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Structural Change and Economic Dynam ics 7 (1996) 147-162

STRUCTURAL

CHANGEAND

ECONOMIC

DYNAMICS

Natural dynamics, endogenous structural change and the

theory of demand: A comment on Pasinetti

Davide Gualerzi”, b

a Ist i tuto di Studi per la Programmazione Economica ( ISPE), Corso V. Emanuele 282/284, 00186

Roma, I ta ly

b Department of Econom ics, Universi ty of Pisa, 56100 Pisa, Italy

Abstract

This paper examines the mo st recent contr ibution by Luigi P asinett i to the investigation of

structural economic dynam ics by consider ing in part icular the role of demand theory. The

author suggests that a number of cr i t ical features of demand (and demand evolution) in modern

capital ist economies cannot easi ly be reconci led with the theoretical framework under lying

Pasinett i ’s analysis. I t is argued that such a framework rests on a conception of growth as a

process dr iven by exogenous forces and analysed with respect to a path of equi l ibr ium growth,

which is at var iance with the endogenous determination of consumption patterns and new

modes of l i fe in actual economic dynam ics.

The learning pr inciple at the root of Pasinett i ’s recent contr ibutions suggests an interesting

br idge between the dynam ics of production and consumption coeff ic ients. Howeve r, the mos t

frui tful way of investigating such a connection would be to consider the income-dr iven changes

in the composit ion of consumption expenditure within a speci f ic histor ical stage of develop-

men t. I t is argued tha t the ‘objective character ’ of Engel- type demand theory cannot easi ly

be reconci led with a consideration of the speci f ic, comm odity-based forms of satisfaction on

broad categor ies of needs.

Keywords: Structural dynam ics o f capi tal ist econom ies; Learning in production and consump-

tion activi t ies; Composit ional dynam ics of consumption

JEL classi jkation: 041; P16; D12

1. Introduction

The theoretical ana.lysis of structural change ha s received growing attention in the

last ten years in the economic literature Baranzini and Scazzier i, 1990). Luigi

Elsevier Science B.V.

PII SO954-349X(96)00049-5

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D. Gualerr i iStructural Change and Economic Dynamics 7 (1996) 147-162 149

However, in the 1981 essay, the study of the natural relations associated with

structural dynamics was carried out in stages. First they were examined in connection

with a pure iabour production economy and later within a more complex scheme

involv ing capital goods. Not so in the latest contribution. The introduction of capital

goods is left for a later investigation. Natural relations are analysed with respect to

a pure labour production economy, where labour is the only input and consumption

the only use of output.

Pasinetti argues that, in the same way that the pure exchange model is the essential

core of the exchange paradigm on which neoclassical economics rests, the labour

production model “contains those analytica l features, and only those features, which

classica l and Keynesian theory cannot do without ” Pasinetti, 1993, p. xiv ).’ This

choice also emphasizes that technical progress, not capital accumulation, is the key

concept in the explanation of the long term dynamics of industria l economies.

However, his argument must be seen in light of the exp licitly reformulated aim of

the theoretical approach: to study “the economic consequences of human learning”,

as the subtitle of the 1993 book reads.

The learning principle, which is at the root of the pure production labour) model, goes

down to a more profound level of investigation. The classicaleconomists intuitively perceived

the importance of moving down to this deeper level: they call it ‘na tural’. In the present

work, the ‘natural’ relations emerge as having pre-institutional characte ristics, and thus as

being even more fundamental than in class ical analysis p. xv).

This is the most important change with respect to the 1981 essay. The fundamental

features of structural dynamics can be adequately conveyed “by a simple model of

production with labour alone” p. xiv ) and yet such an abstraction “is aimed at

grasping basic features of the industria l economies of our time” p. xii i) because of

the role assigned the learning principle , which in turn implies a further development

of the notion of natural relations, beyond the meaning they had in classica l analys is.

The investigation is based on a Leontief closed model with two sets of coefficients,

labour input coefficients, Ii, and final demand consumption) coefficients, Ci. The

scheme is meant to represent an economy governed by a Smithian pure labour theory

of value and by the Keynesian princip le of effective demand. Prices reflect labour

content and quantities the level of effective demand, i.e. the level of consumption

demand. In this context the basket of consumption multiplied by the labour

coefficients determines the level of employment in the economy.

The condition for macroeconomic stabili ty, I;= 1 c,l, = 1, says more: employment

is equal to total labour available in the economy. This relation emerges direc tly from

the structure of the model and, mathematically, as the condition for economically

meaningful solutions. It implies that all available labour is utilized, i.e. the existence

of equilibrium solutions. Conversely, those solutions imply that employment and the

wage rate are at their natural level.

