Path dependence and stagnation in a classical growth model

Abstract

This paper embeds a technical progress function in a classical growth model and studies the effects of permanent changes in parameters and temporary shocks such as pandemics. Technical change is driven by dynamic economies of scale and responds to distributional forces: the wage share regulates labour-saving technical change and employment regulates its capital-using bias. The model features path dependence in the employment-population rate and the output-capital ratio. Population growth and distribution can respond to the employment rate. Interpreted through the model, secular stagnation under neoliberal capitalism has been driven by a combination of diminished investment and reduced worker bargaining power more than by slower technical change and population growth. A temporary unfavourable shock to the output-capital ratio will permanently reduce the employment rate. In the fully endogenous model, this will increase the profit share and reduce the rates of technical change, capital accumulation, and population growth.

Goodwin, Baumol & Lewis: How structural change can lead to inequality and stagnation

“…However, if the growth rate of labor productivity is an increasing function of the labor share, labor suppression leads to a decline in the labor share and an endogenous response of the natural growth rate in the same direction. This is the crux of the argument for a classical‐Keynesian theory of inequality‐driven secular stagnation, laid out in various versions in the literature (Barrales et al., 2022; Michl & Tavani, 2022; Petach & Tavani, 2020; Rada et al., 2021).…”

“…The authors build on a micro-founded Kennedy-style framework, which requires the assumption that the exogenous shock affects the intercept of the innovation possibility frontier. Michl and Tavani (2022) discuss classical models that also feature a positive causal connection between labor share and growth in steady state. Rada et al (2021) derive similar results in models of the distributive cycle with Keynesian features: an adverse shock to the labor share leads in the short run to an increase in accumulation due to its profit led character.…”

“…The authors build on a micro‐founded Kennedy‐style framework, which requires the assumption that the exogenous shock affects the intercept of the innovation possibility frontier. Michl and Tavani (2022) discuss classical models that also feature a positive causal connection between labor share and growth in steady state. Rada et al.…”

Post-Keynesian growth theory and the supply side: a feminist approach

“…As was demonstrated in subsection 2.2, technical change can connect distribution to the determinants of the potential rate of growth. Although this does not automatically solve the first Harrod problem, if y p is affected by distribution and g ¼ y p is observed in the steady state, then distribution can be said to affect the actual (equilibrium) rate of growthbut through supply-side channels, rather than the demand-side channels traditionally emphasized in PK macrodynamics (Petach/Tavani 2020;Luzuriaga/Tavani 2021;Rada et al 2021Rada et al , 2022Michl/Tavani 2021). Further to all this, as is demonstrated by Rada et al (2021), in a model in which distribution affects both the actual and (via technical change) potential rates of growth, redistribution of income may provide a mechanism capable of reconciling the equilibrium and potential rates of growth and thus solving the first Harrod problem.…”