Circular and Cumulative Causation

Abstract

Recent debates, which have informed modern growth theories, have centered on the issue of technical progress. In the original Solow/Swan model, most of the growth was attributable to exogenous technical change, or the so-called Solow residual. As a result, neoclassical growth theories were based on a model in which the greater part of the sources of growth occurred “outside” the model. Technology was analogous to a black box. The problem for the new growth theorists was to endogenize technical progress. However, the basic analytical framework remained essentially neoclassical. In other words, the growth process continued to be a peculiarity of the neoclassical production function with all of its special and restrictive assumptions. Neoclassical and general equilibrium models have been subjected to quite rigorous critiques by post-Keynesian theories. The general rationale for these critiques is that the heuristic assumptions, which inform neoclassical theories of growth, are designated to be entirely unrealistic. In order to account for the “stylized facts,” post-Keynesian approaches emphasize the law of increasing returns, endogenous technical change and the role performed by effective demand as the major sources of long-run, sustainable growth. A more dynamic theory of circular and cumulative causation informs these critiques.