Pasinetti argues that it would make no sense to consider the natural level of

I Quotations are from Pasinetti 1993) unlessotherwise ndicated

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150 D. GualerziiStructura l Change and Economic Dynamics 7 (1996) 147-162

employment as anything different from full employment. The total quantity of labour

available in the economy “is a magnitude of national relevance. . . And it is clearly

a matter of general concern that i s should entirely be employed” p. 23). Simi larly ,

the natural wage rate emerges as a concept of macroeconomic relevance. The ‘natural’

prices, being proportional to labour quantities, “channel back to each unit of physical

labour an equal amount of purchasing power” p. 24). The natural wage is their

necessary counterpart and represents “each labourer’s equal share into the net

national product”.

When the equilibrium macro condition is undersatisfied we are in a situation of

unemployment, the familiar case examined by Keynes; when it tends to be oversatisfied,

inflation pressures arise.

2.2. Proportional growth and structural change

This static scheme is the foundation for the study of dynamics. The latter requ ires

an adequate treatment of the process of change, on the basis of the evolution of the

technical and demand coefficients. Th is is a fundamental difference with growth

theory models, which can at best accommodate some unrea listic patterns of growth

that have in common the charac teristic of maintaining unaltered sectoral proportions.

Proportional growth has no effect on the macroeconomic condition. Once an

equilibrium is established, it is maintained. Consequently, these models cannot take

into account dynamics in any meaningful way.

A truly dynamic theory must start from the fact that technical change proceeds

unevenly between sectors and therefore labour coefficients decrease at different rates

among sectors. In general, they will not be compensated by a symmetrical and

opposite growth in demand. Indeed, sectoral demands evolve following their own

path. A theory of demand, adequate “for the purpose of an inquiry into the evolution

of industria l systems over time” p. 39), can be grounded on two foundations: the

first is the evidence that “the structure of consumption always varies as income

changes” p. 38), an empirical regularity known as Engel’s Law; the second is that

“consumers’ demand follows well defined paths, before slowing down and eventually

reaching saturation” p. 38). Such a theory is therefore based on the recognition that

essential needs are satisfied first, following a hierarch ical pattern, and that, in turn,

as income increases, saturation sets a limit to the consumption of any good.

Consequently, in a dynamic setting there is an inherent tendency towards the

non-proportional growth of demand.

Taking into account these few hardly disputable facts, the labour and consumption

coefficients become time functions of their ra tes of change, determining the time paths

of prices and quantities, i.e. the dynamic counterparts of the static model’s unknowns.

2.3. Structural udjjustment and ‘natural’ dynamics

On the quantities side, outputs grow at a rate that depends on a ‘scale component’,

due to population growth, and on a ‘structura l component’, due to the rate of change

of per capita demand in each sector. Since technological progress and changes in

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demand patterns proceed at a different pace, maintaining full employment requires

the continuous process of reproportioning sectors ’ employment. Indeed, keeping the

macroeconomic condition satisfied in a dynamic setting “is a truly complex problem”

p. 50). “More precisely, each sector expands, maintains constant, or contracts its

share of total employment over time according to whether the corresponding rate of

growth of per capita demand is greater than, equal to, or smaller than, the

corresponding rate of growth of produc tivity” p. 51).

Population growth and the rate of retirement in each sector add an element of

flexib ility, to the extent that they allow for the redistribution of employment without

labour displacement. But such a non-disruptive way of adjusting sectoral employment

may not be sufficient in the face of the inevitable decline of certain sectors and the

emergence of technological unemployment. In general the continuous decrease in

technical coefficients and the limit s set on per capita demand by saturation result in

a tendency for the macro condition to be undersatisfied. There are a few remedies

to this potential situation of stagnation. On the supply side, the diminution of the

activi ty rate and/or of labour time; on the demand side, external sources of demand,

such as exports, or consumer learning, which speeds up the growth of per capita

demand in the new areas of spending.

The structural dynamics of prices presents more analytica l difficulties. In the

physical quantities system the total quantity of labour and its rate of growth can

reasonably be taken as exogenously given. In the price system the model closure

depends on the choice of a numeraire and it is not obvious which price should be

taken as given. Moreover, the expression for the general average) price level would

become dependent on the rate of productiv ity growth of such a numeraire.

