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The Economics of Demand-Led Growth

Challenging the Supply-side Vision of the Long Run

Edited by Mark Setterfield

The Economics of Demand-Led Growth is a collection of specially written essays that develop and apply the theory of demand-led growth. Long-run growth is usually portrayed as a supply-determined process. The contributions to this volume, however, are rooted in the theory of demand-led growth. In addition to general discussions of the role of demand in the long-run, the volume contains essays in the Kaldorian and Kaleckian traditions, and a section on the relationship between demand-led growth and structural change. The conclusion reached is that current neglect of the role of demand in analyses of long-run growth is unwarranted.
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Chapter 12: A Model of Kaldorian Traverse: Cumulative Causation, Structural Change and Evolutionary Hysteresis

Challenging the Supply-side Vision of the Long Run

Mark Setterfield


Mark Setterfield INTRODUCTION In his celebrated critique of equilibrium economics,1 Nicholas Kaldor argued that history rather than equilibrium should be the central organizing concept on which economic analysis is based. This methodological contribution emerged in the context of KaldorÕs rethinking of the economics of long-run growth. Kaldor favoured the VeblenÐMyrdal notion of cumulative causation as a vehicle for analysing growth, not least because it eschewed the conventional notion of equilibrium as a strong attractor defined and reached independently of the path taken towards it. Instead, models of cumulative causation provide a recursive analysis of growth as a self-reinforcing process, indelibly influenced by its own past history. However, not all commentators have shared KaldorÕs enthusiasm for analysing growth in terms of cumulative causation. If growth is inherently self-reinforcing, then this suggests that once Ôinitial conditionsÕ are specified, and in the absence of unexplained shocks, so is the subsequent growth trajectory of the economy.2 As Hargreaves Heap (1989, p. 142) argues, cumulative causation is, at its core, a model of historical continuity, not one of historical change. On this basis, Gordon (1991) has argued that models of cumulative causation display Ôtoo much cumulationÕ in order for them to successfully explain the comparative historical growth record of capitalist economies Ð despite the conclusion of authors such as Amable (1993) that cumulative and divergent forces are of the greatest general relevance for the description of realized growth outcomes over the post-war period. Building on Setterfield (1997a, 1997b), the purpose of this...

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