Özgür Orhangazi
The sources and dynamics of economic growth have occupied a central place in economics since its beginning. The main concern of the classical political economists was explaining the growth and distribution of income. While the rise of the marginalist school pushed this question aside for some time, the 1940s saw growth economics brought back to center stage. Starting with Harrod’s (1939) growth model, there emerged a voluminous literature that analyzes the determinants of economic growth and its pace.
The search for the determinants of economic growth was accompanied by questions of: whether capitalist economies tend towards stable growth at full employment; and whether fluctuations in growth are due to endogenous or exogenous reasons. The dominant neoclassical thinking in economics suggests that under conditions of perfect competition and minimal state intervention, capitalist economies generate a stable growth path at full employment. Any fluctuation around or deviation from this path is attributed to factors outside the economic system. Heterodox theories of economic growth, on the other hand, question the validity, attainability, and stability of long-term economic growth at full employment, while theorizing on the fluctuations in growth as inherent to the capitalist economic system.
In this chapter, I present an overview of the foundational ideas and main issues in heterodox growth theories, paying specific attention to Post Keynesian and Marxian contributions.1 While it is not possible to do justice to the whole heterodox literature on economic growth within one chapter, this chapter is intended as an accessible entry point to the many different ways of heterodox growth theorizing. To that end, I set aside the details of the formal theoretical models as well as issues of economic development and the link between growth and development. I start in the next section with Post Keynesian models in general, then move on to models that focus on growth in developing countries, and finally discuss various Marxian approaches to economic growth. In the following section I outline some common features of various heterodox growth theories and discuss the relevance of heterodox growth theories with respect to the recent ‘secular stagnation’ debate. Finally, a brief overview of recent work that is critical of growth itself is presented.
Modern growth theory finds its origins in the works of Roy Harrod and Evsey Domar. Harrod (1939), influenced by the ideas of Keynes, studies whether the short-run conclusions of the Keynesian theory in terms of growth and employment are valid also for the long-run. Domar (1946) takes into consideration the capacity effects of investment and looks for an equilibrium growth rate that will give constant capacity utilization.2
Incorporating Keynesian characteristics both in terms of methodology and the theoretical construction of the model, Harrod’s (1939) analysis demonstrates the multiplier mechanism as well as the acceleration principle as the dynamic of economic growth. Harrod suggests the existence of a ‘warranted’ growth path—in the sense that the sales and capacity expectations of the firms and the outcomes are on average consistent with each other. However, he notices two problems with this path. First, there is no mechanism to ensure that this ‘warranted’ rate of growth will be equal to the actual or the ‘natural’ rate (that is, the growth rate of the labor force). Second, there is no mechanism for expectations and outcomes to be equal to each other and hence, the warranted path is likely to be unstable.
These conclusions essentially depend on Harrod’s theorization of firms’ investment behavior. The decisions of firms are directly determined by the level of aggregate demand, particularly through the capacity utilization rate. Harrod argues that once the actual growth rate deviates from the warranted growth rate, there are no mechanisms to bring them back to equilibrium; rather, the accelerator principle will lead to further deviations. For example, when the capacity utilization rate exceeds the desired level, firms undertake investment. However, this investment, through multiplier effects, leads to a worsening of the initial disequilibrium. As investment is determined independently from the savings, it is possible to have an investment-saving inequality ex ante. Ex post, investment creates an equal amount of savings. Hence, income, employment and savings are determined by the ex ante investment decisions and their workings through the multiplier process. In other words, market signals can generate disequilibrium—that is, the market system fails to ensure permanent equilibrium in goods and labor markets. As a result, the short-run Keynesian conclusions will be valid in the long-run as well and this serious problem, according to Harrod, can only be solved through government interventions.3
Harrod’s approach and conclusions are in sharp contrast to the neoclassical presupposition that the market system generates an equilibrium with efficient outcomes under conditions of perfect competition. His arguments, especially the instability conclusion, triggered studies that led to what is known as the ‘neoclassical solution.’ Solow (1956) and Swan (1956) modified Harrod’s model with a set of strong assumptions so that the model would give a stable growth rate at full employment through relative price variation and factor substitution. Hence, the instability of the warranted growth rate disappeared in the neoclassical growth models.4 Various neoclassical growth models developed later were dedicated to showing long-run equilibrium within the same general framework, albeit under different conditions and assumptions. A second generation of neoclassical growth models emerged, known as ‘new growth models’ or ‘endogenous growth models,’ which treat technological progress as an endogenous variable (Romer 1986; Lucas 1988). Post Keynesian growth theory, on the other hand, developed through a number of key contributions made by economists such as Nicholas Kaldor, Luigi Pasinetti, Joan Robinson, and Michał Kalecki, who provided the main ideas and the building blocks of modern Post Keynesian growth models.
