The Great Financial Crisis and Functional Distribution of Income

This article provides a post-Keynesian analysis of economic growth and discusses the effects of austerity measures on demand in countries where growth is wage-led. It finds that growth is predominantly wage-led in both the United States and the Eurozone, although it is profit-led in some European Union countries. Profit-led growth may flourish under austerity measures, whereas wage-led growth requires economic stimuli (and reforms) to address an economic downturn. The dominant policies of addressing the great financial crisis currently are austerity measures to deleverage balance sheets, incidental interventions to save banks, and market reforms. However, these policies ignore the effects of the functional distribution of income on growth and are not likely to turn the tide in economies where growth is wage-led. Distribution of income cannot be left to market=mechanisms alone. A decent society requires a government policy of income distribution.