Maria da Conceição Tavares and demand-led growth in developing countries

New paper by Franklin Serrano, Miguel Carvalho and Ricardo Summa on Maria da Conceição Tavares (1930-2024) and her contributions to demand-led growth theory. The paper reviews the pioneering contributions of Maria da Conceição Tavares to the theory of demand-led growth, emphasizing her early recognition that effective demand is central not only in the short run but also in the long-run process of capital accumulation. In that respect, it is more focused and detailed in the discussion of economic growth, than my paper (in this book) that tried to put her ideas in the context of the Latin American Structuralist School, and the emergence of heterodoxy in Brazil.

From the 1960s onward, Tavares developed a framework that departed from dominant development economics, which typically treated growth in developing countries as supply-constrained. Instead, she argued that developing economies function like any capitalist system, where output and growth respond to demand.

A key contribution highlighted in the paper is Tavares’s analysis of structural change during import substitution industrialization. She explains how growth regimes can shift from export-led to domestic demand-led as the economy develops a capital goods sector and increases the domestic content of demand. Public investment and industrial policy play a central role in sustaining this transition, reinforcing the idea that growth is driven by expanding demand rather than limited by supply constraints.

The paper also stresses her critique of stagnationist theories. Against views (including Celso Furtado’s work) that predicted long-run stagnation due to structural constraints, Tavares argued that slowdowns are typically the result of insufficient effective demand rather than inherent limits to growth. By distinguishing between capacity and its utilization, she shows that apparent structural problems often reflect cyclical demand deficiencies.

Another central element discussed in the paper is her Kaleckian inspired separation between distribution and accumulation. Tavares argued that income distribution does not mechanically determine growth. Instead, it affects demand conditions but does not impose a necessary trade-off between consumption and investment. Growth depends on autonomous components of demand, and different distributive regimes can sustain accumulation depending on the broader demand structure.

The paper emphasizes her original contribution regarding autonomous demand, particularly capitalist consumption and public expenditure. These components, along with residential investment, are seen as crucial drivers of long-run growth because they sustain demand without directly expanding productive capacity. This insight anticipates later developments in demand-led growth theory, especially the supermultiplier framework.

Finally, and perhaps more importantly, the authors discuss Tavares’s views on investment and financial capital. Drawing on Hilferding, Hobson and Schumpeterian ideas, she incorporates autonomous investment linked to innovation and financial structures. The paper concludes by showing her influence on two strands of contemporary research, one that treats investment as fundamentally autonomous, related to the financialization literature, particularly as developed at Unicamp, where Tavares taught starting in the 1970s, and another, associated to Serrano himself and his co-authors at Tavares's alma mater in Rio, that led to the Sraffian supermultiplier, where investment is entirely induced.

The Economist and the American Economy

It takes something for me to say that The Economist is probably right. Sure enough the cover of The Economist, which has led to many critiques, sarcastic comments, and plain mockery by some friends on the left, was a bit hyperbolic. But the main argument of the piece -- basically that the American economy did pretty well in the recovery from the Pandemic, and that the United States has done well when compared to other advanced economies, and better than it did in the last few recoveries, which is not the case with China, which still grows faster, but has slowed down -- is correct.

Regarding the recovery, it is clear that the US has outperformed most economies, and it is also true that to a great extent that is due to the fiscal packages from the Pandemic, including the Biden ones, that were derided by many, including many Dems, like Larry Summers (and inflation, which resulted from the supply chain problems, in the absence of significant conflict went down pretty fast).

 

Not only this was the first recovery that was NOT jobless in a while, as can be seen by the fact that real GDP went back to trend, it also puts in doubt the notion that there is some fundamental secular stagnation problem with the US economy.

There are, no doubt, structural issues, like increasing inequality, and an hegemonic challenge from China*, but no significant reason that dooms the economy to grow less in the long run. The lower growth was a result of policy decisions, not structural problems. As Steindl would have said, stagnation policies. Had Obama (and then Trump) pushed for a more robust fiscal expansion after the 2008/9 Great Recession as Christina Romer wanted (and contrary to what Larry Summers advocated) then the growth rate would have been higher, and perhaps even the deficits (as a share of GDP, with GDP growing faster) would have been smaller.

