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Research Article

Gunnar Myrdal on Labour Market Regulation and Economic Development

Guglielmo Forges Davanzatia1 c1

a1 University of Salento, Department of History, Society and Human Studies.
Article author query
forges davanzati g [Google Scholar]


This article proposes a re-reading of Gunnar Myrdal’s theory of the functioning of the labour market. In contrast with the conventional view of his time (what he labelled “equilibrium economics”), Myrdal upholds that a deregulated market economy is unable to spontaneously generate a social environment characterized by “harmony of interests”. In this context, income inequality perpetuates both within countries and between countries. For the purpose of obtaining a more equal income distribution—and higher economic growth—, an external intervention is necessary, by means of the creation and the progressive expansion of the Welfare State. More peculiarly, it will be shown that for Myrdal economic growth is driven by labour market regulation, increasing public transfers to the benefit of workers and the payment of unemployment benefits, in a theoretical schema where aggregate demand and aggregate supply systematically interact according to a cumulative process.


Dans cet article, nous proposons une relecture de la théorie du fonctionnement du marché du travail de Gunnar Myrdal. En opposition avec la vision commune de son temps (ce qu’il appelle « l’économie de l’équilibre »), Myrdal soutient qu’une économie de marché dérégulée n’est pas capable de générer spontanément un environnement social qui promeut « l’harmonie des intérêts ». Dans un tel contexte, les inégalités de revenus perdurent dans chaque pays et entre les pays. Afin de réaliser une distribution des revenus plus égalitaire – et une croissance économique plus forte – une intervention économique est nécessaire, sous la forme de l’État Providence. Plus particulièrement, on montre que pour Myrdal la croissance économique est favorisée par une régulation du marché du travail, par des transferts publics croissants au bénéfice des travailleurs, et par le paiement d’allocations chômage, selon un schéma théorique dans lequel la demande et l’offre interagissent conformément à un processus cumulatif.

Keywords :Gunnar Myrdal; labour market; economic development; cumulative process; institutions; Welfare State

Mots-clés :Gunnar Myrdal; marché du travail; développement économique; processus cumulatif; institutions; État providence

JEL:B25; E02; E24


c1 Email:


I thank two anonymous referees for their very useful suggestions. The usual disclaimer applies.

Historians of economic thought have devoted their attention mainly to Gunnar Myrdal’s theory of interregional divergences, and the connected theory of circular cumulative causation (Anthon Eff, 1998). The methodological issues raised by the author have also been scrutinized in detail (Panico and Rizza, 2009). Little attention has been devoted to Myrdal’s original view on the functioning of the labour market, which can be considered a major alternative to the mainstream picture of his time.1 Myrdal approaches these issues within a broader discussion on the Welfare State, defining it as an Institutional setting based on “State intervention”, or even “State planning”, as opposed to that based on a “free economy”. More specifically, while he does not provide a definite definition of what he means by Welfare State, he implicitly defines it by means of several examples of State intervention designed to improve the well-being of “the less privileged groups in democratic society”—for instance, “social housing” (Myrdal, 1958, 28).2

Myrdal systematized his ideas on the functioning of the labour market and its impact on the Welfare State in the third period of his professional life, after he had been confronted to such issues as a policy advisor in the thirties.3 For the purpose of this paper, three aspects of policies implementing a Welfare State system will be considered: a) labour market regulation aimed at reducing job insecurity; b) public transfers to the benefit of workers (in particular, health services and public education), c) the payment of unemployment benefits.

In what follows, the theoretical framework of the “circular cumulative causation” (CCC—see below, section 1. will be used in order to provide an interpretation of Myrdal’s view on the role of labour market regulation (and the expansion of the Welfare State) in promoting economic development. Two main arguments will be discussed: the effects of labour market (de)regulation and of public transfers to the benefit of workers on labour productivity, and the linkages between the payment of unemployment benefits and the rate of growth. Myrdal addresses these topics mainly in his Beyond the Welfare State (1958) and the reconstruction provided here is mainly based on this work. This reconstruction is justified on two grounds. First, Myrdal does not expound these ideas in an organic and systematic way: it is therefore useful to bring them together and assess them so as to get a better understanding of the logic underlying them. In so doing, an analytical discussion of Myrdal’s arguments will be proposed, taking into account the historical context of his work. To this end, a preliminary reconstruction of his particular view of the dynamics governing economic processes (the “cumulative circular causation” approach) is in order. Second, as will be shown, his arguments manifest significant elements of originality (which have been largely neglected by historians of economic thought), insofar as the author mixes arguments on economic efficiency, distributive justice and on the dynamics of power in a capitalist society.

