Cumulative causation refers to a self-reinforcing process during which an impulse to a system triggers further changes in the same direction as the original impulse, thus taking the system further away from its initial position in virtuous or vicious circles of change that may result in a continuing increase in advantages (to some people or activities) and disadvantages (to others).
The term cumulative causation was coined by the Swedish economist Gunnar Myrdal (1898-1987), even though the basic hypothesis first appeared in American economist Allyn Young’s (1876-1929) analysis of economic progress ("Increasing Returns and Economic Progress," 1928). In An American Dilemma (1944), Myrdal used the concept of cumulative causation to explain race relations in the United States. In a vicious circle of social determination, the prejudice of the white populations and the low living standards of the black populations could reinforce each other in a downward spiral: a decline in black living conditions could worsen white prejudice and trigger institutional discriminatory processes, further deteriorating black Americans’ standards of living.
In Myrdal’s analysis, the circular interdependence between social, economic, and political forces, by hindering identification of the "primary" factors (e.g., economic) behind social issues, challenges traditional scholastic boundaries among the social sciences. Fundamentally, Myrdal’s notion of cumulative causation conflicts with the concept of "stable equilibrium" (central to most social sciences, particularly to economics)—that is, the self-stabilization properties of the social system, whereby a disturbance to it will trigger a reaction directed toward restoring a new state of balance between forces. In Economic Theory and Under-Developed Regions (1957), Myrdal addressed the failure of neoclassical economic theory to account for the persistence and widening of spatial differences in economic development within and between countries. He ascribes these differences to cumulative processes, whereby regions or nations that gain an initial advantage maintain and expand it as they attract migration, capital, and trade to the detriment of development elsewhere, an idea that permeates the voluminous "non-formal" literature on "uneven development" of the 1960s and 1970s.
As discussed in the valuable surveys by Amitava Dutt (1989) and Lewis Davis (2005), in the 1970s and 1980s cumulative causation was incorporated into formal models of "North-South" trade and growth and into models of the "structuralist" tradition that explicitly recognized structural and institutional asymmetries between industrial ("Northern") and developing ("Southern") countries. These models challenged the static neoclassical framework and captured explicitly, by means of dynamic analyses based on differential equations and phase diagrams, the role of history in the evolution of economic processes, resulting in unorthodox effects of trade and in cumulative processes of diverging growth and incomes between countries.
Cumulative causation is also central to the view of economic growth as a "learning process" (resulting from virtuous circles of specialization and technical progress) that emerged in the 1960s and 1970s (e.g., Arrow 1962). However, its assimilation into mainstream economic theory was hampered by the difficulty of modeling "increasing returns," on which it inherently relies. Inspired by Adam Smith (1723-1790) and Alfred Marshall (1842-1924), Young (1928) emphasized how increasing returns stem primarily from the process of the division of labor and specialization in production. In Young’s virtuous circle, an expansion of the market deepens the division of labor, ensuing in cumulative increases in production efficiency and in market size. Nicholas Kaldor (1966) formalized this idea in his four-stage model of industrial development. In Paul Krugman’s model (1981), increasing returns in manufacturing effect, via virtuous circles of capital accumulation and cost reductions, uneven patterns of industrialization. Increasing returns are crucial to the self-reinforcing cumulative nature of economic processes and became central to most of the "endogenous" growth literature (whereby growth is generated within the economy), pioneered by Paul Romer (1987), which accounts for persistent international inequality.
The "new" economic geography literature that emerged in the 1990s formalizes cumulative causation mechanisms that account for the uneven geographical distribution of economic activity. Regions or countries with similar underlying structures are shown to endogenously differentiate into a rich "core" and a poor "periphery," as production of manufactures concentrates where the market is larger, which in turn will occur where the concentration of manufactures is higher. In Krugman’s seminal paper (1991), the tendency for firms and workers to cluster together as economic integration increases is driven by the interaction of labor migration across regions with increasing returns and transport costs. Larger markets attract more firms, which in turn attract more workers. The larger population eases competition in the labor market and thus attracts more firms.
In Anthony Venables’s (1996) model, agglomeration of industry occurs via cumulative processes triggered by input-output linkages between "upstream" intermediate producers and "downstream" final-good firms. With increasing returns to scale, upstream firms have an incentive to concentrate where there is a large downstream industry to produce at a more efficient scale. This in turn will make it attractive to downstream firms to locate where there is a large upstream industry, as the cost of the intermediate goods will be lower there. These models, in which the market output depends on the initial conditions, offer a neat formalization of Myrdal’s idea and capture the role of history in determining spatial differences in development, acknowledging how minor changes in the socioeconomic environment may result in large and self-perpetuating asymmetric geographical configurations.