Growth and stagnation in a two-sector model: Kaldor's Mattioli Lectures

Kaldor's Mattioli Lectures analyse a two-sector model with increasing returns to scale (IRS) in industry and diminishing returns in agriculture (DR). This review article shows that (i) with IRS in industry, a long-run equilibrium growth path with strictly positive growth rates may exist even if agriculture is subject to DR; (ii) the industrial sector is the 'engine of growth' if agricultural investment is determined passively by available saving; and (iii) if one introduces a separate agricultural investment function, both positive and negative agricultural supply shocks may lead to stagnation, thus vindicating Kaldor's emphasis on commodity price stabilisation.