Cumulative causation

Question 1

What is cumulative causation?

Answer 1

Cumulative causation is a key feature of heterodox disequilibrium models which, unlike standard neoclassical theory, do not return to stable points of equilibrium. Instead cumulative causation is a process that is self-reinforcing through feedback loops and only continues to grow stronger over time. There are no-counteracting forces to restore equilibrium and instead small disturbances result in major long-term trends (Jackson, 2020)

Question 2

What are the key features of cumulative causation?

Answer 2

• Disequilibrium
• Self-reinforcing feedback loops that strengthen and persist
• Small disturbances result in long-term trends

Jackson, 2020

Question 3

Who were the main proponents of cumulative causation?

Answer 3

• Gunnar Myrdal
• Nicholas Kaldor
• Veblen

Question 4

What aspects of cumulative causation did Kaldor assess vs Myrdal?

Answer 4

Kaldor - Economic significance
Myrdal - Social aspects

Jackson, 2020

Question 5

What does cumulative causation do regarding inequalities?

Answer 5

• Widens inequalities on the principle of virtuous and vicious cycles known as the Matthew effect.
• Inequalities become permanent and institutionalised

Question 6

What are two key examples of cumulative causation?

Answer 6

• Commercial success or failure
• Expansion or decline (deindustrialisation) of regions or countries

Question 7

Give an example of a virtuous cycle at the firm level?

Answer 7

Higher profits could then result in higher investment, which can result in technical change making the firm more competitive by reducing costs and prices boosting demand resulting in higher profits. When increasing returns are allowed for, the forces making for continuous changes are endogenous making the system propagate itself (Kregel, 2011)

Question 8

How does the view of migration in neoclassical perspective differ to that of heterodox?

Answer 8

KEY: Orthodox view of migration is that it is equilibrating, it is part of the equilibrium process so movements from one regions to another would tend to lead to equilibrium and Pareto efficiency but from a Keynesian viewpoint we can have the opposite that migration is disequlibrating because the emphasis is put on demand, a Keynesian argument. People moving in would create demand increasing investment, attracting capital and labour but would be leaving the less successful region. Labour and capital move in the same direction towards the successful region. In a neoclassical model they would move in opposite directions, responding to price signals. Keynesian view of migration is cumulative.

Question 9

What are the benefits of learning-by doing under increasing returns to scale?

Answer 9

Leaning by doing: A firm with higher levels of productivity and is able to under-cut rivals (from lower costs) and/ or earn higher profits. This firm is then able to expand further and gain more experience and reap more productivity gains. Each stage of technical advance builds on the earlier stages. The firm at the frontier of technical knowledge has the basis on which to build the next step forward, whereas a firm away from the frontier needs to move to the frontier before being able to advance. Further, the firm at the frontier would gained experience from the previous stages to help undertake the next stage

Question 10

Give an example of a virtuous cycle at the international level?

Answer 10

High profits/wages > Inward movements of capital/ labour > increased market size > high demand > high profits

Question 11

What are backwash effects and how do they work?

Answer 11

Prosperous region’s better infrastructure makes them more attractive to capital and labour with migratory flows which accentuate their growth. Such migration from peripheral regions depletes the human capital, particularly their younger and more entrepreneurial people.

Question 12

What does Keynesian economics stress about demand and the neoclassical equilibrium view?

Answer 12

Successful regions will have a surge in demand and enhanced market size as incomes and population rise; declining regions will have the opposite as incomes and populations fall

Question 13

What are the theoretical implications of cumulative causality?

Answer 13

• Historical time not logical time
• Equilibrium analysis has little relevance when causality is cumulative
• Increasing returns to scale (only demand limits)
• Resource creation instead of just allocation
• Demand dependent
• Knowledge takes cumulative form (No intertemporal optimisation)
• If unchecked, create large inequalities

Question 14

What are Kaldor’s growth laws?

Answer 14

Empirical laws of growth relating to cumulative causation explaining why cumulative processes in economic growth arise

Question 15

What is needed for cumulative causation?

Answer 15

• Increasing returns to scale
• External economies of scale (Specialisation and complimentarities)
• Dynamic economies of scale
• Economies of scope

Question 16

What are Kaldor’s 3 laws of growth?

Answer 16

1. Growth of GDP positively correlated with growth of manufacturing output
2. Verdoorn’s law Growth rate of manufacturing productivity with the growth rate of manufacturing output (cumulative causation)
3. (Not really used) Growth of manufacturing output is positiviely correlated with the transfer of labour to the manufacturing sector

Question 17

What are the implications of Kaldor’s growth laws?

Answer 17

• A thriving manufacturing sector has beneficial effects on output and productivity growth (crucial to development)
• A struggling manufacturing sector may lead to a downward spiral of deindustrialisation and poor economic performance (hard to grow from services alone)

Question 18

What is the Prebisch-Singer thesis?

Answer 18

The gap between rich and poor countries has been worsened by the long-term fall in primary product prices, bringing a decline in the terms of trade for less developed countries. Goes against neoclassical hypothesis that increased demand would increase prices

Question 19

What are the causes of the Prebisch-Singer thesis?

Answer 19

• Slow demand growth realtive to industrial products,
• Poorly organised labour,
• No cartels
• Supply expanded through resource discoveries

Question 20

With no equilibrium renewing price adjustments what has been the impact?

Answer 20

Centre-periphery relations. Differences in economic prosperity have become institutionalised as economic dependency making centres and peripheries with power concentrated in the centre

Question 21

What is underdevelopment?

Answer 21

Suggests that the industrialisation of less developed countries is being hindered by the economic power of the developed world

Question 22

What policy should be adopted by poor countries to allow them to develop?

Answer 22

Forming cartels or introducing protectionist measures to reduce the central power

Question 23

What are the implications of cumulative caustation for free trade?

Answer 23

Cumulative causation casts doubt on whether free trade and international capital mobility promote economic expansion for all rather it creates dramatic inequalities (This is a rejection of the Washington consensus)

Question 24

Who to reference for the fact that once established, economic inequalities tend to self-perpetuate and grow?

Answer 24

Stillwell, 2012

Question 25

Who said it generated spillovers into political power?

Answer 25

Sawyer, 1989

Question 26

When referring to economists who started cumulative causation?

Answer 26

Stillwell 2012

Question 27

Matthew effect reference?

Answer 27

Jackson, 2020

Question 28

What are the implications of increasing returns to scale?

Answer 28

• As identified by Sraffa, the notion of perfect competition is not viable under increasing returns to scale, the notion that these are present in industries rejects the justification for perfect competition as a method.
• any firm that is larger would have a cost advantage over other firms
• the forces making for continuous changes are endogenous making the system propagate itself (Kregel, 2011)