Transformational Growth and the Business Cycle (Studies in Transformational Growth)

354 Pages·1998·2.25 MB·English

by  Edward J. Nell

TRANSFORMATIONAL GROWTH AND THE
BUSINESS CYCLE
This book examines the concept of Transformational Growth from a number of different
historical and geographical perspectives. Transformational Growth sees the economy as
an evolving system in which the market selects and finances innovations, changing the
character of costs and affecting the pattern of market adjustment. This creates’ the
possibility that markets will work differently in particular historical periods.
This book explores market adjustments in two distinct historical periods, 1870–1914
and 1945 to the present. The book focuses on six countries: the United States, the United
Kingdom, Canada, Germany, Japan and Argentina. In all cases the earlier period,
dominated by craft-based technologies, proves to be the one in which markets adjust
through a weakly stabilizing price mechanism. By contrast, in the later period, in all
cases, with the exception of Argentina, there is no evidence of such a price mechanism.
In its place can be seen a multiplier-accelerator process which, arguably, reflects a
change of technology to mass-production.
Edward J.Nell is the Malcolm B.Smith Professor of Economics at the New School for
Social Research, New York. He is the author of Making Sense of a Changing Economy
(Routledge, 1996).
STUDIES IN TRANSFORMATIONAL
GROWTH
Edited by Edward J.Nell
Malcolm B.Smith Professor of Economics, New School for
Social Research
The fundamental insight of transformational growth is that the working of the market, in
any given era, presents economic difficulties which set in motion competitively driven
forces bringing about innovations designed to solve those problems. But these
innovations change the character of costs and the flexibility of factor supplies, and this, in
turn, if on a sufficient scale, will change the way the market system adjusts. Such changes
will require adaptation by institutions—firms, households and governments—and this
will react back on markets. The effect will be to bring about a new pattern in the normal
working of the market, which, in turn, can be expected to present new difficulties, leading
to innovations, and so, eventually, to yet another new pattern of market adjustment.
Two points follow: first, the fundamental role of markets is not bringing about the best
allocation of scarce resources among competing ends—this may or may not be important.
What is essential is understanding that markets drive innovation, and mobilize the
resources to finance and spread investment in innovation. Second, since markets may
adjust differently in different historical periods, the economic principles by which we
describe and analyze the working of markets will also be different.
The Series will present a succession of studies in the application of the
transformational growth framework to issues in economics and political economy,
including policy questions and social problems related to economics. Most of the books
will consist of closely related essays, written by a study group, although some single
author monographs will be included. These essays will be primarily empirical, drawing
implications for policy questions and for current debates in the literature.
TRANSFORMATIONAL
GROWTH AND THE BUSINESS
CYCLE
Edited by Edward J.Nell

London and New York
First published 1998
by Routledge
11 New Fetter Lane, London EC4P 4EE
This edition published in the Taylor & Francis e-Library, 2005.
“To purchase your own copy of this or any of Taylor & Francis or
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Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
© 1998 Edward J.Nell
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalogue record for this book has been requested
ISBN 0-203-98236-3 Master e-book ISBN
ISBN 0-415-14855-3 (Print Edition)
CONTENTS

List of illustrations vii
List of tables viii
List of contributors x
Preface xii

PART I The idea of Transformational Growth

1 From craft to mass production 3
The changing character of market adjustment
EDWARD J.NELL
2 Methods and methodology in historical macroeconomics 54

THORSTEN H.BLOCK AND RAYMOND C.MAJEWSKI

PART II Industrial history

3 The US economy during World War II 77

GEORGE ARGYROUS
4 Transformational Growth and the merger movement from 1895 to 1904 98
Some theoretical, empirical and historical evidence
HELGE PEUKERT

PART III Studies of stylized facts

5 Transformational Growth and the business cycle 118

EDWARD J.NELL AND THOMAS F.PHILLIPS
6 UK Business cycles 142
Stylized facts and the marginal cost/marginal productivity debate
STEPHANIE R.THOMAS
7 Product wages and the elasticities of effective demand in the United States 164
during the old and the new business cycles
RAYMOND MAJEWSKI
8 Price v. output adjustments 174
The changing nature of the business cycle in Germany, 1871–1989
THORSTEN H.BLOCK
9 Transformational Growth in Japan 205

