On the short- and long-run

“… The long run trend is but a slowly changing component of a chain of short run situations; it has no independent entity …” Kalecki

That is the long-run is just a sequence of short-runs. And that these short-runs are all linked by path-determinancy – so you are today where you have come from. Effective demand (with investment as a major variable component) drives output and employment, but, in turn, influences investment (through expectations and profit realisation), which determines the path of potential output.

Investment today – by expanding productive capacity – requires a growth in effective demand tomorrow to absorb the output forthcoming from that extra productive capacity. This was a problem well understood by the likes of Roy Harrod and E.V. Domar (and Marx) – all who were largely ignored by the mainstream growth theory that underpins Alan Blinder’s short-run and long-run division.

In considering the long-run as a sequence of short-run situations he considered long-run influences to be manifest and developed within the short-run.

What are these long-run forces? Answer: factors that have an enduring influence on the path the economy takes. So these factors are evident by the sequence of short-run situations and so analytically it is impossible to decompose the long-run from the short-run.

Editor’s note: Keynes also said: “In the long run we are all dead”!

Chosen excerpts by Job Market Monitor. Read the whole story at 

via The spurious distinction between the short- and long-run | Bill Mitchell – billy blog.