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Cycles and Growth: A Source ofDemand-Driven Endogenous
GrowthPierangelo Garegnani a & Attilio Trezzini aa Dipartimento
di Economia, Universit degli Studi di Roma Tre,Rome, Italy
Version of record first published: 16 Dec 2009
To cite this article: Pierangelo Garegnani & Attilio
Trezzini (2010): Cycles and Growth: A Source ofDemand-Driven
Endogenous Growth, Review of Political Economy, 22:1, 119-125
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Cycles and Growth: A Source ofDemand-Driven Endogenous
Growth
PIERANGELO GAREGNANI & ATTILIO TREZZINIDipartimento di
Economia, Universita` degli Studi di Roma Tre, Rome, Italy
ABSTRACT This paper moves in a theoretical context in which the
level of economicactivity is dependent on aggregate demand in both
the long and the short period. Itshows that given two simple
hypotheses, the economy will exhibit a tendency to
growindependently of any increase in the average level of ongoing
investment (or any othertype of autonomous demand) over time. The
two hypotheses are (a) that investmentoscillates over time and (b)
that the communitys marginal propensity to consume islower when
income contracts in slumps than when it increases in booms. This
points toa source of growth that is as endogenous to the system, as
trade cycles are.
1. Introduction
The general theoretical background of our argument is one in
which the level ofeconomic activity is understood to depend on
aggregate demand both in the longperiod, where productive capacity
can change, and in the short period, where itis a given. While we
have discussed this background elsewhere (see Garegnani,197879,
1992; Garegnani & Palumbo, 1998; Trezzini, 1995, 1998), it is a
charac-teristic of the present paper that the question of the
dependence of output onlong-term aggregate demand is not approached
in the usual terms of a dichotomybetween autonomous and induced
expenditure. Attention will instead be focusedon an endogenous
mechanism of growth of aggregate demand, and hence of thesocial
product,1 based on the cyclical fluctuations of investment. This
growthwould thus be as endogenous as are the cyclical fluctuations
of investment.
Review of Political Economy,Volume 22, Number 1, 119125, January
2010
Correspondence Address: Pierangelo Garegnani, Universita` degli
Studi di Roma Tre, Centro Studi eDocumentazione Piero Sraffa,
Dipartimento di Economia, Via Silvio DAmico 77, 00145 Rome,Italy.
Email: [email protected] growth discussed here is in the first
place the growth of aggregate demand. However,in the
above-mentioned theoretical framework of demand-driven growth, the
normality ofa considerable degree of long-period elasticity of
output makes it generally possible toassociate the suggested
increase in aggregate demand with a corresponding increase insocial
product. It may be recalled here how the argument for a long-period
elasticity ofoutput with respect to aggregate demand rests
importantly on the compound-rate natureof the potential long-period
growth of productive capacity (Garegnani, 1992).
ISSN 0953-8259 print/ISSN 1465-3982 online/10/0101197 # 2010
Taylor & Francis
DOI: 10.1080/09538250903392119
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Economists have long been aware of the existence of a cyclical
asymmetry ofthe marginal propensity to consume, understood as the
comparative rigidity ofsocial consumption during a decrease rather
than an increase in the socialproduct (see Samuelson, 1943;
Duesenberry, 1948). Insufficient attentionappears to have been
focused, however, on how this can generate growth endogen-ously
once a long-period role of aggregate demand is admitted. As we
shall see, amarginal propensity to consume that is lower when the
social product falls thanwhen it rises entails a progressive upward
shift in the propensity to consume. Con-tinuing cycle after cycle,
this results in a tendency of the economy to grow even ifthe
average level of investment (or autonomous expenditure in general)
remainsthe same.
The above contrasts with the fact that cyclical fluctuations
have generallybeen considered irrelevant in determining the
long-run trend of the socialproduct, not only in the obvious case
of neoclassical theory, where the tendencyto full utilisation of
resources would only allow oscillations around a trend deter-mined
by supply-side circumstances, but also whenever a long-period role
ofaggregate demand is analysed under the assumption of steady
growth. In ourearlier work, cited above, we noted that this
assumption is essentially inconsistentwith an independent role of
aggregate demand in the growth process. It also leads,however, to a
belief that short-period fluctuations in autonomous demand can
onlycause the level of aggregate output to oscillate around a trend
determined byaltogether different circumstances and thus to
overlooking important phenomena,such as the one presented here.
2. General Assumptions
The aim of the paper is to present the above mechanism
engendering an endogen-ous demand-driven tendency of the economy to
grow in its simplest form. Differ-ences in the marginal
propensities to consume in the different phases of the cycleare
therefore assumed without attempting any theoretical or empirical
justifica-tion.2 The same circumscribed aim explains why technical
progress will beignored and why constant returns to scale will be
assumed with no scarcenatural resources and with a limitless supply
of labour.
Investment, savings and the social product will be taken as
gross. Since it willbe necessary to operate with value aggregates,
the ground is cleared for this byassuming a given real wage and the
corresponding system of competitivenormal relative prices. Growth
will accordingly leave relative prices unaffected.As usual at this
level of abstraction the effects of government and
internationaleconomic relations will be ignored.
