The Effect of Demand-Driven Structural Transformations on Growth and Technological Change

The paper analyses the effect of the dynamics of consumption preferences on the dynamics of macro–economic growth. We endogenously derive micro–dynamics of consumption behaviour as a result of the increase in the number of income classes. The different degrees of inertia in the adjustment of consumption levels to income changes affect firm selection and the dynamics of market structure, which is ultimately responsible for different regimes of macro–economic growth. We find, firstly, that higher heterogeneity in consumption preferences amplifies and accelerates market dynamics, leading to a swift shift from a Malthusian to a Kaldorian growth pattern. Secondly, consumption smoothing mainly affects the timing of such a take–off. Inertia in consumption delays the occurrence of a Kaldorian engine for growth.