ABSTRACT
As a matter of definitions private investment plus budget deficit plus export surplus, which can be called together net injections into the aggregate demand, are ex definitione equal to private savings. A major economic problem is the question what determines what: do net injections determine private savings or vice versa? This very question seemed to be definitely resolved at the time when The Economics of Full Employment (1944) was published, and for many years thereafter the theory of effective demand giving priority to net injections seemed to be well established. But since the oil crisis and the surge of inflation in the 1970s a new paradigm in economic theory has prevailed. This new paradigm was not quite new. Mainstream economics returned gradually to the old laissez-faire competition theory which the theory of effective demand had seemed to substitute for good. According to the new-old theory, the spontaneous action of market forces is an optimal solution for all economic problems. As far as unemployment is concerned, the new-old theory has returned to the view that it is mainly caused by real wages being too high and by lacking flexibility of the labour force and has nothing to do with aggregate demand. The policy conclusions derived from the new-old paradigm were contrary to the recommendations of the theory of effective demand given in the famous paper of Michal Kalecki (1944a), ‘Three ways to full employment’. Those very conclusions have been, in the opinion of the present author, mostly responsible for the high unemployment in Germany and the EU in the last decades.