Kaldor (1957) argues that steady growth is a ‘stylized fact’ of capitalist economies and therefore needs to be explained. He introduces a growth model in which a steady growth equilibrium at full employment can exist and be stable depending on the values of the parameters. However, similar to Harrod, Kaldor also argues that there are no mechanisms that will give the right parameters to ensure stable long-run growth. Kaldor’s model was later criticized for its full employment assumption and the lack of an explanation as to how full employment is reached and for its insufficient explanation of the determinants of autonomous investment, which Kaldor considered to be a main driver of economic growth (Skott 1989a). However, the most well-known criticism of Kaldor came from Pasinetti (1962), who argues that whereas in Kaldor’s model there are different savings propensities from wages and profits, the dynamic implications of this model are ignored because if workers save they will gradually own capital stock and as a result they will receive two types of income. Kaldor (1966a) responded to Pasinetti’s criticism and a long debate ensued around the implications of this issue.5 Later, Kaldor (1966b) put forward a number of theses on growth, arguing that manufacturing is the engine of growth as it has increasing returns to scale and draws resources from other sectors inducing productivity growth in those sectors as well.
Robinson (1962) argues that with a constant rate of capacity utilization, the rate of growth will be equal to the accumulation rate. She introduces the idea that the accumulation rate is determined by the expected profit rate. This means accumulation determines the realized profit rate, which sets the expectations for the following period. In this framework, firms invest and savings adjust to the rate of investment. Robinson rejects the steady-state equilibrium models of growth and argues that models need to be historically and institutionally specific and the investment functions should take into account these historical and institutional factors as well as Keynes’ ‘animal spirits.’6
Kalecki’s ideas provided the basis for a family of modern heterodox growth models. Kalecki combined elements from both Keynesian and Marxian approaches, which made him influential among both Post Keynesians and Neo-Marxians. It is also well known that Kalecki introduced the idea of the importance of aggregate demand in the determination of output and employment before Keynes (Kalecki 1971). In fact, famous dictum ascribed to him that workers spend what they get and capitalists get what they spend follows along the lines of Post Keynesian theory of distribution. He also used ideas consistent with Marxian class struggle arguments. For example, he argued that powerful trade union movements could reduce profitability.7 For Kalecki the modern capitalist system is characterized by imperfect competition and firms are price makers. They set a mark-up over costs depending on the degree of oligopoly. The normal operation of capitalism generates both excess capacity and unemployment. A key argument is that the level of demand affects the capacity utilization rate and long-run growth is driven by investment. This makes the analysis of the determinants of investment important. In the short-run, an increase in oligopolization leads to increasing mark-ups and a redistribution of income in favor of profits, which then has a negative impact on investment through its negative effect on aggregate demand. In the long-run, investment is determined by technological progress and innovations, which also tend to slow down due to increasing oligopolization.
In this regard, Kalecki’s arguments have similarities with Steindl (1952), who argues that the industry is transitioning from a competitive structure towards monopolization, which he calls a process of ‘absolute concentration’ or mature or oligopolistic capitalism. Steindl also argues that oligopolies lead to demand shortfall problems as they cause an increase in profits that are not used since oligopolist firms are likely to have excess capacity and they will not invest in the absence of competition and demand. As a result, a self-enforcing stagnation tendency emerges in capitalism.
A family of ‘Kaleckian’ growth models are based on these ideas of Kalecki. Rowthorn (1981) explicates the basis for most of the Kaleckian approaches to economic growth.8 In Rowthorn (1981) economic growth is led by wages. In an economy operating below full capacity, an increase in nominal wages leads to an increase in the share of wages within total income. This generates an increase in aggregate demand that leads to higher output levels. As a result, a higher utilization of capital is observed and profits on the existing capital stock increase. In the process, it is also possible that increased capacity utilization leads to economies of scale and this will counteract the increased cost of higher wages. Capitalists respond to these changes by investing. Hence, capacity utilization and profits are the two main variables determining investment in Rowthorn’s formulation.
