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).
Keywords: Growth and Distribution, Classical Political Economy, John Maynard Keynes, The End of Laissez-Faire
JEL classification: B12 E11 E12 O41
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