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Economic theories

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Thus, as the economy grows, the surplus army of labor shrinks. As the surplus army shrinks, wages will increase. This in turn provides greater incentive to producers to either reduce their demand for labor or to pay more for it. Increased wages are passed along to the consumer in the form of inflation. Marx predicted, however, that in general the situation would work in the other direction. Increasing capital, he presumed, implied that producers were decreasing their staff sizes in order to become more efficient and accumulate more capital. To Marx, this means that an increase in capital accumulation equates to an increase in the size of the reserve army of labor and a corresponding decrease in wages as the unemployed compete with one another for scarce jobs (Green 1991). The reserve army, then, helps to keep costs down allowing for the continued expansion of capital accumulation (Magdoff & Magdoff, 2004)

Kalecki built upon Marxs theories about effective demand. Marx argued that deficiencies in aggregate demand are rooted in the normal workings of the capitalist system (Sebastiani, 1989). Kalecki felt that he could improve upon this theory and provide proof to support it. Marx had emphasized production of surplus