The idea that the rate of profits determines accumulation was formalized by Robinson (1962), while the idea that capacity utilization affects investment was first introduced by Steindl (1952). Steindl argues that excess capacity exists because, first, firms prefer to build capacity ahead of demand and, second, in oligopolistic markets they use excess capacity as a barrier to entry. The indivisibility of capital goods further adds to excess capacity. In Steindl, an increase in capacity utilization, therefore, leads to investment. In this type of Kaleckian formulation, the industrial structure becomes quite important as the degree of oligopoly determines the mark-up rate, which directly affects the relative shares of wages and profits within total income. While investment determines savings in a Keynesian fashion, the main difference from the short-run Keynesian formulation is the argument that the accumulation of capital (investment-capital ratio) determines income distribution (profit rate).
Following Marglin & Bhaduri (1990) and Bhaduri & Marglin (1990), a distinction between wage-led and profit-led growth models became one of the major features of the Kaleckian approach to economic growth. These scholars introduced the idea that a profit-led economic growth would also be possible with a different investment model. Bhaduri & Marglin (1990) argue that investment and savings are functions of the profit share and capacity utilization, which is an indicator of expected demand. Their use of the profit share instead of the profit rate stems from the argument that when investment is specified as a function of capacity utilization and the profit rate, this specification makes only wage-led growth possible and rules out the possibility of profit-led growth. In their model, the system is called ‘exhilarationist’ (profit-led), if investment responds strongly to profitability. In this case, a higher profit share leads to higher capacity utilization. And the system is called ‘stagnationist’ (wage-led), if a higher profit share leads to lower capacity utilization. In a wage-led regime, an increase in the wage share leads to increased economic activity and growth due to workers’ higher marginal propensity to consume. In a profit-led regime it has the opposite effect and demand is led by profits. Hence, the issue is basically about the relationship between income distribution and aggregate demand. A profit-led regime is possible whereas a wage-led growth may fail to create the necessary growth in capacity and lead to a crisis of under-accumulation. Bhaduri & Marglin (1990) and Marglin & Bhaduri (1990) also present an intermediate case—‘conflictual stagnationist.’ In this case, aggregate demand can be weakly wage-led, while at the same time growth is profit-led.
While these models are usually set up for the case of a closed economy, reformulations for the open economy case are possible. In an open economy, an increase in wages can decrease export competitiveness by raising labor costs and also decrease profits, leading to lower investment. If the negative impact of the trade balance on growth is greater than the positive impact of increased domestic demand due to higher wages, the net effect on accumulation will be negative. The economy can be wage-led only if the increase in demand is large enough to outweigh the negative effect of net exports. In other words, wage-led growth is only possible if the economy is relatively closed to foreign trade—that is, exports and imports have low price elasticities, imports are a small percentage of Gross Domestic Product (GDP) and they have low income elasticity (Blecker 1989, 1999).
It is also suggested that even though some economies can be considered to be profit-led, the world economy as a whole would still be wage-led if the international competitive results cancel each other out at the global level (Onaran & Galanis 2012; Lavoie & Stockhammer 2012). If this is the case, then a global redistribution of income towards wages will have expansionary consequences even in profit-led economies. A large empirical literature examines various economies and tries to determine whether they are wage-led or profit-led although no consensus is reached.9 Blecker (2015) suggests that the lack of consensus may be because insufficient attention has been given to the time dimension in these empirical studies. According to his arguments, demand is more likely to be profit-led (or weakly wage-led) in the short-run and wage-led in the long-run (or strongly wage-led). The reasoning behind this argument is that the positive effects of higher profits and higher net exports on accumulation are stronger in the short-run, whereas the positive effects of higher wages on aggregate demand are stronger in the long-run.
Following Keynes’ (1933) theory of monetary production, the Post Keynesian tradition began incorporating monetary variables and the role of financial markets into growth models by the 1980s. More recently, a group of scholars developed models to account for the effects of finan-cialization on growth, following the empirical findings of Krippner (2005), Stockhammer (2008), and Orhangazi (2008a, b), who show that a process of financialization is at work in advanced economies in the post-1980 era.
