Cumulative Causation Details

Cumulative causation is also known as circular cumulative causation. This is a theory that Gunnar Myrdal, a Swedish economist, developed. The first systemic application of the cumulative causation theory was done in 1944, looking at the effects between poverty-stricken communities and racial prejudice.

The main idea behind cumulative causation is that an existing condition may lead to a future vicious cycle or a virtuous cycle. A vicious cycle is when two negative effects aggravate each other, leading a situation downwards. A virtuous cycle is when one positive event leads to more positive events, resulting in growth.

Cumulative Causation Examples

An example of cumulative causation is how some countries can gain a competitive advantage against other countries in the global market. A country that does not experience war or political unrest has enough resources and a generally conducive environment for business to succeed. Additional positive influences such as free trade and good market prices will then make it possible for them to export their goods and profit from international business.

Countries that successfully went through industrialization experienced cumulative causation. The positive aspect created a virtuous cycle. This spurred the growth of their economy and allowed the citizens to conduct business under favorable conditions.

In some cases, governments need to intervene to reduce the impact of negative cycles of cumulative causation or a vicious cycle. In such cases, reducing trade costs and taxes and creating an enabling business environment may change the situation for the better.

Cumulative Causation vs Competitive Advantage

Cumulative causation mostly refers to economic growth, but in a way that tracks the cyclical impact one event has on society. Competitive advantage refers to the economic position one country has compared to other countries. A country with a competitive advantage can offer a product to the international market at a better price or better quality. Competitive advantage also plays a role in cumulative causation. If a country has or lacks a competitive disadvantage, this leads to other positive or negative results.

Cumulative Causation vs Correlation

Cumulative causation is not correlation. Cumulative causation looks at the cause-and-effect logic as to why one historic event leads to future events. Correlation is the study of different variables. It looks at the relationship between how when one variable changes, another one also changes.

Cumulative Causation vs Multiplier Effect

Cumulative causation is a situation in which the existing conditions lead to more positive or negative results. The multiplier effect is a situation in which when spending is injected or withdrawn in an economy leading to a proportional increase or decrease in the final income. An example is a foreign investment that leads to employment for individuals of the country in which funding is being pumped into.

The increase in spending leads to increased income, with the disposable income being spent in the economy and circulating. An increase in the investment (spending) in the economy leads to an overall effect in which various people experience increased income.