DAVID KUCERA

10 Argentina 225
Transformational Growth in the absence of the new cycle
ENRIQUE DELAMONICA
11 Canada and Argentina 251
A comparison
THOMAS F.PHILLIPS

PART IV Implications for economic analysis

12 On Transformational Growth 257

Edward J.Nell interviewed by Steve Pressman
13 Conclusion 278

EDWARD J.NELL

References 294
Index 319
ILLUSTRATIONS

1.1 The craft economy tangency solution 23
1.2 Adjusting to changing investment 25
1.3 The elasticity of consumption with respect to investment 28
1.4 Saving and investment 30
1.5 The determination of output and employment 31
1.6 Two versions of the sawtooth 41
1.7 The hills and valleys of the new cycle 45
4.1 Cost and revenue curves for the firm 107
4.2 Cost and revenue curves for the industry 108
4.3 Cost and revenue curves for a firm with high fixed costs 109
4.4 Equilibrium under dominant-firm price leadership 112
4.5 Effect of a decline in demand on the dominant-firm strategy 113
5.1 Wages and manufacturing prices 129
5.2 Year-to-year differences in exports and absorption: OBC 131
5.3 Year-to-year differences in exports and absorption: NBC 132
5.4 Real output and real wage: OBC and NBC rate of change 133
6.1 Real rate of growth and the real rate of return on three-month US Treasury 160

securities
6.2 Real rate of growth and the real rate of return on UK Treasury bills 161
TABLES

1.1 Sectors of the world economy as a proportion of GDP 46
1.2 Government expenditure as a proportion of GDP 47
1.3 Labor costs as a proportion of total costs 47
2.1 Different roads to the past 57
3.1 Productivity gains of larger output 78
3.2 Producers of major airframes and engines 81
3.3 Machine tool pool shipments 94
5.1 Canadian manufacturing 124
5.2 Canadian employment 126
5.3 Structure of the Canadian economy 127
5.4 Implicit prices and real wages 130
5.5 Money wages and manufacturing prices 130
5.6 Canadian government expenditure as a percentage of GNP 134
5.7 Effects of government, investment and trade on output 135
6.1 Results of augmented Dickey-Fuller tests 155
6.2 Testing results of the price/output relationship 156
6.3 Testing results of the product wage/output relationship 157
7.1 Cyclicality of product wages 166
7.2 Price elasticity of effective demand 168
8.1 Size of business in German industry 177
8.2 Properties of the first-differenced series 184
8.3 Volatility of HP10 detrended series 185
8.4 Volatility of HP400 detrended series 186
8.5 Covariation of HP10 detrended series 187
8.6 Cyclical behavior of wholesale prices 192
8.7 Cyclical behavior of money wages 193
8.8 Cyclical behavior of product wages 194
8.9 Price and output adjustments in the industrial sector 195
8.10 Relationship between consumption and investment 199
9.1 Proportion of heavy industry to total industry 208
9.2 Wholesale manufacturing prices regressed on manufacturing output 216
9.3 Product wages in manufacturing regressed on manufacturing output 217
9.4 Wholesale manufacturing prices regressed on manufacturing output 219
9.5 Product wages in manufacturing regressed on manufacturing output 219
9.6 Wholesale manufacturing prices and product wages regressed on lagged 220

manufacturing output
10.1 Total foreign investment and railroad investment 227
10.2 Growth of population, railroads and main exports 227
10.3 Evolution of firm size 228
10.4 Index of industrial production 228
10.5 Production of vehicles and machinery 230
10.6 Structure of GDP, 1900–29 231
10.7 Terms of trade 234
10.8 Immigration flows 234
10.9 Weekly hours worked in Buenos Aires 236
10.10 Indicators of the presence of transnational corporations 238
10.11 Share of traditional and industrial exports 239
10.12 Structure of GDP, 1927–65 239
10.13 Main industrial activities 240
10.14 Distribution of total output 241