The exposition is organized as follows. Section 1 introduces to Myrdal’s theory of “circular cumulative causation”, section 2 deals with the vicious circles that a deregulated labour market spontaneously generates. In section 3 Myrdal’s notion of “created harmony” is analysed. Section 4 concludes.

1. Methodological Issues: the CCC Approach

Myrdal’s approach radically opposes the neoclassical view on two main points.4 First, he shows that the institutionalist approach is more appropriate in dealing with these issues, which it would be hard to analyse using the standard axiom of rationality. He considers this axiom to be based on a “naïve” psychological foundation, which, in turn, derives from a very questionable “intellectualistic and rationalistic liberal philosophy” (Myrdal, 1958, 24-25). By contrast, he believes that, for the sake of a “realistic” analysis of the economic process,5 economists and social scientists have to take into account factors relating to the distribution of power in society, impulses, habits, customs, routines and beliefs, which mould agents’ actions, that is, factors which fall outside the utilitarian view of human behaviour. Moreover, Institutional Political Economy is conceived as a “holistic” approach to the study of social and economic phenomena (Angresano, 1997, 84 ff.; Applequist & Andersson, 2004). Myrdal clarifies that Institutional Political Economy must reject the distinction between “economic” and “non economic factors”.6 This distinction “is, indeed, a useless and nonsensical device from the point of view of logic, and should be replaced by a distinction between “relevant” and ‘irrelevant’ factors or ‘more relevant’ and ‘less relevant’” (Myrdal, 1957, 10).

Second, Myrdal emphasises that the functioning of a social and economic system is based on a “circular cumulative causation” process (CCC). Circular cumulative causation indicates a mechanism where if event A happens this gives rise to a number of further events B which—depending on A—produce feedback effects on event A. In more general terms, this means that A is both the cause and the effect of B. This idea can be used for many applications. A well-known case, examined by Myrdal, is that of discrimination in the labour market:7

White prejudice and the consequent discrimination against the Negroes block their effort to raise their low plane of living; this, on the other hand, forms part of the causation of prejudice on the side of the whites which leads them to discriminatory behaviour. (Myrdal, 1957, 17)


Such a static “accommodation” is, however, entirely fortuitous and by no means a stable equilibrium position. If either of the two factors should change, this is bound to bring a change in the other factor too, and start a cumulative process of mutual interaction in which the change in one factor would continuously be supported by the reaction of the other factor and so on in a circular way. (Ibid.)8

This implies that it is unrealistic (or even nonsensical) to seek equilibrium conditions. Therefore, institutional economics identifies with non equilibrium economics, and instability is a key feature of the functioning of deregulated market economies.9

As Myrdal (1957, 13) clarifies:

The idea I want to expound … is that in the normal case there is no tendency towards automatic self-stabilization in the social system … In the normal case a change does not call forth countervailing changes but, instead, supporting changes, which move the system in the same direction as the first change but much further. Because of such circular causation a social process tends to become cumulative and often to gather speed at an accelerating rate. (Myrdal, 1957, 13)

Two general remarks are in order. First, as Berger (2008, 2) points out, “The CCC is the main antithesis to the mechanistic analogy and stable equilibrium of the social and economic system”. Second, phenomena involving CCC processes are not necessarily never-ending vicious circles, both because, according to Myrdal vicious circles are the outcome of a deregulated market economy, so that external intervention can stop them, and because “CCC is no doctrine of hopelessness because vicious circles can be broken” and “virtuous circle are possible” (Berger, 2008, 2).10

As regards the issues dealt with in the next sections, both remarks are relevant. As will be argued, according to Myrdal, a deregulated labour market spontaneously produces unemployment, in a vicious circle where the unemployment rate tends to grow over time. External intervention—namely State intervention designed to regulate the labour market—can reverse this dynamics, thus generating a virtuous circle of increasing employment, increasing wages and the growth rate. It is important to stress that in this theoretical framework, historical time plays a crucial role and, more importantly, CCC processes normally develop in contexts where major variables move with different speeds over time.

As Myrdal emphasises:

The time element is of paramount importance as the effects of a shock on different variables of the system will be spread very differently along the time axis. (Myrdal, 1957, 18)

As a result, the reversal of a vicious circle requires time, and its impact on the relevant variables not only is not immediate, but, above all, is subject to a time-lag so that some variables are affected before others. This can happen because of the existence of phenomena of institutional inertia, i.e. the change in habits of thought normally occurs over a very long period (Myrdal, 1958, 138 ff.) or because some relevant factors are subject to slow variation over time due to their particular technical or physical features. This applies, for instance, to the effects on labour productivity of the rise in education levels and the improvement of workers’ health: “a change in levels of education or health is achieved … slowly, and its effects on the other factors are delayed, so that there is a lag in the whole process of cumulation” (Myrdal, 1957, 19).