The impact of financialization on economic growth occurs through three channels. First, increasing shareholder power and changing financial market requirements can have a negative impact on investment. This literature argues that financialization is associated with increasing power of shareholders vis-à-vis firm management and workers, and with the increased involvement of non-financial firms in financial investments. As a result, firm management has changed its focus from long-run growth objectives to short-term profitability. Second, increased indebtedness can create an expansionary impetus in the short-run (in particular through increased household consumption financed by debt) and a contractionary effect as well as potential instability in the long-run. Third, financialization contributes to increased income inequality with negative effects on aggregate demand (for example, Boyer 2000; Hein & van Treeck 2010; Hein 2012).10 As a result, some argue that two possible growth regimes arise: a debt-led consumption boom regime, and an export-led mercantilist regime (Hein 2014).
An interesting case is made by Stockhammer & Michell (2014) who argue that an economy characterized by a Marxian-type reserve army of labor and a Minskian-type debt channel could exhibit the characteristics of a profit-led demand economy even though it actually is wage-led. As a result, a rising capacity utilization, a shrinking reserve army of labor, and rising debt can all exist at the same time. If the negative effects of increasing debt on aggregate demand and growth dominate, then the economy would appear to be profit-led, when this coincides with increasing wages and decreasing growth rates.11
Another heterodox perspective on economic growth that specifically focuses on developing economies is the ‘structural approach,’ which emphasizes the importance of different structures across sectors and countries. It was originally formulated as a critique of mainstream growth theory, especially in regards to its trade and stabilization policy implications for developing countries. While it is not possible to present a single, synthetic model of the structural approach to economic growth, works in this tradition can broadly be grouped into three: the original ECLAC (United Nations Commission for Latin America and the Caribbean) approach of the 1950s and 1960s, based on Prebisch (1950); Latin American neo-structuralism of the 1970s; and Taylor-type structuralist macroeconomic models of the 1980s and 1990s.
The ECLAC approach argues that the world economy should be considered as a whole, within which a center and a periphery can be identified. The center and the periphery have structural differences that, taken together, create an international division of labor and a single world economic system. In this system, growth in the periphery depends on the conditions in the center. The periphery specializes in low-value-added products (mostly agricultural products) and this specialization leads to a trade-dependent growth path. However, given different income elasticities of imports in the core and the periphery, the world system creates a deterioration in the terms of trade against the periphery and causes structural balance-of-payments problems as well as structural unemployment in the periphery. More importantly, this setup fails to produce industrialization, which is a necessary condition for long-run economic growth. Hence, the proponents of this approach argue that a set of industrial policies, including state investment in key industries, infant industry protections, controls on exchange rates, and promotion of foreign direct investment, are needed for economic growth.
The second group of structuralist analyses—the neo-structuralist theories—focuses more on short-run issues such as debt crises, trade deficits, and stabilization policies starting in the 1970s. The third group is usually identified with Taylor’s work (see, for example, Taylor 1983, 1985, 1991). Taylor presents a critique of the dominant economic policies, especially of the one-size-fits-all policies imposed upon developing economies to solve problems such as trade imbalances and high inflation. He has developed a series of formal macroeconomic models based on Kaleckian ideas and brought growth and distribution into consideration. Taylor emphasizes that the models have to be more flexible and take into consideration different structures in these economies, a position that is in sharp contrast to the mainstream approach. For example, he introduces mark-up pricing in certain sectors; the idea of endogenous money to show that tight monetary policy may restrict production but not decrease inflation; and the role of financial markets and institutions in economic growth for developing economies.
A related analysis that includes structural features as well as ideas from Harrod, Kalecki, and Prebisch, is the balance-of-payments-constrained-growth-model, which suggests that international trade places limits on economic growth (Thirlwall 1979).12 According to this model, a country’s growth rate cannot exceed the rate that is consistent with the current account’s balance equilibrium, unless it can finance its deficits indefinitely. There are limits to the trade deficit to GDP ratio and the foreign debt to GDP ratio. When these limits are exceeded, international financial markets are likely to put downward pressure on the currency, making a financial crisis likely. In contrast to mainstream theories of trade and growth, the balance-of-payments-constrained-growth-approach stresses the potentially negative effects on economic growth of trade openness. This does not imply that it refutes the contribution of exports to economic growth; on the contrary, it recognizes the importance of exports to the growth process, as an increase in economic growth is likely to lead to higher import requirements and hence higher foreign exchange needs. Thirlwall’s model, like Harrods’s and Kaldor’s, highlights that there is no mechanism to guarantee a growth rate consistent with current account balance equilibrium and full employment.
