Inside debt, aggregate demand and the Cambridge theory of distribution: a note

Palley (1996. Inside debt, aggregate demand, and the Cambridge theory of distribution, Cambridge Journal of Economics, vol. 20, 465-74) argues that, when inside debt is taken into account, the Pasinetti theorem does not apply. Palley's conclusion, however, derives from a mis-specification of the steady growth equilibrium condition, according to which capitalists' accumulation of wealth equals their saving. In this note, Palley's mis-specification is corrected and it is shown that, when the rate of profits is equal to the rate of return on debt obligations, the Pasinetti theorem still holds. Furthermore, the range of validity of the dual theorem of Meade (1963. The Rate of profit in a growing economy, Economic Journal, vol. 73, no. 292, 665-74) and Samuelson and Modigliani (1966. The Pasinetti paradox in neoclassical and more general models, Review of Economic Studies, vol. 33, no. 4, 269-302) is severely reduced.