Moreover, one can argue that Myrdal’s theory of CCC does not only state that economic systems are inherently instable. His approach, as will be shown, is based on the view that instability mainly derives from institutional factors, with reference to both political institutions and habits of thought. Accordingly, the theory of CCC should be regarded as strictly linked to Myrdal’s view that the economic process is governed by both “economic” and “non-economic” factors. As Berger (2008, 3) emphasises: “the CCC … focuses on all relevant factors and rejects working with analytically closed models. The relevant factors can, of course, only be determined empirically in a given situation”.11

2. Labour Market Regulation and Economic Development

Myrdal maintains that a deregulated labour market tends to spontaneously produce increasing levels of unemployment and wage cuts. This conclusion is derived from the following assumptions.

2.1. Assumptions

i) Unemployment depends on a lack of aggregate demand, which, in turn, depends on low consumption and low investments. As Myrdal points out: “decreased demand will lower incomes and cause unemployment” (Myrdal, 1957, 23), and “the explanation why there are unemployed and underemployed workers … is that the market provides no effective demand” (Myrdal, 1957, 89).

Low investments are caused by low profits and/or by a low motive for accumulation. This occurs, as a norm, in peripheral economies—populated by small firms—and also in cases where “a rich country which, thanks to an early start, has for some time enjoyed a quasi-monopolistic position may find that the spirit of enterprise and risk-taking has been damaged” (Myrdal, 1967, 36). In other words, Myrdal stresses that a low motive for accumulation may arise in wealthy economies, meaning that high profits are not channelled into ‘productive’ uses. Therefore, it may occur that the increase in profits fails to generate increased investments, thus depressing wages. Myrdal maintains that investments are financed by savings and that—in a context of high unemployment—the consumption by unemployed workers derives from the reduction of accumulated savings:

The unemployed also live on their own past savings and those of their relatives, which likewise reduces the quantity W [i.e. the capital available for new investments]. (Myrdal, [1939] 1965, 164)

ii) Wages rise as employment increases: “a rise in employment will almost immediately raise some levels of living” (Myrdal, 1957, 20). The rationale for this argument lies in the fact that, as employment increases, workers’ bargaining power grows too, thus producing a wage increase. It is interesting to observe that—according to Myrdal—workers’ struggle for higher wages is above all a struggle for power and social and moral recognition, and should be regarded from the standpoint of social psychology. He clarifies this issue in his Political elements in the development of economic theory:

The demands for higher wages, shorter working time, etc. are, of course, important in and of themselves, but viewed more deeply, they are only an expression of far more general strivings for power and demands for justice on the part of a social class which simply feels oppressed. Even if there were no hope of forcing through higher wages, the battle would go on. Even if the workers had reason to believe that a decline in productivity and wages would result, they would nevertheless demand more power and codetermination in the conduct of business. In the last analysis, more is at stake for them than money; their joy of labor is involved, their self-esteem, or, if one will, their worth as men. Perhaps no great strike can be explained merely as a strike for higher wages. (Myrdal, [1930] 1951, 119)

iii) As far as labour productivity is concerned, it must be taken into account that low wages and high job insecurity are associated with low worker “morale” and the consequent low work intensity.12 Myrdal (1957, 123-124) is aware that the dominant view is based on the following assumption:

Another question asked until very recently even in our most advanced and enlightened countries was this one: Would not the motives to work and save in the lower income groups slacken when they were relieved from pressing wants and economic insecurity?

However, he observes that this effect can be in operation only if one considers that workers are not purely rational agents (Ibid., 124 ff.). In the opposite case, in fact, since low propensity to work is associated with a high probability of being fired, workers will not reduce their work intensity since this could increase the probability of loosing their jobs. This is in line with Myrdal’s view that, also in this case, individuals’ decisions cannot be reduced to a problem of optimisation, insofar as they are not made according to the rational choice paradigm. Other fundamental factors mould workers’ behaviour. The reduction of workers’ moral falls within the realm of impulsive reactions driven by “emotions” (Myrdal, 1957, 128), namely what Myrdal labels “feeling of resentments” as opposed to “feeling of solidarity and identification” (Myrdal, 1958, 64).13 Moreover, labour productivity crucially depends on human capital and on the health services provided by the State (Myrdal, 1957, passim). Apart from the direct effects of education and health on the productive capacity of workers, Myrdal also emphasises that a positive relation between education and ‘social capital’14 exists: “Generally, as levels of living and education rise … we may approach a situation where many important public policies can be put into effect without much direct state intervention in the ordinary sense”. This leads to a situation that “it is undoubtedly practical, not only to lay down certain general rules by legislation, but also to sanction their enforcement not only by courts but by administration” (Myrdal, 1958, 65-66). In these passages, the author suggests that 1. human capital accumulation is associated with “social capital” accumulation15 and, as a result, that 2. the rise of social capital is connected with a wider respect for the prevailing moral norms, thus posing the basic condition for economic growth.

