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The end of laissez-faire in classical-Marxian models of growth and distribution

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  • Luke Petach
  • Daniele Tavani

Abstract

In this paper, we study a two-class (‘capitalists’ and ‘workers’) model of growth, distribution, and employment that brings together some recent literature in the classical-Marxian tradition (Petach and Tavani, 2019; Franke, 2020; Tavani and Petach, 2021; Petach and Tavani, 2022). The central innovation of the model is the treatment of aggregate demand as a positive externality for individual firms. Despite assuming competitive firms, optimizing behavior, and perfect foresight on behalf of both firms and households, we show that laissez-faire involves underutilization of the economy’s productive capacity. Moreover, both the long-run labor share of income and workers’ share of wealth are higher at full capacity. Thus, fiscal policies aimed at achieving full utilization are unambiguously worker-friendly. For this reason, however, capitalists may oppose fiscal policy aimed at full employment, because such policies reduce the relative standing of the capitalist class in terms of both wealth and income. As such, our model provides a formalization of the argument by Kalecki (1943) regarding the political aspects of full employment. We conclude by responding to some recent criticisms of the aggregate demand externality framework advanced by Gahn (2023).

Suggested Citation

  • Luke Petach & Daniele Tavani, 2025. "The end of laissez-faire in classical-Marxian models of growth and distribution," Working Papers PKWP2514, Post Keynesian Economics Society (PKES).
    • Handle: RePEc:pke:wpaper:pkwp2514
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    References listed on IDEAS

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    1. Franklin Serrano & Fabio Freitas, 2017. "The Sraffian supermultiplier as an alternative closure for heterodox growth theory," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(1), pages 70-91, April.
    2. Stefan Ederer & Miriam Rehm, 2020. "Will wealth become more concentrated in Europe? Evidence from a calibrated Post-Keynesian model," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 44(1), pages 55-72.
    3. Reiner Franke, 2020. "An attempt at a reconciliation of the Sraffian and Kaleckian views on desired utilization," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 17(1), pages 61-77, April.
    4. Luke Petach, 2024. "Assessing the Political Aspects of Full Employment: Evidence from Strikes and Lockouts," Working Papers PKWP2407, Post Keynesian Economics Society (PKES).
    5. Isabella M. Webe & Evan Wasner, 2023. "Sellers’ inflation, profits and conflict: why can large firms hike prices in an emergency?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 11(2), pages 183-213, April.
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    JEL classification:

    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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