The Upshot NYT On The Kaldor-Verdoorn Law

Neil Irwin writing for The Upshot seems open to the idea that aggregate demand affects aggregate supply, quoting the work of J.W. Mason:

… But what if this is the wrong way of thinking about it? What if productivity growth is not so much an external force that proceeds in random fits and starts, but is rather deeply intertwined with the overall state of the economy and labor market?

It’s a chicken or egg problem: Does low productivity cause slow growth, or does slow growth cause low productivity?

Discussion of such matters was also welcomed by Narayana Kocherlakota on Twitter.

Recently, Simon Wren-Lewis also wrote recently in a post on his blog, Mainly Macro, titled, Why Recessions Followed By Austerity Can Have A Persistent Impact.

In standard economic theory, productivity rises explains the rise and fall of nations, although this shouldn’t really be happening because of the convergence promised by advocates of free trade!

In Kaldorian models, aka the principle of circular and cumulative causation, nations with higher competitiveness will see a large rise in production at the expense of other nations. Higher production leads to higher productivity, so the observed relation between success and productivity has a different story! Also, competitiveness has two aspects: price and non-price. Higher productivity does improve price-competitiveness. Further, I believe, competitiveness itself isn’t something fixed. Initial success feeds into higher competitiveness and the reverse for failure. So there’s a complicated story of causality.

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