Transcript Modern Growth Theories

NS4053
Winter Term 2014
Modern Growth Theories
David Coates: Why Growth Rates Differ I
• Much of the difference between modern theories of
growth lie in the assumptions about market based
institutions as triggers to growth
• Orthodox theory of growth – neoclassical model – views
growth as movement along a production function
• Double inputs, double outputs
• Factor prices determine combinations of labor and capital
• Firms search for most efficient means of production
• Over time with movements in the whole production
function occur as
• Stock of knowledge increases
• Technical progress ensues
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David Coates: Why Growth Rates Differ II
• Neoclassical theory broadly assumes that the
unregulated interplay of market forces is the best
• generator of growth, and
• at creating the convergence of growth paths between economies
• If growth does not occur one should focus on
• the location of inadequacies in either the supply or the quality of
factors of production or
• the existence of barriers or blockages to their free interplay
• Neoclassical theory now challenged from different
perspectives
• Schumpeterians
• Post-Keynesians
• New Growth Theorists – exogenous growth
• Marxists
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David Coates: Why Growth Rates Differ III
• Each of the alternative approaches questions:
• Whether the interplay of unregulated market forces
automatically creates an optimal distribution of resources,
or
• Eventually pulls economies to similar growth paths and
levels.
• Marxists prefer to explain differential growth
performance as the product of different
• class relationships and
• underlying structural conditions within the capitalist mode
of production
• Debate around neoclassical growth theory
• Originated with the work of Robert Solow at MIT
• Wanted to improve on existing Harrod-Domar model
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David Coates: Why Growth Rates Differ IV
• Harrod-Domar had explained economic growth as
consequence of interplay of three factors:
• savings rate, -- result of preferences
• rate of growth in labor force – result of social demography and
• the capital output ratio – result of technology
• Implied that growth could increase as a result of
increased savings alone
• Rate of growth = saving rate X output/capital ratio
• Solow wanted to incorporate a more flexible
production function with:
• Straight labor
• Straight capital
• Residual technological change
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David Coates: Why Growth Rates Differ V
• In Solow each economy had a unique and stable growth
path determined by the growth of the labor force and
technological progress
• Technological progress assumed to expand at a regular rate
• Diminishing returns encouraged capital to redeploy
• Problem with model is that it provided no explanation of
its key variable -- technological progress
• Nor was its key prediction of convergence triggered by
diminishing returns to capital seen in available evidence
• Another criticism of the neo-classicals is the absence of
a linkage between technological progress, investment
rates and growth rates
• These weaknesses stimulated range of “new growth
theories.” – post-neoclassical endogenous growth theory
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David Coates: Why Growth Rates Differ VI
• In general, the new growth theories
• Highly mathematical
• Define capital more widely than normal in neoclassical model
• Emphasize endogenous sources of improved economic growth
• Lucas Model
• Stressed importance of investment in human capital as a trigger
to growth
• Romer Model
• Emphasizes the way in which capital accumulation triggers
learning,
• Which then spills out (beyond the investing company) to raise
efficiency across the economy as a whole.
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David Coates: Why Growth Rates Differ VII
• Key idea in these models is that
• social rate of return higher than private rate of return and
• growth may go on indefinitely because returns to broadly
defined capital do not necessarily diminish as economies
develop
• Implications of new growth models
• Even between advanced capitalist economies growth trajectories
can differ permanently
• Since technical progress can be created internally there are no
automatic diminishing returns and
• no necessary convergence between growth paths
• State policy has a role to play in determining whether growth
paths continue to diverge or to align
• none of the neoclassicals antipathy to the state
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David Coates: Why Growth Rates Differ VIII
• Other differences with new growth models
• Institutions and policies have stronger effects on the
growth rate than what would have been predicted by
traditional neoclassical model
• Thus a case can be made for subsidies or other policy
interventions to raise investment or R&D or human
capital to trigger the accumulation of knowledge
• New growth theorists not however advocates of
• extensive state planning or
• substantial public investment in specific industries or sectors
• Would like a more nuanced and more targeted form of
industrial policy largely confined to
• limited injections of pubic resources to R&D,
• education and training and
• the reform of institutional structures in labor and capital
markets.
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David Coates: Why Growth Rates Differ IX
• Schumpeterian (supply side) Theories of Growth
• Schumpeterian economies – stress different efficiency
than neoclassicals
• Neoclassicals focused on
• Preto-type efficiencies -- allocation efficiencies (diagram)
• Short run, static criteria
• Schumpeterians prefer my dynamic and long term criteria
of efficiency
• Not competitive pressures per se but the possibility of replacing
competitive relationships with oligopolistic ones which provides
the incentive for investment
• Investment looked at as endogenous
• Key to growth is risk taking or entrepreneurship
• Focuses on institutional structures likely to generate
innovation
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David Coates: Why Growth Rates Differ X
• Post-Keynesian theories of growth
• Stresses demand, increasing returns and dynamic
differences between sectors of the economy
• Emphasis on the special role of manufacturing as an
engine of growth
• Tendency of a fast rate of growth of exports and
output to set up a cumulative process –
• virtuous growth thorough link between output growth and
productivity growth
• At hart of post-Keynesian analysis is the notion of
cumulative causation
• To post Keynesians, economies once weakened and if
left to themselves weaken further
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David Coates: Why Growth Rates Differ XI
• Poor profit level generates low investment, low investment
produced diminished competitiveness, diminished
competitiveness guarantees poor profits and the cycle
begins
• The resulting balance of payments deficits require high
interest rates to hold foreign capital and high interest rates
deter domestic investment eventually to produce further
balance of payments deficits of a more serious nature
• Contrary to neoclassicals,
• market forces will not break cumulative, self sustaining cycles of
underperformance
• Will not trigger either economic growth or convergence
• What post-Keynesians have added is the importance of
• profits in in triggering growth and preventing cumulative decline
• conditions in product markets, and profits in setting off patterns of
expansion or contraction
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