ENDOGENOUS GROWTH THEORY
Neoclassical growth theory (both first andsecond generations) focuses on modelling the expansion of potential output on the supply side of the economy, with aggregate demand assumed to passively adjust to accom-modate potential output. In other words, it embodies Say’s Law: aggregate supply creates its own demand, and there is no prospect of ‘Keynesian problems’ arising from deficient aggregate demand at any point in time. As a result of this, the economy’s long-run potential growth path becomes its long-run actualgrowth path.25The essential vision of neoclassical growth theory may thus be characterized as follows:
(1) (2) where yand ypdenote the rates of growth of actual and potential output per capita, respectively, and Xis a vector of variables reflecting the growth of the quantity and/or productivity of factor inputs. Equation (1) consti-tutes little more than a dynamic aggregate production function, and as was made clear in the previous section, the variables Xmay be taken as exoge-nously given (as in the Solow model) or explained within the confines of the model itself (as in NEG theory). Equation (2) establishes the growth of
yyp ypf(X), f 0
potential output as the proximate determinant of the growth of actual output. Combining (1) and (2), then, we arrive at:
(3) which establishes that the ultimate determinant of the actual rate of growth is growth in the quantity and/or productivity of the factors of production.26 In contrast to the neoclassical, supply-led vision of growth, Keynesian demand-led growth theory focuses on modelling the expansion of actual output as a result of developments on the demand side of the economy.
Aggregate supply is treated as adjusting, within limits, to accommodate demand-led changes in actual output – what Cornwall (1972) terms ‘Say’s Law in reverse’ – through changes in capacity utilization and/or changes in the natural rate of growth resulting from induced factor accumulation, factor migration (both occupational and geographical) and technical progress.27The result is that potential output determined on the supply-side of the economy does not create an autonomous and necessarily binding constraint on the path of actual output in demand-led growth theory.
Rather, long-run growth is essentially demand-determined in much the same way that Keynesians have always argued that the levels of real output and employment are essentially demand-determined in the short-run. The central vision of Keynesian growth theory may thus be characterized as follows:
(4) (5) where Zdenotes a vector of variables determining the rate of growth of demand and all other variables are as previously defined.28In equation (4), the actual rate of growth of output is determined by factors affecting the rate of growth of aggregate demand. Note that demand-led growth models typically furnish explicit theories of the growth of aggregate demand, so that the rate of growth of actual output described by these models results from the solution of the models themselves. In this way, there is a close association between demand-led growth theory and the first definition of endogenous growth theory presented in Section 2.
The growth of aggregate demand is translated into the growth of actual output in the first instance through variations in the utilization rates of pro-ductive resources, the latter conceived as being typically under-utilized at any given point in time in the demand-constrained vision of Keynesian macroeconomics. But demand-led growth theory also allows for aggregate
ypy yg(Z), g 0
yf(X)
supply to respond to aggregate demand via the endogeneity of the natural rate of growth to the actual rate of growth. This is captured in equation (5), wherein the actual rate of growth is presented as the proximate determinant of the rate of growth of potential output. Combining equations (4) and (5), we arrive at:
(6) according to which the ultimate determinants of the growth of potential output are factors affecting the growth of aggregate demand.29As inti-mated earlier, this relationship arises from the purported impact of changes in the demand-led actual rate of growth on a variety of phenomena trad-itionally associated with the supply-side of the economy, including factor accumulation, factor migration, and technical progress. Mention of the latter at this juncture draws to attention the close association between demand-led growth theory and the second definition of endogenous growth theory provided earlier.
The distinction between demand-led and supply-led growth only comes to light once we acknowledge the variety of growth theories that is other-wise obscured by the neoclassical ‘capture’ of both the history and termi-nology of growth theory. Moreover, this distinction, once uncovered, reveals an immediate affinity between demand-led growth theory and endogenous growth theory by eitherdefinition of the latter stated earlier.
In other words, in addition to the NEG theories previously discussed, which are often exclusively associated with the notion of endogenous growth theory, we can also identify a family of Keynesian endogenous growth (KEG) models that satisfy either one or both of our definitions of endogenous growth theory. There are two main strands of KEG theory:
Kaldorian and neo-Kaleckian. Neo-Kaleckian growth theory has its roots in Robinson’s (1956) Accumulation of Capitaland the two-sided relation-ship between investment and profit emphasized by Kalecki (1935), accord-ing to which investment creates profit (via an income-expenditure process) and profit creates investment (since profit expectations motivate invest-ment, whilst realised profits finance investment). Rowthorn (1981) and Dutt (1984) are the progenitors of formal neo-Kaleckian models of growth; see Blecker (2002) for a survey of contemporary neo-Kaleckian growth theory. The focus of neo-Kaleckian growth theory is the relation-ship between growth and the functional distribution of income – specifically, the question as to how changes in the latter affect the former.
Neo-Kaleckian models typically abstract from technical progress: these are endogenous growth models primarily in the sense of the first definition of endogenous growth introduced above.30
ypg(Z)
Kaldorian theory, meanwhile, is rooted in the various contributions to growth theory made by Nicholas Kaldor, and especially his post-1966 work on cumulative causation (see, for example, Kaldor, 1970, 1972, 1985, 1996).
Dixon and Thirlwall (1975) are the progenitors of formal Kaldorian models of growth; see McCombie and Thirlwall (1994) for a survey of con-temporary Kaldorian growth theory. Kaldorian theory focuses on the recursive interaction of economic growth and technical progress in an open economy context. Endogenous technical progress is understood to arise from a variety of sources, including the external economies of scale or
‘spillover’ effects that are also a feature of some NEG models.31In this way, Kaldorian models satisfy both of the definitions of endogenous growth theory stated earlier.
The distinction between Kaldorian and neo-Kaleckian growth theories outlined above is somewhat false. Both are of the same KEG genus, so that models from both strands can ultimately be regarded as partial represent-ations of essentially the sameunderlying demand-led growth process. To see this more clearly, note that using only national income accounting iden-tities and assuming a constant capital-output ratio, we can write:
(7)
where qis the rate of growth of labour productivity as previously defined, wis the rate of growth of real wages,r is the growth of the rate of profit and is the wage share of income. Equation (7) makes the simple statement that productivity growth must break down into real wage growth and/or profit rate growth according to somedistributional schema: the seemingly proprietorial themes of Kaldorian models (technical progress and hence productivity growth) and neo-Kaleckian models (the functional distribu-tion of income) are thus intimately related.32It is significant in this regard that efforts are now being made by Kaldorians and neo-Kaleckians alike to provide generalized models of growth, distribution andtechnical change (see, for example, Bhaduri, 2006 and Naastepad, 2006).33