Introduction:

The neo-Kaleckian growth model, pioneered by Rowthorn (1982), Taylor (1983, 1991), Dutt (1984), Bhaduri and Marglin (1990), and Lavoie (1995), has become a workhorse of post-Keynesian growth theory. A key feature of the model, principally attributable to Taylor (1983, 1991) and Bhaduri and Marglin (1990), is the distinction between wage-led and profit-led growth. This distinction gives the model both real world richness and policy relevance. In wage-led economies, increases in the wage share of income (i.e. decreases in the profit share) raise capacity utilization and growth. In profit-led economies, the reverse holds. Additionally, there is a third category of conflictive economies, in which increases in the wage share raise capacity utilization but lower growth. The wage- vs. profit-led growth distinction has clear and significant policy implications, and it has sparked a growing empirical literature aimed at identifying the character of economies (Hein/Tassarow 2010; Stockhammer 2011; Onaran/Galanis 2012). Moreover, from a policy perspective, this empirical literature has become even more important given current conditions of slowed growth, high unemployment, and significant change in the distribution of income in favor of profits.

The current chapter expands the neo-Kaleckian model to incorporate nonlinearities, political economy effects, and financial factors. These expansions enrich the model's interest and ability to explain economic outcomes and political conflict over macroeconomic policy. They also have important implications for the growing empirical literature that tends to frame the issue dichotomously (i.e. are economies wage- or profit-led?). In fact, economies can be both wage- and profit-led depending on cyclical circumstance.