The question is: Can we define a measure that ensures the constancy of the price

level in the face of the continuous process of price adjustment due to productivity

growth differentials among sectors? In this respect it must be realized that in dynamic

analysis there are two degrees of freedom: one is used to close the system of equations

that determine relative prices, and one is used to close the equation system that

determines growth rates. Using a physical commodity or the wage rate labour

commanded) as numeraire obscures this fact since, by definition, their rates of change

are equal to 0. The existence of the two degrees of freedom is instead fundamental

for the main objective of the analysis of price level stabili ty: isolating a structural

real) component from a purely nominal monetary component. This takes a

considerable amount of analytical effort.

Experimenting with the wage rate, expressed in terms of an arbitrary physical

commodity, as numeraire shows that the “constancey of the average, or . general

level of prices . . . is not at all a characteristic of a numiraire in phys ical terms”

p. 66). It is therefore necessary to make reference to a composite commodity the

composition of which reflects “the weighted average of the rates of growth of

productiv ity of the entire economic system” p. 70), or the “standard rate of

productiv ity growth”. When a ‘dynamic standard commodity’ so defined is used as

numeraire, prices wil l change according to the difference between their rate of

productiv ity growth and the standard rate, but the general price level wil l remain

constant. It is then sufficient to use such a composite commodity as the unit of

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account of the wage rate and setting its growth rate equal to the standard rate to

ensure the stabili ty of the price level through time.

Pasinetti cal ls the difference between the rate of produc tivity of any commodity

chosen as numeraire and the standard rate “the rate of inflation of the general price

level, due to the structural dynamics of prices” p. 75).

For a perfectly general analysis of price dynamics we need to consider the case in

which the unit of account is a nominal measure, such as any currency. Conceptually

this simply adds the poss ibility of deviations from the price stability norm, as defined

above, due to the presence of a unit of account fully divorced from the dynamics of

productivity. Expressing the wage rate and its rate of growth in nominal terms

highlights the complete independence of the two degrees of freedom of a dynamic

system and the existence of two components of the sectoral rates of change of prices.

The first, pure nominal, or ‘inflationa ry’, is the result of the deviation of the rate of

change of the nominal wage rate from ‘the ideal situation of dynamic stabi lity’ in

which the latter i s equal to the standard rate of productiv ity growth p. 78); the

second is the difference between the standard rate and the sectoral rate of produc tivity

growth.

Consequently price stabi lity depends not only on the structural component “tied

up with problems of attainment of efficiency in each single branch of production”

p. 81) but also on the policy of a spec ific institution, the central bank, to which the

macro goal of price level stability is entrusted.

2.4. Saoing,$nance and the natural rate of nterest

The central bank must also maintain the rate of interest at its natural level, i.e.

at the level that keeps unaltered through time the purchasing power of loans in terms

of labour, i.e. “the equality between labour embodied and labour commanded”

P. 92).

Although, by definition, in a pure labour economy the system as a whole does not

carry positive savings from one period to another, a rate of interest arises from within

the operation of the financial sector. Indeed, even in the absence of saving in the

aggregate, it is stil l possible to have saving and dissaving for single units, o r between

the private and the public sectors, provided they cancel out one another. The

purchasing power of the flows originating in these debit-credit relationships wil l

remain constant with respect to the commodity in which they are denominated, but

will change with respect to all commodities.

Consequently, even without any explicit rate of interest, a set of own rates arises

simply as a consequence of produc tivity growth differentials; when an actual rate of

interest is stipulated on loans, in terms of a numiraire, say the wage rate, it must be

added to the own rate of interest. If the standard commodity is used as numeraire,

then such rates wil l be determined by the difference between the standard rate of

produc tivity and the commodity rate, plus the actual rate stipulated on the loan. For

labour commanded the own rate is simply the actual rate of interest, reckoned in

terms of the standard commodity, minus the standard rate of productivity.

Once we introduce a rate of interest stipulated in a nominal unit of account, we

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need to consider also changes in the price level. In particular, the natural rate of

interest must take into account the average productiv ity growth and changes in the

price level. The derivation of the natural rate, however, turns out to be remarkably

simple. Pasinetti shows that such a rate is equal to the rate of change in the wage,

independently of any numeraire. Consequently, the rate of change in the wage rate

becomes the reference point for setting the rate of interest at the level consistent with

the internal logic of the natural economy.

3. Structural dynamics, equilibrium analysis and institutions

In his review of the 1981 volume, Scazzieri noted that Pasinetti had offered “a

fresh treatment to many vexed questions in politi cal economy” Scazzier i, 1983). This

is not the purpose of the latest evolution of Pasinetti’s analysis, which focuses instead

on the complex ities of structural dynamics, quite independently of other theoretical

problems. From this point of view the pure labour model may well help to highlight

most cogently the fundamental questions Pasinetti wants to address.

