Introduction: the importance of aggregate demand for full employment and rising living standards

Abstract

With an emphasis on developments during and after the Great Recession, and paying due attention to the impacts of austerity policies, the chapters assembled here explain that maintenance of suitably high growth of aggregate demand is as essential as ever to achieving full employment and rising living standards. Written by distinguished Keynesian and Post-Keynesian economists from diverse national backgrounds, the chapters tackle theoretical and empirical issues in an effort to illuminate the economic experiences of both large areas of the world and specific economies. The volume is organized into three parts, the first of which deals with ‘Theoretical Considerations’. The opening chapter by J.W. Mason, on ‘Macroeconomic lessons from the past decade’, emphasizes the continued relevance of the principle of aggregate demand, first stated in its modern form by J. Maynard Keynes. Mason views aggregate demand deficiency as evidence of a coordination problem, which he identifies as the central economic problem in demand-constrained economies. He draws three lessons for macroeconomic theory and policy of the U.S. experience since 2008. The first is that we should recognize that short-run fluctuations of output and employment are dominated by fluctuations in aggregate demand, not by demographics, technological change or other supply-side phenomena. Second, we should be wary of drawing a sharp distinction between a short run in which growth is demand-determined and a long run in which it is fundamentals-determined. The U.S. experience analysed by Mason suggests that weak growth in employment, productivity and output due to an aggregate demand gap can persist beyond any reasonable definition of the ‘short run’. Third, we should realize that the once-orthodox stabilization policy narrowly focused on the central bank manipulating its key policy rate has become untenable. The policy rate is not only a much weaker tool for stabilizing aggregate demand than was widely believed before 2008,