It should be stressed that, while all the above assumptions will
help to makethe argument clear and simple, the broad conclusions
drawn from it are indepen-dent of them, except for the availability
of labour.
2One of us has addressed this question in a companion paper
(Trezzini, 2005).
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3. An Endogenous Increase in Aggregate Demand with
ConstantOngoing Investment
Let us start by assuming that investment remains constant cycle
after cycle in itsaverage level calculated over booms and slumps.
While this is an unrealisticassumption for what will then be shown
to be a growing economy, it will helpto clarify that on the demand
side this endogenous growth has nothing whatsoeverto do with any
increases in the average level of investment. As already implied in
ademand-driven analysis of growth, however, absolutely no problem
would arise ifwe allowed for increasing investment; it would in
general simply mean a furtherincrease in aggregate demand. The
point of our assumption is that our focus here israther on the
opposite side, namely on the fact that the increase in
aggregatedemand discussed is independent of any increase in
investment. If this is to beshown in the clearest possible light,
it must be in isolation from any changes ininvestment; in other
words, as it operates when the amount of ongoing investmentis
constant.
To simplify, it will be assumed that the cycles are all of the
same duration andthat the distribution of the constant amount of
investment over the various phasesof each cycle is the same in all
the cycles.3 In particular, the amount of investmentin the trough
year of each cycle is assumed to be always the same, a
constantamount indicated by It. The same constancy is assumed for
the amount of invest-ment in the peak years, indicated by Ip.
In Figure 1, as in the usual Keynesian cross diagram with its
458 line, thehorizontal axis measures the social product in terms
of the commodity chosenas the numeraire. If the social product in
period t is indicated as Yt, the verticalaxis will measure the
corresponding aggregate demand in its componentelements, namely
consumption, Ct, and investment, It. The previous assumptionabout
investment in trough years being the same cycle after cycle then
suggeststhat a straight line TT0 can be drawn parallel to the 458
bisector and at a verticaldistance of tt0 from the bisector equal
to the trough investment It; i.e. tt0 It.Consumption must be on
that line in each trough year, at the level of incomecorresponding
to the trough in question. Similarly, a second line PP0 can bedrawn
parallel to the 458 bisector and below TT0. The vertical distance
of thisPP0 line from the bisector, measured by the segment pp0, is
equal to the givenamount of peak investment Ip; i.e. pp
0 Ip. Consumption must be on that linein each peak year. The
lines TT0 and PP0 will therefore provide the limits
3It can be assumed, for example, that investment both rises and
falls, from troughs topeaks and vice versa, in accordance with a
linear relationship. In this case, theaverage level of investment
over the cycle will be (IpIt)/2 regardless of the relativeor
absolute lengths of the two phases. Any other assumption about the
distribution ofinvestment over the cycle would, however, lead to
the same conclusions for thegrowth of the economy. As we shall see
in the following section, the way in whichinvestment increases or
decreases and hence the average level of investment is, infact,
irrelevant as regards the expansive effect, which depends
exclusively on theboom and trough levels of investment.
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within which aggregate consumption will be found to oscillate as
incomeincreases cycle after cycle.
Let us now consider the path of aggregate consumption and the
social productmore closely through, for example, two cycles, under
the above hypotheses andinitially by means of an elementary
numerical example. It is assumed that the mar-ginal propensity to
consume is mpcs 0.1 during slump years and at the higherlevel of
mpcb 0.5 in boom years.
Let us start from a year t 0 with a gross social product of Y0
100 in termsof the commodity numeraire and then assume that, cycle
after cycle, the invest-ment of trough years, measured by the
segment tt0 in Figure 1, is It 5 andthe investment of peak years,
measured by pp0 is Ip 10. On the assumptionthat t 0 is a trough
year, investment will be I0 5 and consumption (on theTT0 line for
the point Y0 100) will be C0 95. A boom will then begin
withinvestment rising progressively to reach I1 10 pp0 in the peak
year t 1.Given the boom marginal propensity to consume mpcb 0.5,
income will needto have increased by the corresponding multiplier,
which can be indicated asthe boom multiplier Mb 1=1 mpcb 1=0:5 2.
The application of Mb tothe increase in investment DI 5 will
therefore give an increase in income ofDY 10 and the income at t 1
will be Y1 110. With I1 10, consumptionwill be at the corresponding
point of the straight line PP0 giving C1 100.
A slump will follow, with investment falling gradually back to
I2 It 5 inthe ensuing trough. Given the slump marginal propensity
to consume mpcs 0.1,application of the slump multiplier Ms 1=1 mpcs
1=0:9 1.11 to DI 5will determine an income falling by DY 5.56 to Y2
104.44. Consumption,C2, will accordingly be C2 Y2 It 104.44 5
99.44.
Comparison of the social products of the two subsequent troughs,
Y0 100and Y2 104.44, already shows the expansionary effect on the
whole cycle.The same effect is of course confirmed on proceeding to
the next boom, where
Figure 1. The trajectory C0, C1, C2, C3, C4, . . . indicates the
path of aggregate consumption wheninvestment fluctuates around a
constant average level
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investment again increases by DI 5, which, with the boom
multiplier Mb 2,will give an increase in income of DY 10, thus
pushing income to Y3 114.4. This peak level is higher than the Y1
110 of the previous peak also by4.44. The same effect is finally
confirmed with respect to the next trough whenits income of Y4
108.88 is compared with the Y2 104.44 and Y0 100 ofthe previous two
troughs with an increase of 4.44 over each cycle.
