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Cambridge Journal of Economics 26:275-277 (2002)
Copyright © 2002 Cambridge Political Economy Society

Notes and Comments

Financial institutions and the Cambridge theory of distribution

Thomas I. Palley

AFL-CIO, 815 16th Street, NW, Washington, DC 20006, USA; tpalley{at}AFL-CIO.org

Abstract

This paper shows how the Cambridge theory of distribution is affected by the nature of financial intermediation. When credit markets are akin to loanable funds markets in which lenders transfer resources to borrowers, the Cambridge theory holds and steady-state income distribution is independent of workers' saving behaviour. However, when credit markets embody endogenously generated bank money, the Cambridge theory does not hold. Financial institutions and endogenous money therefore matter for long-run steady-state outcomes, just as they do for short-run macroeconomic outcomes.

Key Words: Cambridge theory • Pasinetti theorem • Loanable funds • Endogenous money


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