Investment and savings. Supply-side vs. demand-side macroeconomic equilibria
One of the oldest issues in the history of economic thoughts is the question whether supply determines demand or demand determines supply. The supply-side argument, known as Say’s Law, is based on the idea that the motive behind supply is always the suppliers’ desire to earn income for being able to satisfy their wants. Thus, supply eo ipso implies demand, or as it was also formulated: Supply creates its own demand. The demand-side argument, central to the theory of Kalecki and Keynes, says that not the desire to purchase (i.e. notional demand) but effective demand is relevant. Since it cannot be taken for granted that the level of effective demand is high enough to absorb any volume of supply, firms base their production and employment decisions on the level of effective demand that they expect. Thus, expected demand determines supply i.e. the level of production and employment.
KeywordsProduction Labor Production Work Effective Demand Investment Demand Capital Intensity
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