2.2. The Dynamics of Wages and Employment

Under these assumptions, Myrdal argues that—in the absence of external intervention—if the initial condition is characterized by the existence of unemployment, this situation tends to be perpetuated and amplified over time, thus generating a dynamics of continuous reduction of employment and wages.16 It follows that a deregulated market economy cannot spontaneously reach an equilibrium position. This conclusion rests on the following mechanisms, operating both on the demand side and the supply side.17


The demand side—In view of assumption ii), the initial existence of unemployment is associated with low wages. Since low wages are in turn associated with low consumption, aggregate demand will be low and as a result, in view of assumption i), unemployment will remain high and wages low. Importantly, in a long-run perspective, due to the reduction of savings deriving from the decline in wages, investments will fall, thus contributing to a further reduction in aggregate demand, employment and wages.


The supply side—The initial existence of unemployment is associated with low wages and low labour productivity. This, in turn, generates a low growth rate, thus producing low employment, low wages and low labour productivity. Moreover, Myrdal points out that low wages and high unemployment are likely to generate social conflict. The economic policy prescriptions deriving from laissez-faire—insofar as they perpetuate unequal income distribution—face the problem of responding to the increasing demand for social justice. This demand manifests itself in the form of poor people’s “revolt against their poverty—with a very apparent implication that their poverty is not all their fault” (Myrdal, 1957, 114).

Note that these two sequences represent a self-reinforcing vicious circle, where—in dynamic terms—instability tends to be reproduced over time and to generate further instability, which may be limited by the fact that “the workers strenuously resist reduction in money wages” (Myrdal, [1939] 1965, 164). This occurs to the extent that workers’ bargaining power (in the labour market and in the socio-political arena) is high enough, and is not significantly reduced in the course of these processes. Otherwise, a deregulated market economy is based on “the right of the employer to negotiate individually with his workers, to pay the smallest salary he can for the job, and to hire and fire whom he wants, when he wants” (Myrdal, 1958, 61).

Myrdal adds that low wages and high unemployment can also depend on upper class opposition to contributing to State intervention designed to expand the Welfare State. This, in turn, depends on institutional factors (i.e. the inertia which inhibits social changes) and on economic (and moral) variables, labelled “rational generosity”:18

When people are better off and have great security they feel freer to give up privileges and to let down barriers which keep others out and are more prepared to carry the costs of the common burden. And this process, in turn, strengthens the foundation for continuous economic progress. (Myrdal, 1957, 40)19

Therefore, where the vicious circles described above are in operation due to the decreased growth rate, there is less likelihood of egalitarian reforms. In fact, following the “rational generosity” argument, the reduction of the growth rate reinforces the opposition to State intervention, insofar as this requires a tax hike, which—at least in part—may affect higher incomes.20

Myrdal stresses that the sole solution to the problem of rising unemployment, falling wages and instability spontaneously generated in a deregulated market economy lies in the expansion of the Welfare State. The next section will be devoted to scrutinizing the motives behind this policy prescription.

3. “Created Harmony”: the Welfare State and Economic Development

Myrdal’s view on the role of the expansion of the Welfare State in promoting economic development is ultimately based on critiques of the dominant view that a deregulated market economy tends to spontaneously generate the most efficient allocation of resources, and full employment (Cherrier, 2009). The conventional view, Myrdal observes, is based on the “liberal” idea that 1. in all markets (and particularly in the labour market) agents have the same bargaining power; 2. the interplay of demand and supply automatically guarantees equilibrium, and an equilibrium condition is conceived as the realization of the “harmony of interests”, which, in turn, is a natural outcome of capitalist dynamics. Myrdal opposes the conventional view—attributed to Alfred Marshall—that greater income equality is incompatible with sustained growth of economies (Myrdal, 1957, 122).

