Demand-led growth

Demand-led growth is the foundation of an economic theory claiming that an increase in aggregate demand will ultimately cause an increase in total output in the long run. This is based on a hypothetical sequence of events where an increase in demand will, in effect, stimulate an increase in supply (within resource limitations). This stands in opposition to the common neo-classical theory that demand follows supply, and consequently, that supply determines growth in the long run.

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.

Within the theory of demand-led growth, there exist two schools of thought. The first claims that an increase in wage share is the impetus for growth. A study by the ILO, to illustrate, concluded that higher wage shares correlate with increased productivity, and suggests policies including "improved union legislation" and "increasing the reach of collective bargaining agreements" to assist in increasing wage shares.^[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.^[2]