On the Endogenous Sustainability of Economic Growth: Why Is the Scale of Government Enlarged?

Abstract

Almost every developed country experiences serious enlargement of the scale of government , specifically the expansion of fiscal deficits. We inquire why such a phenomenon is so prominent based on a Keynesian growth model entirely compatible with a standard neoclassical microeconomics. The cost-minimizing investment plays a key role. Whenever the demand that each firm faces is constrain ed by the effective demand (such case includes the situation of monopolistic competition), a firm strives to raise the productivity of labor and save its production cost. Such a process incessantly continues even if the effective demand is kept intact. It also implies that the unemployment would tend to be unbounded because the labor productivity improves under the constant effective demand. As such, a ceaseless expansionary aggregate demand policy is inevitably required for sustaining explosive potentials of production.