In this respect the sharp separation of structural dynamics from institutional and

historical analysis is also noticeable. In his latest book, institutions are considered

in a separate chapter, mostly to highlight their function of bringing into being and

keeping at their natural level the key macro variables. Sim ilarly, the exposition is

cleared of any descrip tive passage on histor ical dynamics, except for a ‘bird ’s eye

view’ of the evolution of the structure of production of industria l economies, discussed

in one of the last chapters of the book.

More explic itly than before the distinction between separate spheres of analysis

seems to be a condition for concentrating on the investigation of the natural relations

that lie at the core of structural dynamics.’

Pursuing such a research program, however, comes at a price. Deprived of any

reference to historical or institutional dynamics, the system is held together exclusive ly

by the requirements of full employment, i.e. structural change is analysed in the

framework of an equilibrium growth path.

This is an element of continuity of Pasinetti’s theoretical approach, and a

troublesome one.

It can be legitimate in order to call attention to the permanent process of

redistribution of labour imposed by structural change, a highly complex and

unsettling phenomenon. Pasinetti argues that it would be of no interest to consider

a natural system which is not a full-employment system. However, it is one thing to

assume effective demand as a constraint, but quite another to assume full employment

as a constraint. This transforms the full-employment condition from a methodological

’ Pasine tti points out that the scant attent ion given in the theoretical literature to the issue of structural

change contrasts with the numerous importa nt contributions coming mostly from the develop ment

literature. These, however, never achieved, nor even pursued, any status of theory. For this reason the

analysis of structural change shoul d b e based on a theoretical founda tion, beyond the empiric al search

of historical regularities.

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tool into an attribute of the natural system. What slips into the argument is that a

natural system would be one of full employment, a statement which has little in

common with the ideas of the classics .

A similar criticism was levelled against Pasinetti previously. Shapiro 1984-85) has

argued that the notion of equilibrium imbedded in the model is a fundamental flaw:

“the employment effects of technical progress on a full employment growth path are

quite different from what they are outside of it” Shapiro, 1984-85, p. 243).

Consequently, the results of the model ho ld only for a natural economy, not for a

capitalist economy.

Pasinetti,

l ike other equi libr ium theor ists, a ssume s that the equi libr ium relations are

the necessary ones, and thus the equi libr ium impl ications of technical change are i ts

econom ic impl ications. They have no more signi ficance than the equi libr ium state which

they support and do not necessarily hold outside the conditions which produce them. .

For the employme nt effects of technical change to be speci f ied, the pattern of technological

change has to be determined.

And this can only be done by ‘denaturaliz ing’ the innovation

process (Shapiro, 1984685, pp. 2446245).

Harris 1982) in his review of the 1981 book observed that Pas inetti does not

depart from equilibrium analys is. His entire analysis based on the factors that

systematically upset equilibrium positions. If we further consider that factors of

change are independent from the workings of the economy, the model presents a

continuity with a theoretical framework which would be “no cause for discomfort”

for the sophisticated neoclassica l theorist p. 37). This is what Pas inetti described is

a “super golden age”, in which, although everything changes, there still is full

employment. Calling it a natural economic system appears just one way to get around

the problem.

The meaning of equilibrium positions needs to be clarified with respect to the

general purpose they have in the theoretical scheme. Pasinetti has stressed severa l

times that the model is intended to highlight the necessary decisions that confront

any progressive society because of the existence of technical change, independently

of any institutional set-up. The pure structural and institution-free character of the

model is also underlined by the lack of any gravitational force. Consequently, it seems

fair to say that the scheme of the natural economy should be used to define what

ought to be done. The natural magnitudes then become the targets that institutions

should have as a guiding star to devise policy . Observing that full employment of

labour is “clearly a matter of general concern” p. 25) stresses that full employment

must be pursued as an object of policy: “there is nothing in the structural evolution

of technical coefficients . and of per-capita demand . . . that wil l ensure the

maintenance of full employment . . it will have to be active ly pursued as an explicit

aim of economic polic y” Pasinetti, 1981, p. 90).

Certainly Pasinetti cannot be mistaken for an advocate of ‘laissez-fa ire’. It does

not follow, however, that equilibrium positions are the necessary or best guide to

economic policy . Because of the separation between distinct spheres of analysis, the

burden of explanation falls entirely on the scheme of the natural economy. Its internal

logic defines the economic problem which institutions should govern. Indeed, this

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suggests that, without ill-conceived policies, full employment would be within reach.

