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The Macroeconomics of Model T

Author

Listed:
  • Reto Foellmi
  • Tobias Wuergler
  • Josef Zweim�ller

Abstract

We study a model of endogenous growth where firms invest both in product and process innovations. Product innovations (that open up completely new product lines) satisfy the advanced wants of the rich. Subsequent process innovations (that decrease costs per unit of quality) transform the luxurious products of the rich into conveniences of the poor. A prototypical example for such a product cycle is the automobile. Initially an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, the car that 'put America on wheels'. We show that an egalitarian society creates strong incentives for process innovations (such as the Model T) whereas an unequal society creates strong incentives for product innovations (new luxuries). We show that the inequality-growth relationship depends on which type of innovative activity drives technical progress, analyzing both the characteristics of and the transition to the balanced growth path.

Suggested Citation

  • Reto Foellmi & Tobias Wuergler & Josef Zweim�ller, 2009. "The Macroeconomics of Model T," IEW - Working Papers 459, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:459
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Inequality & innovation
      by chris dillow in Stumbling and Mumbling on 2009-12-21 20:43:33

    Citations

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    Cited by:

    1. Sun, Tianyu & Tian, Liu, 2023. "No pain, no gain: implications in consumption and economic growth," MPRA Paper 118081, University Library of Munich, Germany.
    2. Timo Boppart, 2014. "Structural Change and the Kaldor Facts in a Growth Model With Relative Price Effects and Non‐Gorman Preferences," Econometrica, Econometric Society, vol. 82, pages 2167-2196, November.
    3. Daron Acemoglu, 2019. "Comment on "Trading Up and the Skill Premium"," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 317-330, National Bureau of Economic Research, Inc.
    4. Gilles Saint-Paul, 2023. "The educated class and the fragility of consumer society," PSE Working Papers halshs-04129252, HAL.
    5. Baselgia, Enea & Foellmi, Reto, 2022. "Inequality and Growth: A Review on a Great Open Debate in Economics," CEPR Discussion Papers 17483, C.E.P.R. Discussion Papers.
    6. Schetter, Ulrich & Schneider, Maik T. & Jäggi, Adrian, 2024. "Inequality, openness, and growth through creative destruction," Journal of Economic Theory, Elsevier, vol. 222(C).
    7. Latzer, Hélène, 2018. "A Schumpeterian theory of multi-quality firms," Journal of Economic Theory, Elsevier, vol. 175(C), pages 766-802.
    8. Alain Desdoigts & Fernando Jaramillo, 2017. "Learning by Doing, Inequality, and Sustained Growth: A Middle-class Perspective," EUSP Department of Economics Working Paper Series 2017/05, European University at St. Petersburg, Department of Economics.
    9. Sirine MNIF, 2016. "Bilateral Relationship between Technological Changes and Income Inequality in Developing Countries," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 1, pages 1-1, June.
    10. Sun, Tianyu & Tian, Liu, 2023. "No pain, no gain: implications in consumption and economic growth," SocArXiv 95fdm, Center for Open Science.
    11. Saint-Paul, Gilles, 2025. "Artificial Intelligence, the Collapse of Consumer Society, and Oligarchy," IZA Discussion Papers 17682, Institute of Labor Economics (IZA).
    12. Alain Desdoigts & Fernando Jaramillo, 2020. "Bounded Learning by Doing, Inequality, and Multi-Sector Growth: A Middle-Class Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 198-219, April.
    13. Sirine MNIF, 2017. "The Impact of Inequality on Growth Driven by Technological Changes: a Panel of Developing Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(1), pages 127-140, March.
    14. Esteban Jaimovich, 2021. "Quality growth: from process to product innovation along the path of development," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(2), pages 761-793, March.
    15. Sirine Mnif, 2015. "Impact of Inequalities on Technological Changes: Case of the Developing Countries," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(3), pages 460-478, March.
    16. Reto Foellmi & Josef Zweimüller, 2017. "Is inequality harmful for innovation and growth? Price versus market size effects," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 359-378, April.
    17. Diego Comin & Danial Lashkari & Martí Mestieri, 2021. "Structural Change With Long‐Run Income and Price Effects," Econometrica, Econometric Society, vol. 89(1), pages 311-374, January.
    18. Marti Mestieri & Danial Lashkari & Diego Comin, 2015. "Structural Transformations with Long-Run Price and Income Effects," 2015 Meeting Papers 437, Society for Economic Dynamics.
    19. Meili, Rahel & Stucki, Tobias, 2023. "Money matters: The role of money as a regional and corporate financial resource for circular economy transition at firm-level," Research Policy, Elsevier, vol. 52(10).
    20. Wen-Tai Hsu & Lin Lu & Pierre M. Picard, 2023. "Income inequality, productivity, and international trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(1), pages 203-249, July.

    More about this item

    Keywords

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    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • D30 - Microeconomics - - Distribution - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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