By contrast, it is stresses that:

This gradually accomplished harmony of interests is not the old liberalistic one, which was supposed to emerge out of the unhampered working of the free forces in the market … The harmony which is being realized is therefore a “created harmony”, created by intervention and planned coordination of interventions. It is the opposite of the natural harmony of the old liberal philosopher and theoreticians. (Myrdal, 1958, 47)

The “liberal” view is ultimately based on a static theoretical schema of the social and economic processes and it rests on the conservative social philosophy of the “belief in innate differences” (Myrdal, 1957, 114). In this respect, Myrdal observes:

The reforms were continuously motivated primarily in terms of social justice, with the implication that the better situated classes had to pay for them by accepting a lowering of their standard of living. And the question could then be asked and was, as a matter of fact, continually asked: How could this be done without injustice, and without slackening the energies of the leaders of progress? (Myrdal, 1957, 114)

According to this view, “the leaders of progress” (i.e. the richer class) are assumed to be the most productive individuals, with the implication that a high taxation on their income reduces their incentive to work and, as a result, this generates low rates of growth which also affect low income households. Myrdal’s critiques of this view rest on two considerations. First, Myrdal contends that this view is consistent only in a static theoretical framework and that it ultimately proves highly questionable, on the basis of the following argument: the fact that inherited wealth is high for some individuals acts as a boost to their productivity and high productivity is associated with high wages, so that, in a CCC process and in the absence of external intervention, inequalities tend to be perpetuated over time. In other words, wage differentials ultimately depend on the degree of social mobility.21 As Myrdal points out:

The existing differences as among different nations and, within a nation, different economic classes [are] caused by the environment and, more specifically, by earlier economic inequalities. Nevertheless, it is clear that, whatever the cause, the differences, and, in particular, the differences in productive capacities, support the continuous existence of economic inequalities. Myrdal (1957, 121)

Second, even if one accepts the theory of innate differences (and its policy implications), a problem arises related to what contemporary institutional economists call the State’s “legitimation function.” According to O’Connor ([1973] 2002), State spending in a capitalist society must fulfil two functions: to raise profits, for example by maintaining aggregate demand; and to legitimate the system by dampening inequalities.22 Based on these considerations, the expansion of the Welfare State is profitable also for the upper classes, since it reduces conflictual pressures.23

Furthermore, Myrdal insists that the defence of the Welfare State cannot rest on the moral argument that economic justice is preferable to injustice. This leads the author to oppose the conventional view that increased income equality reduces efficiency, so that, for instance, in this theoretical perspective, wage increases reduce employment. Myrdal’s aim is to demonstrate that the reduction of income inequality increases efficiency and, in turn, greater efficiency (i.e. higher economic growth) lessens inequalities (Myrdal, 1958, p. 112). This argument is explicitly based on an egalitarian perspective.

The basic policy intervention pertains to 1. labour market regulation, in the form of increasing wages and reducing job insecurity;24 2. State provision of health services and education, and 3. the payment of unemployment benefits. While the first two types of intervention are devoted to increasing labour productivity, the latter aims at sustaining the path of investments. Even in this case, the author stresses that a CCC process is in operation. This is because, once the State started to intervene,

the political power of the workers increased in the process of democratization … and the social conscience became more alert to the sufferings of the unemployed and their families—two changes which, of course, are closely related—measures of financial aid to the unemployed were instituted in one country after another. (Myrdal, 1958, 49)

This means that, once workers’ bargaining power increases in the socio-political arena, the Government is forced to pay higher unemployment benefits, which, in turn, reinforces workers’ political power. As Myrdal observes:

The unemployed workers must live and in view of the ever-growing importance of social ideals, they must not live too badly. (Myrdal, [1939] 1965, 164)

On this basis, Myrdal shows that the expansion of the Welfare State is effective for the purpose of increasing the growth rate. His theoretical schema rests on the view that expansionary fiscal policies generate positive effects both on the supply side and on the demand. It is summarized in the following sequences.


Higher public expenditure, mainly thanks to increased unemployment benefits, raises aggregate demand; increased aggregate demand raises employment, profits and investments. This effect is amplified by the increase in available savings (insofar as more savings allow more investments) resulting from the rise in unemployment benefits;


The increase in employment generates higher wages and greater bargaining power for workers. This generates an increase in wages and the reduction of job insecurity, which stimulates a higher productivity and growth rate;


This, in turn, generates an increase in employment and a consequent increase in wages.25

The analytical links described in sequence 1. are amplified by the operation of an accelerator effect, so that increased consumption stimulates increased investments, via the increase of profits. In fact, as a consequence of an “increase of incomes and demand”:

Rising profits increase savings but at the same time cause investments to go up still more, which again pushes up the demand and the level of profits. And the expansion process creates external economies favourable for sustaining its continuation. (Myrdal, 1957, 95)

This sequence reflects many of Keynes’ arguments (in particular, the principle of effective demand), but departs from them in two main respects:

Firstly, at the methodology level, Myrdal—unlike Keynes—explicitly takes into account factors which fall into the realm of Institutional Political Economy. Notions like “workers’ morale” or “rational generosity” play a crucial role in Myrdal’s theory of the labour market, while they are absent in Keynes’ thought. This difference stems from the fact that Myrdal inserts issues typical of the ‘old’ Institutionalism into the basic Keynesian schema,26 so that his work can be conceived as one of the possible expansions of Keynes’ theory. According to this interpretation, Myrdal’s theory (and, more generally, Institutional Political Economy, starting from Veblen) should be regarded as a theoretical development of Keynesianism (Randall Wray, 2007).