Works in the Marxian tradition are concerned mainly with disruptions to economic growth. Some important Marxian growth theories deserve careful examination. Goodwin (1967), to begin with, brings Marx’s concept of the reserve army of labor into growth modeling. In his model, the size of the reserve army of labor (or the rate of unemployment) determines workers’ bargaining power. Low unemployment increases the bargaining power of workers, which then leads to an increase in the share of wages in total income. An increase in wages, however, hurts profitability and has a negative effect on investment and hence the rate of accumulation and employment. Therefore, a cyclical growth path emerges out of the interaction between the rate of unemployment, the wage share of total income, and investment. A large body of literature followed Goodwin (1967), extending and generalizing his contribution.13 These models do not attempt, however, to integrate all Marxian ideas and focus primarily on the labor market, with distribution outcomes which investment accommodates without any demand problems.14
Other formal growth analyses within the Marxian tradition, in general, start with an economy with two classes (capitalists and workers), an unlimited labor supply and an income distribution determined by class struggle.15 In this economy, workers do not save and capitalists use their savings for investment, which expands output and employment. Hence, in the classical-Marxian model, growth depends on savings, which leads to capital accumulation. In the absence of any demand problems, then, a more unequal income distribution leads to higher income for capitalists, higher investment and higher economic growth. While in Post Keynesian models changes in wages affect the growth rate through their effects on demand and then capacity utilization; in the classical-Marxian models real wages affect the profit rate, which determines the rate of accumulation and growth.
In the classical-Marxian approach, in contrast to the Post Keynesian tradition, economic growth is determined on the supply side through technological change due to competition and class struggle. Some argue for a potential convergence between the two approaches by suggesting that while in the short-run aggregate demand will determine the level of capacity utilization, in the long-run the Marxian tendencies will dominate (Duménil & Lévy 1999, 2014; Dutt 2011). A Marxian approach to growth emphasizing the demand side is Baran & Sweezy’s (1966) monopoly capitalism approach, which is influenced by the arguments of Kalecki and Steindl. They suggest that increased market concentration gives firms pricing power, resulting in increased mark-up rates and higher profit shares in the economy. Hence, an increased degree of oligopoly results in a tendency for economic stagnation and continued economic growth requires external factors such as public spending, export markets, epochal innovations, and so on.
Another Marxian approach to long-term economic growth is Social Structure of Accumulation (SSA) theory. In its original formulation it was a theory of how crises are resolved (Gordon 1978) and quickly developed into a theory that explains both long periods of economic growth and how they end (Gordon 1980; Gordon et al. 1982; Kotz et al. 1994; McDonough et al. 2010).16 SSA theory is built on the Marxian idea that the economy and social and political institutions constitute a whole system, and that capitalism creates periods of growth, crisis, and slowdown. Therefore, instead of only focusing on economic models and variables, the whole institutional structure needs to be examined.
As such, SSA theory has some parallels to both Kondratieff’s (1925, 1935) and Schumpeter’s (1939) concerns about explaining periods of long-term growth followed by slowdowns—known as long waves. Kondratieff (1925, 1935) identifies three long waves and argues that the main determinant of these long waves is the replacement need of long-lived capital goods. Schumpeter (1939), on the other hand, views major innovations as the driving force behind the long waves (for example, cotton textiles and iron 1790–1815; railways, steam, and steel 1845–1873; electricity and industrial chemistry 1895–1913).
SSA theory’s approach to economic growth can be summarized as follows. Stable economic growth occurs when a set of economic and political institutions are in place that favor capital accumulation. These institutions are referred to as a social structure of accumulation and they promote accumulation and growth by regulating key relationships in the economy to create stability and predictability, while ensuring sufficient profitability and aggregate demand over time. In the absence of these conditions, the economy may suffer from instability and/or stagnation. For example, the social structure of accumulation in the post-Second World War United States (US) economy included institutions such as an increased involvement of the state in the economy through investment and regulations, limited competition among firms, a ‘tacit’ deal between capital and labor, and US leadership in the world economy, among other things.