The approach bears little resemblance to the natural system of Smith and Ricardo,

where the attainment of natural long-run positions is intrinsically linked to the work

of competition and is distinct from the question of full employment.

To sum up: keeping the analysis strictly institutions-free seems to create more

problems than those it intends to solve. Recently, Ba ranzini and Scazzieri 1990) have

argued that institutional mechanisms and structural dynamics are two distinct levels

of analysis which should be kept together: “In particular, it emerges that the analysis

of actual economic dynamics requires the integration of structural and institutional

types of analysis” Baranzin and Scazz ieri, 1990, p. 257). In Pasinetti’ s scheme the

trouble arises with the very notion of a natural economy. While it can hardly justify

the reference to equilibrium positions, it suggests that institutions come into being

from some process distinct from that of economic growth and then can be added to

the scheme of necessary structural relationships . This way of proceeding may make

the analysis of the long-term evolution of industria l economies more elusive than

substantial.

In fact, it is not clear how institutions could prevent the tendency for the

macroeconomic condition to become undersatisfied, unless, as noted by Harris, they

could stop the course of technological progress Harris , 1982, p. 35). The very

fundamental mechanism contrasting the lapse of the system into depression and

underemployment, the learning by consumers of new preferences, conceivably

combined with the introduction of new products, brings to the fore the question of

the institutional factors that shape consumption in advanced capita listic economies.

From this point of view the natural economy only works to move the real questions

of development and accumulation a step away, displacing them into the domain of

policy . It seems, quite frankly, a far too extreme conc lusion.

It is also not immediately clear what can come out of efforts to improve the model

by adding new parameters to the fundamental relationships ; or model histor ical or

institutional processes into the scheme.

As an example, one may recall a recent attempt to insert the long wave into

Pasinetti’s model. Reati and Raganelli 1994) show that, as the innovation process

unfolds along the path of the long wave, prices converge towards natural prices.

However, this only shows that there are way to model the unsteady character of

technical change which are consistent with natural relations, much less that they

capture the essence of the actual dynamics of structural transformation of industria l

economies. As Harris has noted, the consistency of the model and, more genera lly,

the logic of structural models, is not a matter of dispute. The problems arise with

the “theoretical practices, purposes, and uses to which the model is put” Harris, 1982,

p. 28).

4. Endogenous growth, exogenous forces of change and the theory of demand

In light of these criticism s it may be useful to reconsider the development of

Pasinetti’s approach in the 1993 book. As pointed out in Section 2, Pasinetti argues

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that the essential features of structural dynamics may be analysed independently of

the process of capital accumulation; from this fundamental change of perspective the

prominent role of the learning princip le takes its full relevance. On the basis of these

premises, Pasinetti can claim that the pure production model, and the natural

relations that emerge from it, can capture the essential aspects of the long-term

dynamics of structural transformation of industria l economies.

This development of the approach raises new interesting questions. In particular,

the relevance accorded to the learning princip le shows an important similarity with

the fundamental theme common to the new models of endogenous growth Romer,

1986; Lucas, 1988). In these models a long-term growth trend i s obtained without

any reference to exogenous technical change, but rather by taking into account the

effects of the accumulation and diffusion of knowledge, either in the form of new

technical knowledge, which becomes widely available Romer, 1986) or spreads as

a consequence of specialization of production Romer, 1988) or as a result of the

improvement of the general level of education that affects human capital resources

Barro, 1989). Although such a similarity should not be stretched too far,3 the analogy

between this view of the growth process and the role of learning in Pasinetti’ s scheme

is quite clear.

In particular, the new growth theory, which directs attention to the endogenous

and cumulative nature of the growth mechanism that originates in the accumulation

of socia l knowledge, helps to formulate the question of endogenous growth within

Pasinetti’s model.

Indeed, the fundamental aspect that has eluded previous criticism s is its reliance

on exogenous forces of change, which remains despite the centrality of the learning

principle . An exogenous process of technical progress creates the conditions for

income growth. As income grows, the consumption structure evolves, following its

own independent path, modelled after Engel’s Law. The potential for more output

in each sector must be validated by a symmetrical increase in demand, bringing to the

fore a conflict which is at the core of structural adjustment. However, beyond the

non-proportional pattern of expansion of Engel’s Law, final demand composition is

not specified and the rates of produc tivity growth are fully exogenous. Income growth

appears, from this point of view, as something totally unexplained and leading to

stagnation. Uneven demand expansion, before indicating the poss ibili ty of economic

expansion, results in a tendency for markets to become saturated.

The notion that the forces of change can be taken as exogenous rests on the

questionable argument that they fall mostly outside the domain of economic analys is.

