The Supply Side and Macroeconomic Performance I: Technological Evolution

Abstract

In Chapter 3, it was suggested that Kaldor’s model of cumulative causation can be interpreted as a first step towards understanding macroeconomic dynamics under conditions of hysteresis. Recall that our characterization of this model in equations [3.1]—[3.4] can be summarized as:

$$\frac{{{{\dot Y}_{jt}}}}{{{{\dot Y}_w}}} = {({\lambda _j}{\alpha _j}{\beta _j})^t}\frac{{{{\dot Y}_{j0}}}}{{{{\dot Y}_w}}} + {\lambda _j}({\gamma _j} - {\alpha _w}{\beta _j})\sum\limits_{i = 0}^{t - 1} {{{({\lambda _j}{\alpha _j}{\beta _j})}^i}} $$

([3.10])

where 0 < λ _j α _j β _j < 1. The limit result of this expression was shown to be a determinate equilibrium (equation [3.8]). However, in Chapter 3, it was suggested that this determinate long-run outcome will be of no practical consequence if we assume that adjustment towards it is slow relative to the speed at which the data defining it are themselves changing over time. This assumption was, in part, justified by the suggestion that these data may themselves ultimately be sensitive to the prior growth path of a region. In this and the following Chapter, we will explicitly study mechanisms which may give rise to changes in the coefficients α _j and γ _j , which play a key role in defining the long-run growth outcome in equation [3.10] (and its limit, equation [3.8]). This will be shown to transform the model of cumulative causation developed in Chapter 3 into a more generally hysteretic model of long-run growth and development.