ABSTRACT
Proposition 2: Investment is induced, based on the reasonable stability of the normal growth of demand, with composition at least partly dictated by productive interdependencies. Entrusted to the broad social dynamics of transformation, demand growth motivates investment. It is expected demand, therefore it is uncertain. Uncertainty also opens the door to speculation, and innovation. Therefore the emphasis is on an accelerator type theory of investment. However, the accelerator is essentially a theory of aggregate investment, that is, it does not consider issues of composition, but only the level of demand. It is the rise of new markets, therefore changes in market composition, which ensures the re-creation of the conditions for a normal growth of demand. The theory of TG indicates that new markets will emerge from the response of the market system to structural imbalances. Using an historical perspective, it then considers the stylized facts, such as the rural to urban migration, that explain the structuring of the market and thus demand growth. In particular, under a third scenario of growth it considers a more general phenomenon, described in abstract terms: the imbalance determined by differentials in the growth rate of different sectors. Again, the point is to focus attention on the necessary response of the system, which accounts for the rise of new markets. This calls for an analysis of the process, beginning from the reasons for these differentials. Proposition 3: Technological development and innovation have a fundamental role in the transformation, but cannot be understood without considering investment decisions and expected demand growth. Technological innovation reduces cost, changes the character of costs, affecting cost structures, for example, the ratio of fixed and variable cost, and introduces new processes as well as new products. The process of structural transformation thereby is innovation-driven. After all, it is precisely the role played by innovation that characterizes the progressive mode typical of the operation of modern industrial society. The combination of technological progress, innovation and the expected market expansion lies at the core of the demanddriven nature of mass production, marking the difference with respect to craft production. However, technology and innovation are typically supply-side arguments. How can they effectively be part of a demand-driven view of the growth process? The answer lies in their association with investment. Specifically, we are not speaking of induced investment, but rather of autonomous investment. Now we need to consider the relationship of autonomous investment with the expected growth of demand. This third proposition indicates in which direction one ought to search for an understanding of the path of Transformational Growth. To do that, we need to reconsider the growth scenario based on differential growth rates among sectors mentioned above. These differentials underscore a change in the pattern of investment, with new investment distributed unevenly. The result is a changing industrial structure. This suggests that endogenous structural change, driven by investment and innovation, is associated with the rise of new industries, ultimately determining the process of transformation. As such, a purely induced
theory of investment is not sufficient and we need to provide a motivation for autonomous investment. This leads to a second point: the manner in which these differential growth rates intersect the issue of market development, and therefore that of market growth. More specifically, we need to consider whether there is a relationship with the expected growth of demand. It cannot be the same as that underlying induced investment. To address these questions the focus should shift directly to the rise of new markets, first clarifying two notions of expected demand. According to Proposition 2, new markets fuel expected demand, therefore determining a new level of normal demand and induced investment. However, this must be only one notion of expected demand. Some other notion of expected demand, implicit in the mechanism, must be the basis of autonomous investment and the rise of new industries. This additional notion does not deny the previous one that motivates induced investment. It simply distinguishes between the process accounting for the structural development of the market, and thus the prime mover of the growth of demand, and that driven by the expected market expansion based on income growth. These two aspects are reconciled within the overall process of market development. There are stages in this process. In the first one the demand side is only a potential to be transformed in an actual development process by investment in new products. This is why we can speak of potential demand, rather than expected demand. In successive stages, investment can be more directly determined by the growth of demand, as postulated by the fundamental idea behind the accelerator. How are the two notions of expected demand brought together in a consistent demand-led theory of growth? The answer relies on the argument that relates new markets formation to the rise of new industries elaborated within the Consumption-Growth (CG) relationship. It is based on two points:
1 Autonomous investment is the key to new products and the rise of new industries in the first place. This is primarily innovative investment, in the sense of investment spending sustained by innovation. However, more importantly it is aimed at a change of the market structure, establishing, for example, a new product in the consumption structure as a source of revenues to the firm. Therefore, it should not be interpreted as supply determined, as the reference to technological “push” factors in the literature suggests. It incorporates technological advances as means to penetrate and “develop” the market. What motivates this kind of investment must be a view of a possible evolution in demand, expected demand changes grounded on current patterns of consumption and their potential for change.1
