Structural Dynamics and Contemporary Growth Theory

Ever since Adam Smith, economists have been preoccupied with the puzzle of economic growth. The standard mainstream models of economic growth were and often still are based either on assumptions of diminishing returns on capital with technological innovation or on endogenous dynamics combined with a corresponding technological and institutional setting. An alternative model of economic growth emerged from the Cambridge School of Keynesian economists in the 1950s and 1960s. This model – developed mainly by Luigi Pasinetti – emphasizes the importance of demand, human learning and of the growth dynamics of industrial systems. Finally, in the past decade, new mainstream models emerged incorporating technology or demand-based structural change and extending the notion of balanced growth. This paper illustrates the approach of Pasinetti's theory of structural dynamics in light of those recent developments. It also discusses further contributions by a number of authors including William Baumol, Geoffrey Harcourt, Nobel laureate Robert Solow and Luigi Pasinetti himself..