Cumulative Causation and Industrial Evolution: Kaldor's Four Stages of Industrialization as an Evolutionary Model
Argyrous, George, Journal of Economic Issues
The notion of circular and cumulative causation is often associated with Nicholas Kaldor, who built on the work of Allyn Young.(1) Kaldor argued that industrialization is a cumulative process in which the development of industries producing consumer goods precedes the development of those producing capital goods, and where production for sale precedes production for export. Kaldor's theory has had an important influence on other writers in the Cambridge, England, tradition [Eatwell 1982; Skott 1985]. The notion of cumulative causation, through its origins in the writings of Thorstein Veblen  and in the subsequent work of Gunnar Myrdal [1944, 1968], has also permeated the work of institutionalist authors.(2) Despite the use of a common theoretical term, however, important differences between the Young/Kaldor and the Veblen/Myrdal versions exist that have not been fully explored. In particular, Kaldor provides a taxonomy for investigating the industrial development of individual countries. However, without a discussion of the process by which a country moves from one stage to another, this taxonomy retains mechanistic overtones of inexorable, linear development. This is contrary to the evolutionary spirit with which the Veblen/Myrdal stream develops the notion of cumulative causation.
The task of this paper is to reconcile these two streams of thinking. Kaldor's four-stage model of industrial development is used and supplemented with other work that provides a more complete explanation of the industrialization process. Drawing on literature that emphasizes learning-by-using and the historical development of consumption patterns, Kaldor's four-stage model can be given evolutionary life. In other words, microeconomic detail needs to be added to Kaldor's macroeconomic picture to give the latter an evolutionary character. The paper will also use research on the Australian machine tool industry to illustrate the argument.
While Kaldor's framework is the organizing principle for the material discussed below, this paper is a sympathetic critique of that framework in that it does not seek to undermine Kaldor's theory, but rather to extend it in a direction more consistent with an evolutionary approach to cumulative causation. In this way, Kaldor's theory may become relevant to the institutionalist school, which may otherwise overlook it because of its mechanistic overtones and close association to the Cambridge tradition.
Young and Kaldor on Cumulative Causation and the Four Stages of Industrialization
Young argued that the development of mass production and the application of heavy machinery meant that processes which were once undertaken within the same craft shop become the bases for entirely separate industries. The extension of division of labor caused the production process to splinter vertically into individual activities, and the industries which this gives rise to were locked together by a system of complimentary supplies - the process of "vertical disintegration" [Robinson 1958, 19-20]. One industry's demand is another industry's supply, so that a general increase in the level of aggregate demand can have profound implications for the sectoral composition of the economy. This process is analogous to what Edward Nell  has described as transformational growth: the internal dynamics of industrialization bring about a qualitative change in the way that the economy operates.
Central to the Young/Kaldor model of cumulative causation is the emphasis on manufacturing as the engine of growth. The reason for this emphasis is the susceptibility of manufacturing, as opposed to other activities such as agriculture and mining, to extensive division of labor as markets grow. The division of labor in manufacturing has spill-over effects on the rest of the economy:
It is the rate of growth of manufacturing production (together with the ancillary activities of public utilities and construction) which is likely to exert a dominating influence on the overall rate of economic growth: partly on account of its influence on the rate of growth of productivity in the individual sector itself, and partly also because it will tend, indirectly, to raise the rate of productivity growth in other sectors . …