True Circular And Cumulative Causation

In my opinion, what Kaldor calls the principle of circular and cumulative causation (originally ascribed to Gunnar Myrdal) is as much an important principle in economics as is the Keynesian principle of effective demand. The former is built on top of the latter and so we could just have one most important Keynesian principle.

In an article Foundations And Implications Of Free Trade Theory, written in 📚 Unemployment In Western Countries – Proceedings Of A Conference Held By The International Economics Association. At Bischenberg, France, Kaldor says:

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

In a recent paper titled The debate Over ‘Thirlwall’s Law’: Balance-Of-Payments Constrained Growth Reconsidered, Robert Blecker says:

Another key empirical question is the direction of causality between export growth and capital accumulation: does the former cause the latter (as assumed implicitly in Thirlwall’s Law), or does the latter cause the former (as in some of the newer small-country models)? Perhaps this is a case of truly ‘circular and cumulative causation’, in which investment is required to promote exports and success in exporting in turn induces further investment.

I have always thought—ever since I have read Kaldor—that this is the case. When Kaldor says success creates more success, what he is really saying is that a rise in a success of a nation makes it more competitive and increases its exports and so on.

In Kaldorian models, however, elasticity of imports/exports is taken to be constant. Rise in production leads to a rise in productivity and hence price competitiveness. But there is no way in which there is a causation to non-price competitiveness (propensity to import, or income elasticities).

A more general modeling plus empirical work should actually study the impact on non-price competitiveness. Personally, my guess is that only this will explain the vast divergence in nations’ fortunes, empirically speaking. Without it, won’t be sufficient. Interestingly, I believe the dynamics could be complex and rich and even lead to convergence in some cases, although will remain just a theoretical curiosity.

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