Neoclassical and Post-Keynesian Theories of Regional Growth and Convergence/Divergence

The study of regional growth has been dominated by two broad and contrasting theoretical approaches regarding regional convergence. According to the first, market forces will lead to a general convergence of per-capita incomes across an integrated space economy over time. This approach is labelled as ‘neoclassical regional growth theory’ and its premises are based upon the standard growth model, as outlined by the pioneering work of Solow (1956) and Swan (1956). Using a general equilibrium framework these models predict that disparities in per-capita incomes across regions are unlikely to occur or, at least, to be persistent, thus creating a pattern of convergence towards a unique level of per-capita income. By contrast, there is a large body of theoretical and empirical work, known as the ‘post-Keynesian approach’, which supports the argument that regional disparities in per-capita incomes are permanent and self-perpetuating and therefore divergence in per-capita incomes is the most likely outcome. Representative models can be found in the work of Myrdal (1957), Perroux (1950, 1955) and Kaldor (1967, 1970 and 1972). This chapter outlines the major approaches to regional growth, as put forward by the neoclassical and post-Keynesian schools of thought. Throughout this and subsequent chapters more emphasis is placed upon the neoclassical model, for two reasons. First, the neoclassical model offers both a theoretical explanation and testable predictions concerning the possibility of convergence in per-capita incomes across regions. Indeed, most of the conceptual definitions of regional convergence used in empirical studies derive directly from the neoclassical model. Second, the vast majority of empirical literature has in fact tested the neoclassical model rather than alternative models.