Trump's victory in 2016 is, to some extent, the result of that choice too (and not prosecuting the Wall Street crooks, in my view), and Kamala has failed to adopt a more populist tone during the campaign, which I hope does not end up leading to another turn to the far right. The limits to growth have been political, and the Dems have played a role in that. Paradoxically, Biden had moved to the left on that (his willingness to promote a more healthy fiscal expansion).

* On the exaggerated fears of the end of American hegemony, also very common on the left, I'll write later.

More on Secular Stagnation

Mauro Boianovsky and Roger Backhouse have written a brief post on the topic, based on a longer paper. As I understand the modern version, due essentially to Larry Summers, it basically suggests that there are insufficient investment opportunities, or a savings glut to use Bernanke's hypothesis, discussed here before. I explained why it doesn't seem particularly compelling story in that previous post. If public spending picked up in the US, so would private investment, and the savings glut would vanish. Yes global imbalances would increase. That would be good. Global imbalances would solve the 'secular stagnation' problem.

Note that the Summers' view is different than the Robert Gordon's view, but not incompatible with it, according to which the innovations of the third industrial revolution are less transformative than those of previous waves of technological change. As noted before also, since I believe the evidence for demand driven technological innovation is strong (something called Kaldor-Verdoorn's Law) I don't think there is much to this argument either. The Gordon hypothesis assumes that innovations are supply side determined, like most neoclassical economists, including Schumpeter.

Boianovsky and Backhouse point out something that I didn't know, since I didn't read Hansen's original paper on this, I might add, that the Turner's hypothesis about the closing of the Western frontier played a role in Hansen's stagnationist hypothesis. Not sure what's the mechanism, so I'll check and report back on that. Also they seem to suggest that Domar's debt sustainability condition depends on the Harrod-Domar model. That result, as far as I understand it, is completely independent of the growth model.

I should also note that the only forgotten author in this revival of the stagnationist thesis, is the most interesting of them all, namely: Josef Steindl, author of the 1952 classic Maturity and Stagnation in American Capitalism. Stagnation resulted from the oligopolistic structure of mature capitalism, in his view. Steindl was famously wrong, in the sense that the 1950s and 1960s were not a period of stagnation.* But at least his explanation pointed out in the direction of social conflicts imposed by the productive structure of advanced economies. As I said on my previous post on the topic, there is no secular stagnation problem, associated to lack of investment opportunities, in my view. There is a political problem that precludes more fiscal expansion, or in Steindl's terms, it's stagnation policy.

* An issue he discusses in his 1979 Cambridge Journal of Economics paper (subscription required).

Introduction to the Second Edition of "The Theory of Monopoly Capitalism"

Introduction to the Second Edition of "The Theory of Monopoly Capitalism" by John Bellamy Foster:

The Theory of Monopoly Capitalism: An Elaboration of Marxian Political Economy was initially written thirty years ago this coming year as my doctoral dissertation at York University in Toronto. It was expanded into a larger book form with three additional chapters (on the state, imperialism, and socialist construction) and published by Monthly Review Press two years later.2 The analysis of both the dissertation and the book focused primarily on the work of Paul Baran and Paul Sweezy, and particularly on the debate that had grown up around their book, Monopoly Capital: An Essay on the American Economic and Social Order (1966).3 In this respect The Theory of Monopoly Capitalism was specifically designed, as its subtitle indicated, as an “elaboration” of their underlying theoretical perspective and its wider implications. 

My original motives for the analysis were twofold: (1) to provide a more thoroughgoing explanation of the economic surplus concept and the theory of accumulation to which it was related, and (2) to correct certain misconceptions of Baran and Sweezy’s analysis that had arisen as a result of the “back to Marx” intellectual movement of the 1970s—and that had led to various traditionalist or “fundamentalist” Marxian criticisms of their work.

See rest here.

Microfoundations and the capital debates

Steve has commented on the ongoing debates about microfoundations of macroeconomics, mainly between Paul Krugman and Simon Wren-Lewis (for my comments and Simon's reply on his blog go here, and scroll down to the last comments). I just want to further clarify what I think is, from the point of view of the history of ideas, a significant confusion in the debates about microfoundations, and one (oh yes, here he comes again) that is ultimately related to the capital debates (the Rosetta Stone of the history of economics ideas; if you prefer Sraffa's PCMC, as I tell my students, is the Rosetta Stone. To get an idea of what is the meaning of the capital debates go here).

