Financialization and Endogenous Technological Change: a Post-Kaleckian Perspective

In post-Keynesian literature, Hein (2012a) was the first to incorporate financialization as an influential positive determinant of the rate of technological change. However, financialization is more like a two-edged sword which can affect technological progress negatively as well. We capture both the positive as well as the negative effect of financialization on technological progress which encapsulates the possibility of multiple equilibria. In analyzing the long run of the model we endogenize the financialization parameter as well. We then show how two subsystems (technological progress and financialization dynamics) when interact with each other, can produce instability and cycles for the whole system. We show that under certain circumstances, higher speed of diffusion of technological innovation, more regulated financial markets, and higher intra-class competition among firms are desirable for stabilizing the economy. Finally, we provide some policy prescriptions for the same.