Transcript CLASSICAL GROWTH THEORIES

Topic 3: Growth Theories – "Economic
Development and Prosperity"
Nicholas Ashford
September 30, 2015
Environment
Technological
change &
globalization
(trade)
Work
Economy
Copyright © 2006 by Nicholas A. Ashford.
Technological change and globalization (trade) as
drivers of change within and between three
operationally-important dimensions of sustainability
Drivers of Economic Growth
 Investment [political economy: production (supply)
and consumption (demand) within a legal and political
framework with a minimalist intervention]. Financial
capital accumulation is key. Encouragement of savings
to spur borrowing and investment.
 Technological Innovation (Schumpeter’s ‘waves of
creative destruction’)
 Exploiting innovative potential
 Dependence on factor endowments (broadly conceived)
 Trade (Ricardo’s theory of comparative advantage)
 Exploiting excess capacity
 Access to Cheap Energy (Ayres)
Growth and Development Distinguished
 Growth
 ‘Economic’ growth is measured in economic terms –
GNP, GDP, productivity, and other metrics – and does not
account for non-traded goods, services, and cultural
attributes – or who shares from productivity gains.
 GNP = GDP + trade ; not all GDP is “good” or desirable
 Development (in contrast)
 Accounts for more of the attributes of the quality of life
 A multidimensional process that involves:
 The reorganization and reorientation of entire
economic and social systems leading to a better life
 Beneficial changes in institutional, social, and
administrative structures
 Beneficial changes in popular attitudes and, perhaps,
[Section 3.1.1; Chapter 3]
customs and beliefs
Measuring the Intangible/Invisible
 Mainstream perspective:
Progress =
Growth in productivity/GDP that
supports an expanding market
 What does this mean for sustainable development?
 Can measures such as GDP/GNP capture the quality or
variety of products/services?
“the more we move towards post-industrial society, the more the
notions of growth, output, and productivity that we inherited from
industrial capitalism will become obsolete. This means also that, with
time, it will be necessary to invent a new national accounts system,
and not simply improve on the existing one” Liagouras (2005)
Purpose of Economic and Social
Development
 Increase the availability of essential goods and
services
 Raise quality of life (by securing meaningful
employment and enhancing cultural and human
values)
 Expand the range of economic and social choices
available to individuals and nations (ability to be
independent from others – self-reliant)
 Government has an important to role to address
market imperfections and to act as trustee for
disadvantaged or under-represented groups (and the
natural environment)
Savings and Investment – A Driver of
Growth
 Every country must save a certain proportion of its
national income (GDP) to replace impaired capital goods
(e.g., buildings, equipment, and materials)
 For a nation to “grow”, new investments representing net
additions to the capital stock are necessary
 The more a nation can save and invest, the faster it can
grow (providing there is enough demand/purchasing
power)
 Domestic investments can be supplemented by foreign
investments (FDI, ODA, etc.)
 In addition to investment, labor force expansion and
technological innovation are important drivers of growth
Factor Endowments (a broader view)
 Land
 Material Resources (natural and physical capital)
 Energy
 Labor capable of performing physical work
 Know-how (intellectual human capital)
 [innovation systems][1]
 Built capital (bridges, roads, ports, dams, etc. ~ infrastructure)
 Information and Communication Technology (ICT)
 (Health and Environment)[2]
 Structural capital (knowledge and productive routines held by organizations)
 Networks and Outsiders (linking organizations, people, and entrepreneurs)
 Social capital (knowledge held by consumers and citizens)
 1] Innovation systems are discussed in Chapter 6 in the context of the
institutions fostering technological innovation.
 [2] Good human health (both physical and mental) and an unpolluted and
preserved environment (what could be called ‘environmental capital’) are
increasingly regarded as essential for maintaining the productiveness of
human and natural/physical capital.
[Section 3.1.2; Chapter 3]
Classical Growth Theories
1. Linear stages-of-growth model: (capital fundamentalism)
(1950s – 1960s)
 Predetermined development pathway: agricultural to
industrial
 Dependent on (additional) capital formation = mobilization
of domestic and foreign savings (a necessary, but not
sufficient factor) ~ suggests a Marshall Plan for underdeveloped nations
 Model assumes labor is abundant and technological
change (captured by the capital-output ratio) was fixed
 Model assumes under-developed nations have the same
capacity as Europe to grow the economy through investing
additional capital – an unrealistic assumption
Classical Growth Theories, cont.