Secondly, at the analytical level, Myrdal—more than Keynes—conceives economic development as the outcome of the dynamic interaction between aggregate demand and aggregate supply, emphasising that labour market regulation (as well as the expansion of the Welfare State) not only promotes economic growth via the expansion of aggregate demand, but also boosts the path of labour productivity and aggregate output.27 More broadly, Dostaler (1991) convincingly argues that Keynes was not the sole protagonist in the building of new theoretical frameworks associated with what is now called the Keynesian revolution. Myrdal was active too in the changes taking place. Notably, Dostaler claims that, in certain respects, Myrdal went beyond Keynes towards more contemporary developments: this is because he expanded the basic Keynesian argument into a dynamic “model”, where institutions play a pivotal role, according to his original view that economic phenomena are, as a norm, subject to cumulative circular causation effects. On this point, Myrdal (1957, 20) concludes that “The principle of cumulation … promises final effects of very much greater magnitude than the efforts and costs of the reform themselves”. Importantly, according to these effects, it is maintained that, in a dynamic context, the Welfare State generates a higher standard of living for the workers without damaging the ruling classes. However, the ruling classes tend to oppose policies designed to strengthen the Welfare State, and, for Myrdal, this occurs for the following reason:

For some, the Welfare State implied sacrifices. At least, this was true, apparently, and in the short run. But the Welfare State had such a powerful influence in releasing the potential productivity of the people that, in the dynamic process of its gradual realization, an improvement of the working and living conditions of the poor could be carried out in an economically progressive economy without depressing the conditions of the most of those were initially better off and who, in the first instance, had had to pay for the reform. (Myrdal, 1958, 121, italics added)

Thus, Myrdal clarifies that—in a way consistent with his view that economic processes are inherently dynamic and subject to CCC phenomena—it would be nonsensical to imagine an “optimum” amount of public expenditure devoted to realizing and maintaining the Welfare State. This occurs for two main reasons. First, the size of the public intervention required to generate economic growth via the implementation of Welfare State programmes varies in relation to historical, social and institutional settings. Second, the increase in productivity and the consequent increase in the rate of economic growth deriving from State spending on education and health services make it possible for the State to implement new welfare programmes. Importantly, Myrdal (1958, 66) believes that “in the immediate future … there are many fields where we should prepare ourselves for a radical diminution of state regulation”. This occurs because formal norms will be “interiorized”, becoming social (and moral) norms. Moreover, in a short-run perspective, apart from the economic costs of the expansion of the Welfare State on the ruling classes (insofar as this implies an increase in their income tax), the most powerful opposition to this policy rests on the “institutional inertia against short-term impulses for changes” (ibid., 139). Accordingly, the opponents of the expansion of the Welfare State are labelled “reactionary forces” (ibid., 121). However, in the period when Myrdal wrote, the expansion of the Welfare State was a matter of fact, and he did not doubt its further expansion or the eventual transformation of the political institutions governing it. In particular, he was confident that:

Generally, as levels of confidence and education rise … we may approach a situation where many important public policies can be put into effect without much direct state intervention …, simply by activating the pressure of enlightened public opinion, and the bargaining strength of the organizations. (Myrdal, 1958, 65)

He was also confident that, in the long-run, both because of the growth of the levels of education and the increasing demand for public policies to the benefit of workers, the expansion of the Welfare State would preserve the interests of all parties in the economy, so that the opposition of the “reactionary forces” will almost inevitably be overcome. In this respect, Myrdal’s theory of “created harmony” provided further support for Keynesian economic policies.28 It is to be stressed that, when Myrdal wrote on these issues, the prevailing cultural climate was in favour of public intervention, and the growing bargaining power of workers in the socio-political arena pushed public policies in that direction. It was on these grounds that Myrdal remarked that public opinion and most politicians agree that “Economically, as well as socially, the Welfare State [is] a conspicuous success” (Myrdal, 1958, 65).

4. Concluding Remarks

The present article was concerned with Myrdal’s theory of the labour market. It has been stressed that, in contrast with the conventional view of his time, a deregulated market economy is unable to spontaneously generate a social environment characterized by “harmony of interests” and income inequality becomes a self-sustained phenomenon. On the contrary, once labour market institutions are put into a dynamic picture of economic development, Myrdal shows that economic growth is driven by labour market regulation, by increasing public transfers to the benefit of workers, and by paying unemployment benefits, in a theoretical schema where aggregate demand and aggregate supply systematically interact according to a cumulative process.

