NS4053 Winter Term 2014 Modern Growth Theories. David Coates: Why Growth Rates Differ I Much of the...
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Transcript of NS4053 Winter Term 2014 Modern Growth Theories. David Coates: Why Growth Rates Differ I Much of the...
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
• With capital and knowledge constant this involves;
• Intensifying labor practices
• Exploiting economies of scale
• Replacing labor by capital
• 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 5
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 10
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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