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Increasing returns, new growth theory, and the classicals




Contemporary "new classical" endogenous growth models make imaginative use of the Smith-Marshall-Young-Kaldor division of labor-increasing returns principle. Yet new growth theorists seem to have forgotten (or misunderstood) the essential role of an expanding market as a companion to division of labor as the cause and consequence of economic growth; it is the force of aggregate demand operating through the scope of the market that makes the cost savings inherent in Smith's division of labor operational. While professing to build on the insights of Marshall, as well as those of Smith, Young, and Kaldor, new growth theorists perceive the growth process as a phenomenon of general equilibrium, and focus on the cost experiences of individual producing units as their starting point for identifying increasing returns in the macroeconomy. The mathematical conventions they adopt (about which the classical economists were oblivious) render growth an endogenous process that proceeds on a deterministic growth path into an infinite future without a feedback into aggregate demand, or a consideration of the requirements for market clearing. This approach suggests that when contemporary theorists make casual use of well-established historical principles (in this case, division of labor, externalities, and increasing returns), the theoretical outcome may have limited substantive value despite its appearance of technical elegance.

Suggested Citation

  • Ingrid H. Rima, 2004. "Increasing returns, new growth theory, and the classicals," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(1), pages 171-184.
  • Handle: RePEc:mes:postke:v:27:y:2004:i:1:p:171-184
    DOI: 10.1080/01603477.2004.11051431

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    References listed on IDEAS

    1. Marc Lavoie, 2000. "A Post Keynesian View of Interest Parity Theorems," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 23(1), pages 163-179, September.
    2. John Smithin, 1994. "Controversies In Monetary Economics," Books, Edward Elgar Publishing, number 412.
    3. repec:mes:jeciss:v:31:y:1997:i:2:p:615-622 is not listed on IDEAS
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    2. repec:dau:papers:123456789/6516 is not listed on IDEAS
    3. Bruno Tinel, 2013. "Why and how do capitalists divide labor? From Marglin and back again through Babbage and Marx," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00763837, HAL.
    4. repec:wea:econth:v:1:y:2012:i:1:p:7 is not listed on IDEAS
    5. Sue Konzelmann & Frank Wilkinson, 2016. "Co-operation in Production, the Organization of Industry & Productive Systems: A Critical Survey of the 'District' Form of Industrial Organisation & Development," Working Papers wp481, Centre for Business Research, University of Cambridge.

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