Microfoundations are first and foremost about the determination of relative prices, the core of what we now call microeconomics, and used to be called before the theory of value. Individual behavior, rational or otherwise, is relevant to the extent that one thinks that behavior of individual agents is central for price determination, and that was at the core of the Marginalist Revolution.

The point is that if individual workers (using the figure of a representative rational utility maximizing worker), for example, in the labor market, confronts rational individual profit maximizing firms (again a representative firm), the free play of the market would produce an optimal outcome. Krugman is very clear why he thinks microfoundations are important. He says:

“if the assumption of perfect rationality breaks down even in the most standard of micro settings — if consumers behave in a way inconsistent with full maximization even when doing something as mundane as choosing which type of gas to put in their tank — how absurd is it to insist that, say, Keynesian stories about the economy can’t be right because we can’t fully derive them from intertemporal maximization?”

In other words, if workers say are not concerned with maximizing utility in terms of higher real wages, but in terms of relative wages, or if firms have limited knowledge about the workers willingness to work, and have an incentive to pay wages above the reservation wage (the one that compensates workers for the trouble with parting with leisure time), then the imperfection implies that the labor market will not clear and you might have unemployment. This is basically the efficiency wage story that New Keynesians use to justify unemployment (note that unemployment does result from real wages above the equilibrium level, and not from lack of demand as in Keynes).*

The capital debates show that even if you have workers trying to maximize utility in the normal fashion, and firms too have full information, that is, in the absence of any imperfection, there is no guarantee that lower real wages would imply more intensive use of the labor ‘factor.’ It is actually quite simple, if commodities are produced with commodities, then a reduction in wages also reduces the price of all goods, since they are produced with labor too, and there is a possibility that the fall in the price of commodities that do not use too much labor falls more than proportionally, so the increase in their demand does not lead to an increase in the hiring of new workers. Also, as wages are central for the consumer’s demand, the income effect of any reduction in wages would trump any (if it is positive) substitution effect. In other words, why would a firm hire more workers (even cheap ones) if nobody buys their products?

Further, PCMC does provide a sound way of determining relative prices. Long term normal prices are determined by the technical conditions of production, given one distributive variable (either real wages or interest, or if one prefers, for a given wage-profit frontier). It does take long term patterns of demand as given obviously, since producers would not supply, in the long term, goods and services for which there is no demand. The analysis of the determinants of effectual demand, the long term patterns of demand, are at a lower level of abstraction, and include all the institutional factors associated to fashion, conspicuous display of power, the effects of marketing, etc., that Veblen, Galbraith (father) and other institutionalist authors suggested were relevant.

Also, workers are rationally trying to obtain a fair wage, and to consume according to their tastes and the other social and institutional factors that determine their behavior. But those are taken as given for the determination of long run prices. And firms do maximize profits, and this implies that they add a mark up on their full costs. These models were developed by the authors of the Full Cost Pricing School, and the literature on barriers to entry, e.g. Sylos-Labini, Steindl and others, and the empirical evidence tends to be favorable.

In that sense, heterodox (classical-Keynesian, by which I mean Sraffa’s prices cum Keynes/Kalecki’s effective demand) does have a coherent determination of long run prices, based on rational behavior, as the foundation of the macroeconomic theory. Markets do not produce optimal outcomes and unemployment of productive resources is the normal, long run, position of the economy. In fact, the capital debates not only say that classical political economy (the surplus approach) provides sound microfoundations, but also that it is NOT possible to do so within the neoclassical/marginalist paradigm.***

* Interestingly enough Krugman’s argument for the current recession is not a rigidity in the labor market, but one in the money market, that is, a rate of interest that does not allow for investment at the level of full employment savings, the so-called Liquidity Trap.

** And yes there is empirical evidence in favor of this view, since there is no support for the effect of lower real wages and higher employment. Real wages tend to be pro-cyclical, go down in a recession, and up in the boom.

*** Arrow-Debreu also does not provide a way out of this conundrum.

PS: For the implications of Sraffa's contribution for Keynesian economics see this paper, and this post.