2. Structural-change models (1960s – 1970s)
 Focus on the transformation of subsistence economies
 ‘Two-sector surplus labor’ model – Lewis
 Assumption: Underdeveloped economy consists of [1] an
overpopulated rural subsistence sector and [2] a highproductivity urban modern sector
 Transfer of alleged surplus agricultural labor to (a growing) highproductivity industrial sector – growth will occur until all rural
labor is absorbed, after which food production is affected
 Speed = f (rate of industrial investment and capital accumulation
~ influx of capital + savings needed); New employment created
 Growth occurs since all excess modern-sector profits over wages
are presumably reinvested by capitalists in the economy.
Classical Growth Theories, cont.
2. Structural-change models (1960s – 1970s), cont.
 Criticisms:
 Profits may instead be reinvested in labor-saving capital
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


equipment or ‘capital flight’
Not really a labor surplus in the rural subsistence sector
Not really a competitive urban industrial labor market, rather
surplus labor exists with migration to the cities, but still higher
than equilibrium wages in new sectors
Eventually enough rural farm labor may be withdrawn to
lower food production and raise food prices
Not the same in all countries
Classical Growth Theories, cont.
3. International-Dependence Revolution (1970s)
 Neoclassical dependence model: Dominance by rich countries
with help of domestic elites (underdevelopment is externally
induced)
 False-paradigm model: Inappropriate or incorrect policies ~
false-paradigm model from foreign ‘experts’ (bad advice)
 Dualistic-development thesis: Pockets of wealth within broad
areas of poverty (not ‘trickle-down, but ‘push them down’)
“[t]he invisible hand often acts not to promote the general
welfare but rather to lift up those who are already well-off by
pushing down the vast majority.” Mantra: ‘a rising tide raises all
boats’ But, what if you don’t have a boat?
Classical Growth Theories, cont’d.
4. Neoclassical Counterrevolution: (Laissez-faire) Market
Fundamentalism (1980s) – Most recently, the Washington
Consensus
 Rise of conservative governments in the U.S., UK, West Germany
 Neoclassicists obtain controlling votes on the boards of World
Bank and IMF
 Result: Promotion of supply-side macro-economic policies,
privatization, rational choice theory (but a focus on
technological innovation is still missing) – i.e., free markets and
laissez-faire economics
 For developing nations: Freer markets, dismantling of public
ownership, statist planning, and government regulation of
economic activities (i.e., the problem is not predatory activities of
developed world, etc., but too much state intervention and bad
economic policies)
Classical Growth Theories, cont’d.
5. Neoclassical Growth Theory: The Solow Model
 Most well known model of economic growth
 Built upon the Harrod-Domar model
 Solow substituted the fixed labor/capital ratio with a
production function in which labor and capital could vary –
i.e., producers can switch between capital and labor
depending on their respective prices (note: energy not
included explicitly)
 Exogenous parameter was used to describe the rate of
technological change – “exogenous growth theory”
(technology as a ‘black box’)
Classical Growth Theories, cont’d.
5. Neoclassical Growth Theory: The Solow Model, cont.
 Increases in GNP that cannot be attributed to short-term
adjustments in the stocks of labor or capital are attributed
to technological change – i.e., the ‘Solow Residual’
 Based on differences in countries’ growth rates, Solow
posited that technological change accounted for 50% of
the increase in output per capita (between 1909-1949)
 Mankiw elaborated on the model trying to explain
increased innovation to more human-capital accumulation
and slower population growth
Classical Growth Theories, cont’d.
6. New Growth Theory: The Romer Model (late 1980s)
 Schumpeterian roots – i.e., focus on the process of innovation
 Endogenous treatment of technological change - i.e., change
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from within a system – “endogenous growth theory”
New Assumption: Expectation of increasing returns on capital
due to technological change
Model highlights the important role of complementary activities
– e.g., education, retraining, R&D – in explaining economic
growth
Model has four basic inputs: Capital, Labor, Human Capital
(education/training), and an Index of the level of technology
Weakness: Model overlooks inefficiencies in developing
economies (poor infrastructure and capital and goods markets)
Summary
 While none of the growth theories provide a complete solution,
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

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they each provide something to help understand the problems
of development
Linear-stages model: Emphasizes the crucial role savings and
investments play in promoting sustainable long-term growth
Structural change model: Underlines the importance of linkages
between traditional agriculture and modern industry (Drucker)
International-dependence theorists: Highlight the importance of
the structure and working of the world economy and the many
ways in which the actions of the developed world can affect the
life of people in the developing world
The same applies to the arguments regarding dualistic
structures and the role of ruling elites in the domestic
economies of the developing world
Summary, cont’d.
