This paper was first published in the Cambridge Journal of Economics 2011; 35: 873-96. For full paper see: https://academic.oup.com/cje/article/35/5/873/1699758

It was my first attempt at an overview of the basic idea of how to explain why the modern economy – the type of economy that first arose during the industrial revolution, before spreading internationally and coming to dominate and transform the world – is so different from all other types of economic system. In particular, it is more dynamic, and characterised by “creative destruction”. The explanation is based on the emergence of a new type of hierarchical firm, with comprehensive control over production, and the new causal forces that this introduced.

There are some terms that need to be replaced. Some are errors: “hidden” hand(s) should of course be “invisible” hand(s), and entity “protection” should be entity “shielding”. Others are undesirable: “capitalist” economy and firm should be replaced by “modern” economy and firm; “flexibility” should be replaced by “alterability”, because this suggests deliberate action; the notion of being able to buy in all its inputs is not very helpful; and the modern firm does not just have wage labour, which has been far more widespread historically, its key feature is enhanced direction of labour along with control over the means of production.

Footnotes 6 and 7 can be ignored. They were inserted at the insistence of the reviewing editor. S/he also was reluctant about this paper, because s/he explicitly was hoping for something that combined Marx and Kalecki, rather than something with original ideas.

Abstract

Drawing on historical and other empirical evidence, this paper provides a causal explanation of a central question: why sustained per capita growth occurs in capitalist economies—i.e. in what way capitalism differs from ‘the market’ that gives it this property. It describes an endogenous economic logic that is based on the institutional characteristics of capitalist firms in the non-financial sector, especially the flexibility of the inputs that they can call upon and of the size of the market that they can supply. This perspective naturally generates a realistic theoretical account not only of the source of economic growth, but also of the evolution of market structure, the forces that produce divergence in, for example, profit rates, a starting point for explaining price-setting and a language for describing firms’ economic power. It draws on previous traditions, especially those based on the works of Marx and Schumpeter, but differs from them in important respects.