This occurs for three main reasons, which establish a link between expansionary fiscal policy and labour productivity. First, insofar as State intervention is also designed to regulate the labour market, the consequent increase in wages (and the reduction of job insecurity), by boosting workers’ morale, increases labour productivity. Second, programmes designed to guarantee health services and public education also increase the potential productivity of the workforce. Third, the increase in per-capita incomes is associated with the occurrence of a “rational generosity” phenomenon, so that egoistic and opportunistic behaviour is prevented. Furthermore, public expenditure generates increased employment and a higher growth rate, due to the standard Keynesian effect and the operation of the accelerator effect.


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1 Note that Myrdal himself made reference to the mainstream or dominant approach, identifying it with “equilibrium economics”, based on “the notions that every disturbance provokes a reaction within the system, directed toward restoring a new state of equilibrium, and the action and reaction will meet in one and the same time space” (Myrdal, 1957, 9). He considered Alfred Marshall the most important proponent of this approach (Myrdal, 1957, 122 ff.).

2 As we know, Myrdal—as a member of the Swedish Government in the 1930s—contributed to Sweden’s post-1933 economic recovery, mainly via expansionary fiscal policy. Although the direct contribution of Myrdal in generating positive macroeconomic outcomes is the object of a debate, Uhr (1977, 112) considers that—partly because of the acceptance of Myrdal’s proposals—the unemployment rate was significantly reduced and was associated with a significant increase in exports. (In Sweden, the employment rate in the public sector rose from 25% to 63% before the World War II). Myrdal’s contribution to the Swedish Welfare State is not restricted to macroeconomic policies. He outlined an exhaustive Welfare State program in a 1934 book (co-written with his wife), titled The population problem in crisis [I thank an anonymous referee for raising this point].

3 Angresano (1997) distinguishes three periods in Myrdal’s professional life: after being a pure theoretician (in the years 1925-1933) and then a “political economist” (from 1932 to 1938), he became an ‘institutional economist’ (Myrdal, 1969, 10).

4 Myrdal maintains that the axiom of rationality—economic agents maximise an objective-function given their budget constraint—is a cornerstone of neoclassical economics. He remains vague in references to his contemporary neoclassical economists that share this view.

5 Myrdal strongly believes that economic theory must be based on realistic assumptions. In the Preface to Rich and Poor Lands, he clearly states this point, emphasising that “[his] purpose is to help to make theory more realistic” (Myrdal, 1957, xix).

6 On this point, it is worth noting John Hicks’ opinion—as expressed in his 1953 review of Myrdal’s Political Element—that Myrdal is a sociologist [I thank an anonymous referee for drawing my attention to this point].

7 Myrdal formulated the CCC approach for the first time in Appendix 3 of American Dilemma – The Negro Problem and Modern Democracy (1944) (Berger, 2008, 2)

8 The CCC theory—applied to discrimination in the labour market - includes the cases of self-fulfilling prophecies.

9 Jennings (in Ramazzotti et al., 2012, 58) points out thatcontrary to Myrdal’s view that “everything causes everything else” and that “this implies interdependence within the whole social process” “standard theory in economics sidesteps the issue of interdependence: unbounded economic causality offers no place to stand”.

10 Within the vast literature on the CCC, see, among others, Jackson (1990) and Barber (2008).

11 The emphasis on the role of institutions in triggering CCC phenomena is typical of Myrdal’s approach to this issue. The principle of CCC has been frequently interpreted in a purely economic sense (i.e. ignoring its institutional dimension). This is the case of Kaldor, who treats it as a principle solely connected with the existence of increasing returns to scale (Kaldor, [1970] 1978).

12 The idea that low wages imply low productivity was one of the main arguments supporting Francesco Saverio Nitti’s proposals for labour market regulation in Italy, at the beginning of the 20th century, and Lujo Brentano’s programmes of social reforms in Germany (See Forges Davanzati, 2000).

13 One can stress that this theory is fully integrated into contemporary Post Keynesian economics. As has been recently pointed out, among others, by Sawyer (2001, 287, italics added), “Unemployment has scarring effects on individuals and there is demoralisation felt by workers in the face of heightened job insecurity, which tends to reduce productivity”.

14 Myrdal did not explicitly refer to what contemporary economists (and sociologists) label “social capital”: nevertheless, he places great emphasis on the role of individual and collective respect for formal, informal and moral codes in promoting economic development (Praska and Sell, 2004).

15 On the links existing between social and human capital in contemporary debate, see in particular, Coleman (1988).

16 It can be pointed out that the Myrdal’s view on the operation of a CCC process of increasing income inequality (“poverty [is] own cause”) is closely linked to what sociologists—following Merton (1968)—call “the Matthew effect”, i.e. the idea that initial advantage among individuals and groups over time creates a widening gap between those who have more and those who have little.

