Pasinetti, Keynes and the principle of Effective Demand

This paper explores the relationship between the Keynesian multiplier and Pasinetti's (1981) model of pure production. Key assumptions of Pasinetti's model are its multi-sectoral structure, the definition of all income as a reward to labouring activities, and as a consequence the operation of a pure labour theory of value. A translation between these models is effected by introducing investment as an exogenous determinant. By drawing from Keynes to apply his concept of the wage unit, it is possible to aggregate from Pasinetti's multi-sectoral model to a genuinely macroeconomic multiplier. For theorists and policy makers, this provides a way of using the Keynesian multiplier without making the restrictive one-commodity assumption. In addition, this formal demonstration adds to the hitherto largely textual literature on the relationship between the wage unit and the labour theory of value. Finally, this derivation contributes to recent debates between Pasinetti and his critics. Emphasis is placed upon the interpretation of Pasinetti's model as a simplifying device, bringing clarity and precision to economic theory, without making any rash claims about its pre-institutional status. In particular, this approach enables a more precise judgement to be made about which aspects of money are primary or secondary to the principle of demand.