While there is in principle no reason to disagree with the fact that a theory of technical

change “would pertain to a much wider field than economics” Pasinetti, 1981, p. 67)

it is equally true that economic theory must be able to explain how these forces

work their way into the growth process.

’ Endogen ous growth models develop out of the effort to rescue growth theory from the contradiction

between capital accumulation and decreasing returns typical of the neoclassical production function. This

is

clearly irrelevant for Pasinett i’s scheme, which does not make reference to the neoclassical theory of

production.

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It is precisely on this issue that Pasinetti’s model contains a promising new insight.

A characte ristic of his approach is the integration of the demand side into the analysis

of growth and the link established between the production and consumption

coefficients. The reason for this insight is fully brought to light by the most recent

development of the model: at the roots of economic progress is indeed the general

princip le of learning. Once disentangled from the notion of improvement of the

production methods, which is dominant in economic theory, it is clear that the same

princip le applies also to demand, i.e. to consumers.

Having gone this far, however, Pasinetti does not follow through with the

implica tions of his own reasoning. Learning may indeed be the core of the

endogenous self-determination of the growth process. But then the latter cannot be

modelled in a way that leaves exogenous the forces of change. Pasinetti seems to

have overlooked the fact that precise ly the evolution of his argument about structural

dynamics exposes the inadequacy of the stylized facts on which the model is based.

Both technological innovation and taste evolution attain their spec ific connotations

in so far as they are endogenous to the process of economic development; however,

their reciprocal determination is the source of expansion of the market economy and

consequently also where the process of structural change originates. Accord ingly. as

opposed to the general principle of learning, there exist a number of spec ific learning

processes that are part and parcel of the process through which scientific and

technological progress, as well as taste and preferences, are organized to become

markets. Alternatively, the entire model is pulled by exogenous fac tors. It has no

dynamics of its own.

The reference to the forces of change as exogenous is not therefore justified

conceptually, whereas theoretically it leads to a model in which structural dynamics

and the composition of industria l output are entrusted to processes independent of

economic development. In fact, Pasinetti’s s tructural dynamics ends up in a paradox:

it rests on consumer sovereignty. Learning new preferences is the main force

counteracting the tendency to market saturation, but the rates of change of per capita

demand for each good cannot be determined without reference to an exgenous process

of the formation of consumer preferences.

Ultimately, the integration of the demand side into the analysis of growth, which

is potentially the most fruitful step forward, does not lead to an analysis of the

endogenous growth mechanisms because of a fully inadequate theory of demand.

In the 1981 essay Pasinetti argued that preferences “ultimately depend on

human nature. which represents, in the same way as the technical conditions of

production do. a fundamental external datum for any meaningful economic investiga-

tion” p. 68). As questionable as it is, it was an argument for asserting the exogeneity

of taste. In the latest book the notion of human nature has disappeared and we have

instead a careful drawing of all the implica tions of Engel’s Law and numerous hints

that go well beyond it.

Pasinetti observes that technical progress implies “the poss ibilit y of obtaining . . .

entirely new goods and services” and that this aspect of technical change opens the

way “to further, autonomous decisions” distinct from the pure availability of more

income.

“It thus becomes necessary to discuss the relation that exists between

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increases in real income and expansion of demand for consumption goods” p. 37).

In this respect the traditional theory of consumer demand is completely useless .

However, he observes that “for the purpose of developing a reasonable theory of

consumption decisions in a dynamic context, we already have many important

fragments” p. 107). Among these “the inevitable asymmetry between consumption

decision concerning already known goods and consumption decision concerning

goods that are consumed for the first time” and the fact that an “increasing

proportion of consumption goods require a process of preliminary training and

learning, in order to be enjoyed” p. 108). Fina lly: “It may in fact become necessary

to investigate in some detail the inherent charac teristics of human needs . about

which to pretend to remain ‘agnostic’ would be simply self-defeating” p. 109).

Al l these observations, however, do not affect the analytical structure of the model,

nor can be considered a more adequate theoretical treatment of the relationship

between demand, structural change and growth.