The key driver of accumulation according to SSA theory is also profitability, but profitability by itself is insufficient, as capitalists will only invest if they have confidence in the outcome of that investment. This confidence is provided by a set of institutions that are favorable to capital accumulation as well as to stability. As such, power is also an important determinant in the sense that profitability is ensured by the power of the capitalists over other classes and groups in the society (Gordon et al. 1987). For example, a crucial feature of the institutional structure in the post-Second World War US economy was the enhanced power of the capitalists. A key idea in this approach is that while a social structure of accumulation can promote stable growth for a long time, it eventually runs into a crisis, as institutions became obstacles rather than promoters of economic growth. Then there follows a ‘structural’ or a ‘long-run’ economic crisis that is only resolved through a reconstruction of the institutions and a transformation to a new social structure of accumulation.
As should be clear by now, heterodox scholarship on economic growth includes many different perspectives which are not possible to combine into one synthetic heterodox model of economic growth. Furthermore, cross-influences between heterodox schools of thought sometimes make it difficult to classify one into a particular school of thought. However, it is still possible to identify some common themes even though the particular significance attributed to a theme may vary from one approach to the other. Five common themes can be identified.
The role of aggregate demand: Keynes assigned a significant role to aggregate demand in the short-run. Various heterodox growth models examine whether aggregate demand is also a significant determinant of long-run growth. Post Keynesian growth literature takes this issue as central and suggests that aggregate demand affects long-term growth through different channels.
Distribution: Issues of distribution also play a central role in many heterodox growth models. Distribution is not only considered as one of the potential determinants of economic growth and technical change, but also as an economic outcome that is important in and of itself.
Instability: Potential instability of the growth process and its sources are taken seriously by heterodox approaches. Even when formal models with steady-state equilibrium analysis are used, heterodox economists are concerned with the attainability and sustainability of equilibrium. Contrary to mainstream growth theories, the possibility that economic growth is a cyclical process rather than a steady one and is inherently unbalanced is usually entertained in the heterodox growth literature.
Competition and technical change: The role of competition and technical change is treated differently from mainstream analysis, in that technical change is considered as being not just endogenous but also endogenous to the outcomes such as growth and distribution. The degree of competition, for example, has an impact on technical change as well as on growth and distribution.
The role of institutions: The role of institutional structures feature prominently in heterodox growth theories as they rule out hypothetical perfect competition without state intervention and attempt to produce more realistic models and understandings of economic growth.
The debate on the determinants of long-run growth seems to have made a comeback recently as the recovery from the 2008 financial crisis and the ensuing Great Recession has been quite weak in the US as well as in other developed economies. An emerging literature discusses the possibility of a secular stagnation, which inevitably includes a discussion on the determinants of economic growth.
The literature can broadly be divided into two opposing groups: supply-side and demand-side approaches. For example, Gordon (2012, 2014) argues that a main driver of growth is technological change; however, recently technological change has failed to promote high rates of economic growth. Summers (2014), on the other hand, draws attention to demand-side factors such as reduced investment demand that is partly due to the need for less capital investment in new technologies; declining population growth and increasing inequality. Ball et al. (2014) similarly challenges the view that aggregate demand does not matter for long-run growth as, they argue, even a short period of depression can have significant effects on the long-run path of potential GDP.
Within this debate, however, references to the history of economic thought on growth are scarce. Hein (2015), noting this fact, presents an argument based on Steindl (1952) and argues that what modern capitalist economies are facing is an aggregate demand constraint and Steindl’s approach is very relevant to the debate on secular stagnation. Hein also stresses that the changing institutional structure, especially the rise of financialization, has a significant role in changing the growth path. Furthermore, Kotz & Basu (2016), following the SSA approach, make the argument that the lack of rapid economic growth results from the inability of the current social structure of accumulation to promote normal conditions of accumulation and growth.
A discussion of the heterodox literature on economic growth would be incomplete without highlighting two recent lines of the critique of economic growth itself: the critique of growth as a measure of social welfare and the critique of growth economics for its neglect of environmental costs.