4. The Algebra
The segments C0C1, C1C2, C2C3, . . . thus show the irreversible
path of con-sumption in the economy. In other words, they are
segments of a consumptionfunction that changes at each transition
from slump to boom within each cycle,and then of course also
changes from cycle to cycle. It is clear that theseincreases in
aggregate demand and social product are jointly engendered by(i)
the difference between the marginal propensity to consume in booms
andslumps, i.e. the steeper slope of C0C1 with respect to C1C2 or
of C2C3with respect to C3C4,
4 and (ii) the oscillations of investment from It to Ipand
back.
On our assumptions, the overall increase in social product in
the course ofthe cycle, which can be labelled DYc, is in fact
simply the difference betweenthe increase in output during the
boomgiven by the boom multiplier Mb 1/(1 mpcb) applied to the
difference between peaks and trough investment(Ip It)and the
decrease in output during the slumpgiven by the slumpmultiplier Ms
1/(1 mpcs) applied to the same investment difference (whichin this
case measures the change in investment during the slump):5
DYc Ip ItMb Ip ItMsor
DYc Ip ItMb Ms (1)This is the increase in social product over a
cycle. The resulting yearly increase in
4It should be noted that if the order of magnitude of the two
marginal propensities toconsume were reversed, the oscillation of a
constant amount of investment would havea symmetrically depressive
effect. This can be seen in Figure 1, where the arrowswould have to
be reversed so that the steeper segments of the path would
represent theslumps and the flatter ones the booms. The economy
would move over time in this casefrom peak Y3 to peak Y1 and from
trough Y4 to trough Y0.5We assume throughout this paper that the
marginal propensities to consume remain con-stant within each
different phases of the cycle, so that we have one multiplier for
thebooms, Mb, and one for the slumps, Ms. Allowing the propensities
to vary within eachphase of the cycle leads to no significant
change in the relation defining the dimensionof growth. It would be
sufficient to take the two multipliers as averages of the
differentmultipliers weighted by the fraction of the total change
in investment to which theyapply, together of course with the
possibility of identifying two successive phases inwhich these
averages give mpcs , mpcb.
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aggregate demand and the social product will then of course
depend also on theduration of each cycle.6
5. A Further Result
Expression (1) has an interesting implication: the tendency of
the economy togrow is independent not only of any increase in the
amount of ongoing investment,as shown by our assumption of the
constancy of that investment, but also to a largeextent of the size
of that constant investment. Given the marginal propensities
toconsume and therefore the two multipliers, the growth of
aggregate demanddepends exclusively on the difference between peak
and trough investment. Thesame expansionary effect can therefore be
obtained by any average amount ofinvestment included between a
minimum determined by the trough investmentIt, which can be
approached by lengthening the slumps to occupy almost theentire
duration of the cycle and keeping investment in it close to its
troughlevel, and a maximum determined by the peak level Ip, which
can be approachedin a symmetrical way.
6. Conclusions
What is outlined above is essentially a process whereby, due to
the cyclical asym-metry of propensities to consume, the
oscillations of investment in the course of thetrade cycle trigger
successive upward shifts of the economys propensity toconsume from
C0C1 to C2C3 or from C1C2 to C3C4 and so on, thus tending toraise
the social product along with them. The idea is simple and the
assumptionsabout consumption behaviour during the cycle are hardly
controversial. Asindicated at the beginning, however, the emergence
of this effect in the theoryrequires two conditions that are rarely
fulfilled together in the literature. Thefirst is a rejection of
the notion of a long-period tendency of the competitiveeconomy
towards the full utilisation of productive resources. The second
conditioninstead is that the analysis should not be conducted in
terms of steady growth, butrather, as has been done here, in terms
of the traditional normal positions of theeconomy which are
compatible with any pattern in the evolution of outputs.
What is presented here is not, however, a model of growth. Its
purpose issimply to draw attention to an element capable of playing
a role, perhaps an impor-tant role, in the tendency of the
aggregate demand in a market economy to grow.We doubt that
formalised overall explanations of the growth of an economy
arelikely to prove fruitful. Once the view that growth can be
explained in terms ofautonomous changes in factor endowments,
technical knowledge or tastes is aban-doned, the central importance
of historical and institutional circumstances inthe growth process
clearly emerges, as it did within the analyses of the
classicaleconomists from Adam Smith to Marx. And such circumstances
are too
6A total increase of 4% over a cycle of 4 years corresponds to
an average yearly rate ofalmost 1%. A lower average yearly rate of
just under 0.5% would apply if the sametotal increase took place
over a cycle of 8 years.
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complex and variable from country to country, and period to
period in the samecountry, to permit any useful deductive
quantitative treatment of the process asa whole, as distinct from
treatment of particular aspects of it, like the oneconsidered
here.
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