In the first place it must be recognized that the dynamic theory of consumption,

based on the “objective ground” p. 37) of Engel’s Law, cannot say anything about

the speci fic, commodity-based forms of satisfaction of such broad categories of needs

as those considered by the income-driven changes in the composition of consumption

expenditure. These are spec ific to a socia l and production structure at the historical

stage of development. The technology content, product complementarities and

investment strategies associated with it are the key to the determination of the pace

and pattern of growth. This line of reasoning implies that much attention must be

directed to new products. Pasinetti seems to attribute to them some autonomous

role in the determination of the patterns of consumption. “The variation in the

composition of consumption may well occur independently of the increase in income

and of the changes in prices, as a consequence of the appearance on the market of

newly invented goods and services” p, 40). However, although essential to keep the

macroeconomic condition satisfied, they are not analytically treated in any way

distinguishab le from the exogenous increases in productivity , nor, he elaborates, on

their influence on taste formation. Fina lly, this approach to demand even contradicts

the notion of learning. Despite the role of prime mover within the theoretical scheme,

learning receives scant attention and is hardly analysed. According to Pasinetti, the

saturation of certain needs imposes the speeding up of consumer learning. The

analysis of this process would presumably indicate that new preferences are not

discovered by consumers, but rather developed within an adaptive, socially con-

ditioned process, where contact with products, and especially new products, as well

as the socia l meanings of consumption, are essential aspects.

We are left to wonder why the analysis of demand remains instead rooted in a

premise. the exogeneity of taste, which is at odds even with the fragments of analysis

that Pasinetti mentions. Pasinetti notes that “Fortunately, at least with regard to the

present analysis, we do not need to develop a complete theory of demand” p. 37).

The question raised here. however, is a different one. It concerns the very premise

on which demand is analysed and consequently the analytical foundation of the

theoretical approach, not its completeness. The only plausible reason to obtain

exogenous taste formation seems to be the logic on which the analysis of structural

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D. Gualerz i/Struclural Change and Economic Dynamics 7 (1996) 147-162

159

dynamics is based. Spec ifically, it is necessary to develop the analysis of the demand

side within an equilibrium growth path. Indeed, if we were to carry out the analysis

of consumption focusing on the relationship between innovation, new commodities

and endogenous taste formation, then it would become apparent that it conflic ts with

the very structure of the approach.

Only this perspective can give full relevance to the notion of learning. The latter

should be considered as the process that endogenizes the interaction between

technological innovation and the evolution of consumer taste. As such it needs to

be integrated into an adequate approach to demand centred on the relationship

between production and consumption. It must be stressed that such a relationship

in no way implies a fully endogenous theory of taste, nor that demand theory must

be exclusively an economic theory of demand. It indicates instead that economic

theory shou ld develop a theory of demand consistent with the analysis of growth.

Such a theory may be developed starting from two premises. First, in order to

consider human needs within economic analysis we cannot abstract from their socia l

nature and from the systems of commodities that are designed to satisfy them.

Spec ifical ly, the analysis of endogenous growth mechanism must focus on the

relationship between technological conditions of production and commodity-specific

forms of satisfaction of soc ially defined needs that determine the evolution of taste.

Otherwise we abstract from the potential for novel consumption, which is a

charac teristic of the production of commodities. Second, it seems safe to say that

firms influence taste both directly, by means of product innovation, and indirectly,

through the impact of their strategies of expansion on the social environment of con-

sumption.” This criticism of exogenous taste is more fundamental than that implied

by consumer manipulation by means of advertising and other marketing efforts.

In a similar vein, several years ago Leon d iscussed the relationship between

production and consumption, the active role of entrepreneurs and the limit s of Engel’s

Law for the analysis of consumption in a capitalist economy Leon, 1967).5 He first

observes that “the inclina tions and tastes of consumers in fact depend on production,

when they are viewed in a dynamic setting, because they can only be manifested

when commodities are already present in the market” p. 124). He then argues that

Engel’s Law, like other phychological laws, although “operative in all economic

systems”, is not capable “of expla ining why certain tendencies rather than others are

present in the evolution of the consumer budget in a capital ist socie ty” p. 12.5). Only

through the action of entrepreneurs does the pattern of growth of consumption

becomes determinate.

4 For a discussion of the theoretical framework that makes reference to the notio n of the ‘social

env,ironme nt of consump tion’. set Levine (1981). In that framework the reciprocal determ ination of firms’

market expansion strategies and the constitution of individuals within a mode of life determines the

evolution of the social environment of consumption, The latter is the source of new needs and the potential

for new commod ities. at least to the extent that needs can be satisfied by commodit ies.

’ Within his model the dynamics of demand, based on Engel’s Law. is the basis for a permanent

differentiation of protit rates. This in turn leads to a possible conflict with the aims of the entrepreneurial

class. Resolu tion of this conflict requires an analysis of consumption and is the key to the theory of its

dcvclopment within capitalism.

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160 D. Guulerz iiStructurtl Change and Economic Dynamics 7 (1996) 147-162

Another research path is the more articulated analysis of consumption spending

and of the household sector.