17 Myrdal does not explicitly refer to a mechanism of interaction of aggregate demand and aggregate supply. Nevertheless, it is obviously implicit in his analysis, and the use of these (contemporary) categories in this context can be useful in order to rationalise his approach. Moreover the view that economic growth is both demand and supply side driven is at the basis of many contemporary Post-Keynesian models. Dutt (2006), among others, emphasises that while mainstream growth theory in its neoclassical and new growth theory incarnations has no place for aggregate demand, Keynesian growth models in which aggregate demand determines growth, neglect the role of aggregate supply. He shows that expansionary fiscal policies, by increasing employment and workers’ bargaining power, push firms to compete via innovation, so that economic growth derives from both public expenditure and the rise of productivity.

18 As Angresano (1997, 91) points out: “Myrdal’s theory contains six key variables: production and income, condition of production, levels of consumption, attitudes towards life and work, institutions, and public policy. To each variable he assigned an equal value so any change upwards or down in one necessarily pulls the other in the same direction. Positive change in one direction (e.g increased level of consumption) would result in secondary changes, thereby improving another condition (workers productivity) which, in turn, promoted greater output and income and this completed the circle by reinforcing further increased consumption, the initial condition affected”.

19 Myrdal does not develop this argument, which is highly relevant to the contemporary debate in ethical economics, and the effects of pro-social attitudes (such as altruism) on economic development. His argument is relevant, on the grounds that it challenges the dominant view supporting the free-riding theory: it is intended to show that free-riding behaviour is not invariant with respect to both income distribution and the Institutional and social setting. By means of behavioural experiments, Bowles and Hwang (2012) have recently shown that the problem of free-riding is likely to be overcome by hostility towards opportunism and social pressure to lower purely selfish attitudes, thus generating a condition where the individual contribution to the production of public goods is not nil.

20 According to Myrdal, this particularly applies to peripheral countries, where per-capita incomes are relatively low.

21 They can also depend on the existence of discrimination in the labour market. As Myrdal (1957, 20) points out: “The low status of the Negro is … tremendously and self-perpetuatingly wasteful all round—the low educational standard causes low productivity, health deficiency and low earnings, and these again keep down the educational standard, and so on”.

22 The upshot is a tendency to bigger budget deficits, i.e. what he calls the fiscal crisis of the State.

23 One can add that the conviction that an individual is rich because she/he is productive must be regarded as an axiom, which—by its very nature—cannot be demonstrated.

24 Although Myrdal does not fully develop this argument, it logically derives from his analysis of the instability of a deregulated labour market (see section 2).

25 This schema seems to recall the standard Keynesian view that economic growth is primarily driven by the increase in public expenditure. Although Myrdal’s schema rests on a Keynesian foundation, it is articulated in different causal links. In particular, insofar as public expenditure increases employment, it is the consequent increase in wages which ultimately drives economic growth, both because of the increase in consumption and investments and because of the increase in productivity.

26 It must be observed that Myrdal received from the “old Institutionalism” (Veblen, in particular) a theory of economic behaviour based on the rejection of the rational choice axiom. Accordingly, he considers habits, customs, power relations as crucial variables in the functioning of a capitalist economy. However, on the normative plane, his view differs profoundly from that of Veblen. While, as shown above, Myrdal strongly supports expansionary fiscal policies, Veblen does not consider them effective in generating economic growth, based on the argument that “however extraordinary this public waste of substance latterly has been, it is apparently altogether inadequate to offset the surplus productivity of the machine industry” (Veblen, 1904, 195; Mouhammed, 2011).

27 Myrdal’s view on this topic was also in line with the ‘Stockholm School’. He contributed to the elaboration of the economic policy programme of the committee on unemployment formed in Sweden in 1927 (Bagge, Hammarskjold and Ohil were the prominent exponents). He supported a macroeconomic stabilization policy based on deficit spending, low taxes and public works. In the documents he wrote in that period (particularly in Business Cycle and Public Finance of 1933) he articulated Wicksell’s view stating that public expenditure—by expanding the domestic market—stimulates private investments. He also maintained that expansionary fiscal policies were to be implemented in the phases of recession, while a balanced budget should be maintained in the long-run (see Dostaler, 1990 and Dostaler et al., 1992).

28 One has to clarify that while Myrdal’s theory falls within the Keynesian theoretical framework (as stated in the General Theory), in the economic policy arena a significant difference between Keynes and Myrdal can be found. Keynes was interested in showing that deficit spending policies reduce unemployment, while Myrdal was interested in showing that the expansion of the Welfare State boosts economic growth.