Growth, external markets and stock–flow norms: a Luxemburg–Godley model of accumulation

Abstract

Abstract This paper explores the idea that in capitalist economies, external markets are the driving force behind long-run economic growth. To this end, a model is developed so that the dynamics of external demand, consumer spending, capital accumulation, income distribution and capitalists’ net financial assets can be analysed together as a complete system. The model shows how, in the long run, if capitalists adjust spending to keep financial wealth at desired levels, and investment reacts to aggregate demand in a Harrodian fashion, then this can cause the rate of capital accumulation to gravitate towards the growth rate of external markets. This occurs even if external demand only accounts for a small share of total economic activity. Based on this framework, the paper argues for a reinterpretation of the relationship between profits and growth during the neoliberal period in the USA.