common objective involves keeping price levels low in an effort to entice consumers to purchase goods.

In large economies, economic targets that affect aggregate demand are often identified on a micro-level, and demand-led growth may be the result of legislation, regulation, or administrative changes.

However, recent political movements in the U.S. have increased the chances that the minimum wage there will nearly double, which raises the possibility that the U.S. will develop more distinctly under a wage-led demand regime.

In addition, fiscal and monetary policies that allow for or promote private organizations that give collective bargaining rights to laborers contribute to the wage-led growth theory.

[9] Some U.S. cities have doubled the federal minimum wage in an effort to meet cost of living increases in major metropolitan areas.

[11] In Keynesian theory the individual factors of aggregate demand can exert inflationary pressure on the prices in the overall economy, rapid increases in consumption by firms, spending by government, exports relative to imports, typically abbreviated and expressed in the following equation:[12]

Additionally, a strong middle class contributes to demand-led growth by supporting education, providing human capital, enabling entrepreneurship, and acting as the foundation for inclusive political and economic institutions.

[18] Various entities and groups play a role in the general response to an increase in aggregate demand, and there is an obvious diversity among the winners and losers when such economic changes take place.