 Neoclassical growth theory: Provided an explicit
recognition of the importance of technological innovation
on economic growth (the ‘Solow residual’)
 Solow assumes growth rather than explains it
 New growth theory: Provided a much more nuanced
understanding of the (endogenous) factors that promote
technological change (e.g., education and training, R&D,
etc.); seeks to explain the factors behind the Solow
residual
 Highlights importance of public/private investment in
human capital/knowledge-intensive industries
Summary, cont’d
 Todaro and Smith (2009) on neoclassical theories
 “Although ... neoclassical economic theory needs to be modified
to fit the unique social, institutional, and structural circumstances
of developing nations, there is no doubt that promoting efficient
production and distribution through a proper, functioning price
system is an integral part of any successful development process”
 “... successful development requires a skilful and judicious
balancing of market pricing and promotion where markets can
indeed exist and operate efficiently, along with intelligent and
equity-oriented government intervention in areas where
unfettered market forces would lead to undesirable economic and
social outcomes” e.g., monopolies.
 In contrast, Rodrik argues that in developing countries, government
policy that guides development has been crucial and responsible for
success, rather than the liberalization of markets. Countries need to
engage in “self-discovery”. One size does not fit all.
New Perpectives
 Ayres-Warr Analysis (2009)
 Developed a new economic theory that is grounded upon the
relationship between the laws of physics (thermodynamics) and
economics
 Argument: Majority of economic growth experienced during the
industrial revolution was not driven by the exogenous ‘black box’
of innovation, rather it was the continual improvement in energy
efficiency – i.e., in the conversion of raw materials to final
products and of raw fuels to finished fuels and electricity
 New thinking: Considered exergy – a measure of the difference
between the theoretical and actual amount of work performed
for a given amount of energy – as the third independent factor
of production alongside capital and labor
 Comment: There is no reason why the capacity for technological
innovation could not be added as a fourth factor
New Perspectives, continued
 Ayres-Warr Analysis (2009)
 Problem: The “opportunities for further technological improvements
in the energy- and materials-conversion stages of the economic
system are simultaneously approaching exhaustion” (Ayres and
Warr 2009, p. xviii)
 Dependency of the current economic system on nonrenewable and
limited energy supplies makes it vulnerable to sustained energy
price increases
 “Economic growth depends on producing continuously greater
quantities of useful work. This depends, in turn, upon finding lowercost sources of exergy inputs or more efficient ways of converting
higher cost inputs into low-cost work outputs. In a world where the
cheapest sources of exergy seem to be approaching exhaustion, the
key to continued growth must be to accelerate the development of
lower-cost alternative technologies, and policies, that increase
conversion efficiency” (ibid, p. 297)
New Perspectives, continued
 The Second Machine Age (2014)
 ICT, robotics, artiificial intelligence etc. will produce valuable goods
and services for the society in unprecedented ways.
 There will be a tendency towards a “winner take all” in various
sectors and markets.
 The Second Machine age will need new skills and workers that will
be highly rewarded (a “bounty”). But the numbers of workers will
be small.
 There will be both a “bounty” and a “spread“ of declining wages,
hollowing out the middle class.
1770-1830
1820-1890
1880-1945
1935-1995
1985-2050
Growth
sectors
Water power
Ships
Canals
Coal
Railroads
Steam power
Mechanical
equipment
Cars
Trucks
Trolleys
Chemical industry
Metallurgical
processes
Electric power
Oil
Airplanes
Radio and TV
Instruments and
controls
Emerging
technologies
Mechanical
equipment
Coal
Stationary steam
power
Electricity
Internal combustion
Telegraph
Steam shipping
Electronics
Jet engines
Air transport
Nuclear
Computers
Gas
Telecommunications
Gas
Nuclear
Information
Telecommunications
Satellite and laser
communications
[NBIC]
Biotechnology
Artificial intelligence
Space communication
and transport
[Nanotechnology
Ubiquitous computing]
Participatory and
interconnected systems
management
Concept of systems
structure
Management
Industrial
organization
Concept of the
industrial firm
Division of labor
Economy of scale
Administrative
Interchangeable parts management
Professional
management
Concept of
Concept of
mass production
management
Interchangeable parts structure and
delegation
Concept of
decentralization
ROBOTICS?
AUTOMATION?
Pace of
Innovation
2nd
Machne
Age??
First Wave
Second Wave
Third Wave
Fourth Wave
Fifth Wave?
Time
With each transition, the complexity of new technological systems is increasing and is placing
greater demands on our ability to understand how these new systems interact and behave
Drucker – The Age of Social Transformation (1990)
 Transformation from agricultural workers to blue-collar
industrial workers
 Were the skills of agricultural workers of value in their new
industrial jobs? [for how long?]
