Growth, Autonomous Demand and a Joint-Product Treatment of Fixed Capital

Abstract

The aim of this paper is to shed light on the idea of demand-led growth and in particular debate of the last two decades on the appropriate direction of non-marginalist growth theory by exploring the relation between growth and autonomous demands in a fixed capital model proper. The paper developes a simplified two sector model producing a pure consumption good and a machine with variable efficiency. A “fixed-price” model is considered whereby relative prices and the real wage are held at their long-period equilibrium levels, so that disequilibrium in the model is limited to quantities. The dynamics of quantities are represented in terms of first order difference equation system in growth rates of demand, investment growth rates, utilization rates and the relative size of the two sectors. While the local stability of the steady state can be considered in terms of the characteristics of the relevant Jacobian for the model in question such analysis is largely inconclusive. Attention is instead focused on the results of dynamic simulation of the model. These latter results, show the dynamics to depend crucially on the assumptions made regarding the formation of producers’ expectations about future growth in demand. Most importantly, expectations of future growth which make allowance for dispersion in past growth rates; as well as expectations which are partially dependent on expectations about autonomous demand growth may have a significant stabilizing effect on the growth of the economy.