Eichner 1987) has shown how the hierarchical pattern of the Engel curve can be

combined with a disaggregation of consumption to construct a model of household

behaviour. The latter distinguishes between needs and products and elaborates on

the role of habit formation and non-routine expenditure in determinjng the expendi-

ture patterns. In a recent article Appelbaum 1922) developed some of Eichner’s ideas

about the modelling of the household sector. Following the idea that household types

react differently to the process of economic development, the model IS combined with

a taxonomy of households. It is then possible to link technical change, consumption

activi ties and labour supply and to analyse their interdependence within an input-

output model.

In yet another recent contribution, Landesmann and Scazzieri 1994) go in a new

direction. They elaborate a methodology for the analysis of structural dynamics based

on the notion of the production process. The latter is specified in three dimensions:

tasks, capabi lities and fabrication stages. From the interaction of these three sets of

elements. which characterize the organization of the produclion process in any

histor ical phase, endogenous structural change results. This scheme can capture

qualitative change which eludes simpler representations. We may conclude that the

intrinsica lly simple decomposition technique used by Pasinetti may limit the kind of

questions that the model can answer and consequently cannot capture the underlying

logic of structural change.

5. Concluding remarks

With his latest contribution Pasmetti’s approach to the analysis of growth and

structural change has attamed a new degree of theoretical clarity . Starting from the

most essentia l model that embodies classica l and Keynesian features he derives the

necessary relationships that hold in a natural economy driven by the non-uniformity

of productiv ity growth and demand structure evolution in order to maintain full

employment. This leads to a rigorous analysis of the many complexities of structural

dynamics, and particu larly of the structural dynamics of prices, and highlights the

questions faced by a policy pursuing macro stabili ty.

Its results must be evaluated with respect to the type of questions asked. The model

can be used to uncover, in an analytically precise manner, the consequences of

structural change. Pasinetti has extens ively explored this issue and, for such a purpose,

the model certainly represents an important theoretical achievement. Its contribution

is most strmulating when it directs attention to the relationship between productivity

and demand. However, the latter is used exclusively to discuss the implica tions of

natural magnitudes and adjustment processes with respect to

macroeconomic stabi l i ty,

rather than to develop new insights into the theory of structurnl chanye.

In general, the relevance of the approach for a theory of the structural transforma-

tion of advanced industria l economies is very much in doubt because it rests on the

concept of a growth process driven by exogenous forces and analysed with respect

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D. Gualerzi Structural Change and Economic Dynamics 7 (1996) 147-162 161

to an equilibrium growth path. There are therefore reasons to be dissatisfied w ith

the approach which are independent of the exclusion of capital goods from the

analysis. j Even the question of learning, which emerges as the key concept in the

scheme of a naturally growing economy, remains largely marginal because of this

underlying concept of the growth process. For Pasinetti the latter is adequately

represented by the inherent uneven dynamics of the labour and consumption

coefficients.

This view contrasts with theoretical abstraction which is based on the endogenous

mechanism that connects income growth and structural change, i.e. the emergence

of new industries and new modes of life. In turn that requires an appropriate

treatment of demand. The question is not how much of an exogenous component

must be considered, but rather how to develop a theory of demand consistent with

the dynamics of growth. It should centre on the issue of the reproduction of socia l

life in a system dominated by the production and consumption of commodities and

account for the internal drive for expansion which results from that.

Admittedly it is not clear how to model the interaction between firm s’ orientation

toward market development and endogenous taste formation. The remarks formulated

above and the most recent contributions to the analysis of the household sector,

together with new efforts to develop an adequate methodology for the analysis of

structural change, need further development to establish how product innovation

and need development may be satisfactorily integrated into the analys is. This

constructive task can be undertaken only with respect to a theoretical scheme

centred on the making of modern consumption and its fundamental relationship with

investment directed toward the creation of new commodities markets. There is

nothing natural about such an evolution, which is indeed social in its essence.

Acknowledgements

An earlier version of this paper was presented at the URPE session “Non-

neoclassical Approaches to Macroeconomics” at the ASAA meetings in New Orleans,

3 January 1992, and at the XIa Riunione Scientifica de1 Gruppo di Studio delle

Teorie e delle Politiche Economiche, held at the Univers ita della Calabria, Cosenza,

13114 March 1992. I wish to thank Prof. E. J. Nell, the editors of this Journal and

two anonymous referees for their comments.

6 This is indee d a different problem . One may wonder, for example , how the presence of capital goods

could affect the derivation of the natural rate of interest.

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