 What about the skills of industrial workers who are now
transitioning to a knowledge-based/service economy? [are
they sufficient today?]
 Drucker’s Predictions/expectations from the 1990s
 “unlike domestic servants, industrial workers will not
disappear” [does this prediction hold up today?]
Drucker – The Age of Social Transformation (cont’d)
 In the 1990s only an insignificant percentage of manufactured
are produced abroad…” “main competition is from Japan and
Germany” [contrast with the situation in trade today]
 “a new class conflict between a large minority of knowledge
workers and the majority of people” [is it a large minority?]
 “increasingly , through their pension funds and other savings
the employees own the means of production” [any longer
true?]
 The knowledge society is a society in which many more
people than ever before can be successful” [true today?]
 “What role did labor unions play in the industrial society?
 What is happening to labor unions today? Implications?
Drucker – Beyond the Information
Revolution (1994)
 What does Drucker think about the role of computers
as an influence on economic growth?
 How do Drucker’s ideas relate to our previous
discussion of growth theories?
 Contrast Drucker’s characterization with the Second
Machine Age – “winner-takes-all” economic system
and the spreading of wages towards the bottom.
Still More Recent Commentary
 Piketty: there is a significant increase in the
concentration of wealth at the top in the US.
 This concentration in the US leads to a distortion of the
legislative and regulatory processes.
 Autor: with the 99% mobility is stifled.
 Atkinson – the UK (Inequality and What Can be Done
About It). Inequality is bad for growth
 Laurent: (Inequality as Pollution, Pollution as Inequality)
 Brynjolfsson and McAfee (The Second Machine Age) –
the “winner-take-all economy” and the “hollowing out of
the middle class” & reduction in purchasing power
Different Competiveness strategies will promote
different forms of Economic Growth
i.e., the approach to competiveness matters
Strategies to Promote Competitiveness*
Within the Advanced Economies
*often expressed as productivity improvements
 Improve competitive advantage by:
 Enhancing worker skills – both technical and inter-
personal (improves workforce’s ability to respond to
rapid change/innovate)
 Cutting costs via workforce cost savings (e.g., shifting to
contingent workers – lowers health care costs, etc.)
 Using better hardware, software, and manufacturing
systems (i.e., investing in capital rather than labor)
 Carefully matching labor with natural/physical capital,
and with information and communication systems (i.e., a
more balance investment in improving labor and capital)
Consequences for Labor
Increase worker skills
 Increase labor productiveness which increases labor productivity as
well
 Rewards (wages and benefits) to workers are increased
Use/develop better hardware, software, and manufacturing systems
(substitution of labor by capital. By energy?)
 Increase capital productiveness which also increases labor
productivity
 However, workers’ share of profits are decreased
Better matching of labor with natural/physical capital, and with
information and communication systems (complementarity)
 Increase joint labor and capital productiveness
 Rewards are increased for both owners and workers
 Human-centered knowledge-based work
Theoretical implications of decreasing labor content
for employment and for the environment
 Lower costs of goods and services
 Lower prices
 Increased demand and sale of goods and services
 in the original industry/market
 in new markets (influenced by increases in disposable income and
producer-created demand)
 Are more workers hired than displaced?
 It depends on whether growth in production (job growth)
outstrips (capital) productiveness growth (job loss)
 May require or stimulate a continual throughput
economy with increasing consumption
 => adverse effects on environmental sustainability
Sectoral/National Strategies to Enhance
Productiveness/Competitiveness
 Innovation-based performance
 enhanced by technological innovation and changing product
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markets
fluid, competitive production
optimizing the use of human resources (labor)
upskilling of labor
important in both domestic and international commerce
 Cost reduction strategies
 enhanced by increased scale of production and/or automation
(and excess capacity)
 rigid, monopolistic production
 shedding and deskilling of labor (lean production/flexible labor
markets)
 where domestic markets are saturated/have excess capacity,
trade becomes the major focus
 Change the Basis of the Economy
Ayres – Turning Point: The End of
Exponential Growth?
 The seven historical drivers of growth that are
now showing signs of saturation.