The first critique is based on the argument that the growth of GDP itself is not a reliable indicator of social welfare (van den Bergh 2009; van den Bergh & Kallis 2012). The GDP measure suffers from a number of problems. First of all, it only measures the costs of market activities but not their benefits, while completely ignoring non-market or informal activities. Second, it does not present a good approximation of social welfare. Not only is there no evidence that GDP accurately represents social welfare, but also it is quite possible that subjective well-being and the growth of GDP can move in opposite directions. Third, the use of natural resources and the costs to the environment are not accounted for in the growth framework (van den Bergh & Kallis 2012).
In fact, ecological economists have been concerned with this last point for some time.17 Recent contributions by some heterodox economists pay attention to the environmental costs of economic growth and suggested investment in a ‘green economy.’ Pollin (2015), for example, argues that protecting the environment and generating job opportunities are not necessarily conflicting goals. Large-scale investment in energy efficiency and renewable energy resources can generate growth while contributing to the protection of the environment. In fact, he suggests that this can also counter the current stagnation tendency. Another line of thought is developed under the title of ‘degrowth,’ which is a concept used to suggest an intentional policy of downscaling the economy so as to ensure it remains consistent with biophysical boundaries (Kallis et al. 2012).
1 Some of the ideas discussed in this chapter feature in Vasudevan (this volume) in the context of capital accumulation and Vernengo (this volume) in the context of business cycles.
2 Hein (2014: 47) notes that the standard textbook version of the Harrod-Domar growth model ignores their main questions and is presented as “a neoclassical model with a built-in-rigidity” without any attention to the role of aggregate demand for growth.
3 For the use of Harrodian ideas by contemporary heterodox economists, see Skott (1989a, b, 2010) and Fazzari et al. (2013).
4 This created the famous capital controversy between the neoclassical and Post Keynesian economists (Harcourt 1972). The main issue in the capital controversy was that in neoclassical theory the real interest rate is determined by the marginal productivity of capital at the aggregate level. However, in order to determine the marginal productivity of capital, the real interest rate needs to be given. Skott (1989a) argues that while aggregation is at the center of the controversy, this is essentially a manifestation of a deep disagreement on the static notion of equilibrium.
5 For the Pasinetti theorem, see Asimakopulos (1988), Skott (1989a), or King (2002: 70–71).
6 For an overview of Robinson’s approach and a comparison with Kaldor and Pasinetti, see Kregel (1975).
7 On the issue of unemployment, Kalecki (1971: 138–145) argues that attaining full employment is possible in modern capitalism as we now have a good understanding of capitalist economies thanks to Keynes. He argues that full employment, through its impact on demand, could also contribute to capitalists’ profitability. However, capitalists will still not want full employment policies; not because it will hurt their profitability but because it would threaten their control over the workplace in particular and political institutions in general (see also Pollin 2012). Kalecki (1971) reasoned that this opposition to full employment can create political business cycles. Later, Steindl (1979) argues that this opposition is likely to contribute to the stagnation tendency.
8 For other earlier formalizations see Steindl (1979), Taylor (1983, 1985), and Dutt (1984, 1987).
9 See, for example, Hein & Vogel (2008), Hein & Tarassow (2010), Blecker (2011), Stockhammer (2011), Lavoie & Stockhammer (2012).
10 See Hein (2014: Chapter 10) for a review of Post Keynesian models of financialization.
11 There is also a growing literature on stock-flow consistent dynamic modeling, based on the idea that growth models need to properly account relevant stocks and flows between them (see Godley & Lavoie 2007; Keen 2013).
12 For a review of the model and its empirical applications, see Thirlwall (2011).
13 See Desai (1973), Shah & Desai (1981), and Goodwin et al. (1984).
14 Skott (1989a) presents a model taking into consideration both the role of labor’s bargaining power and effective demand and argues that a cyclical growth path similar to Goodwin’s (1967) is possible, although the underlying mechanisms can be different.
15 Harris (1978), Marglin (1984), Dutt (1990), and Foley & Michl (1999) cover classical Marxian approaches to growth.
16 See McDonough (2010) for a review of the recent SSA literature.
17 See Kallis et al. (2012) for an overview of the ecological economics literature on growth.
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