Inside debt, aggregate demand, and the Cambridge theory of distribution

This paper presents a Kaleckian model of aggregate demand with inside debt and a generational structure. The model shows how worker borrowing and population growth affect the level of aggregate demand. It also re-examines the Cambridge theorem, and shows that the introduction of inside debt arising from worker borrowing means that the rate of profit and profit share are no longer independent of worker consumption behaviour because increased worker borrowing increases capitalists' debt service income. This necessitates a decline in profits to maintain the balance between capitalists' savings and their investment funding requirement. (C) 1996 Academic Press Limited.