 Division (specialization) of labor
 International trade
 Monetization of (previously unmonetized) work
 Saving and investment
 Borrowing from the future
 Extraction of high-quality and irreplaceable
resources, and consequences for pollution
 Increasing efficiency of doing work with energy
The New Economics
 2008 financial crisis has revived the question of whether
perpetual growth is possible
 Increased labor productivity means increased
unemployment or under-employment
 Emerging ideas under the ‘new economics’:
 Selective growth
 Conditioned growth
 Sustainable de-growth
 GDP de-growth
 Post growth
 A-growth
 Provision of a basic income (Goodwin; Brynjolfsson)
 Greening the Economy
 Sustainable Consumption
The New Economics, cont’d
 Approaches focus on promoting environmentally and
socially sustainable development through:
 Dematerlization and energy efficiency
 Decreased consumption of environmentally destructive
products and services
 Reductions in the workweek – i.e., redistribution of work
hours – without a decline in income
 Redistribution of wealth through income guarantees
 Community-based, people-led services (rather than productbased services) – i.e., ‘people serving people’
 CRITICIAL POINT: Need to ensure that labor is not shed or
deskilled through the (green) innovation process
Nagging Questions
o If the system does not change, how large is growth likely to
be in industrialized economies? In industrializing
economies?
o Is degrowth as a deliberate strategy likely to be accepted?
o Is green growth the answer? A partial answer?
o Need to reconcile growth policies with energy policies,
trade and finance reform, population and immigration
strategies, and cultural changes.
The Washington Consensus - Rules of Good
Behavior for Promoting Economic Growth
(Rodrik 2007)
Original Consensus
Augmented Consensus
1. Fiscal discipline
11. Corporate governance
2. Reorientation of public expenditures
12. Anticorruption
3. Tax reform
13. Flexible labor markets
4. Interest-rate liberalization
14. Adherence to WTO disciplines
5. Unified and competitive exchange rates
15. Adherence to international financial codes and standards
6. Trade liberalization
16. “Prudent” capital account opening
7. Openness to foreign direct investment
17. Non-intermediate exchange-rate regimes
8. Privatization
18. Independent central banks and inflation targeting
9. Deregulation
19. Social safety nets
10. Secure property rights
20. Targeted poverty reduction
Source: Rodrik (2007, p. 17).
The Washington Consensus, cont.
 What have been the impacts in developing regions that
implemented many of the Washington measures?
 Are there alternatives?
 Karala, India – the state values education and health above GDP
per capita
 Costa Rica – all growth/development plans must fit within the
context of environmental protection/presentation
 Recall the idea of ‘national self-reliance’
 Implies a temporary detachment from the international
economy (or a ‘sequencing’ approach – Stiglitz)
 Enables developing nations to benefit from their own resources
 Enables domestic industries to mature before facing external
competition
Alternative Models of Development
 Kerala India
 “Though Kerala has a low throughput, the indicators of social
progress have not suffered because of sustained efforts to
limit population growth and social inequality, to conserve
resources frugally and to use them on a shared basis” Parayil
(1996).
 That is, development is possible without a focus on economic
growth
 Costa Rica
 One minister is in charge of energy and environment
 How does this integration of domains change their
approach to development?
Backup Slides
Peak Oil
 ‘Peak oil’ is the point when the maximum rate of global
petroleum extraction is reached
 Estimates vary, but many believe we have past, or are
about to reach, this point
Source: Energy Watch Group, http://www.energywatchgroup.org/fileadmin/global/pdf/EWG_Oilreport_10-2007.pdf
Source: http://www.dieoff.org/
Peak Oil and Its Implications
 How quickly will the remaining oil be used? What factors
need to be considered?
 How are energy efficiency gains linked to the economy?
What are the implication of these links?
Globalization
 Industrialization
 Internationalization - expansion of product/service market
abroad, with the locus of production in the parent country
 Multi-nationalization - production/service facilities in several
places, with R&D remaining in parent country
 Creation of Strategic Alliances -merging and sharing of
technical and managerial know-how
 Knowledge and Information Mobility
 Capital Mobility
 Labor Mobility / Immigration
The International Economy
Characterized by:
 Trade in goods and services (Internationalization)
 International distribution of production/provision of services
(Multi-nationalization)
 Migration
 Flow of capital across borders
 Broader Access to Information & Knowledge
Globalized Commerce Brings Changes for Domestic Firms:
 Scale effects
 Structural Effects
 Technology Effects
 Product Effects
Todaro’s Five Questions
1.
2.
3.
4.
5.
How does international trade affect the rate, structure, and
character of LDC economic growth?
How does trade alter the distribution of income and wealth
within a country?
Under what conditions can trade help LDCs achieve their
development objectives?
Can LDCs by their own actions determine how much they
trade?
In the light of past experience and prospective judgment,
should LDCs adopt an outward-looking policy (freer trade,
expanded flows of capital and human resources, ideas, and
technology, etc.) or an inward-looking one (protectionism in
the interest of self-reliance) or should they pursue some
combination of both, for example, in the form of regional
economic cooperation?