Microeconomic Foundations of Myrdal's Circular Causation Theory

This paper shows that the theory of circular causation as stated by Myrdal can be ast in a rigorous microeconomic neoclassical model. In doing this, Myrdal's theory of equilibria is extended by showing that existence of stable and unstable types of equilibria and the conditions under which easy is more likely to occur. The use of a formal model permits the derivation of some important additional implications in relation to underdevelopment and inequality and to income the wealth distribution policies. The model can be useful for analyzing several other policies in an economy where subsistence and capitalistic forms of production coexist.