Efficient Economic Growth

The present monograph deals with Efficient Economic Growth. This title has deliberately been chosen so as to distinguish the problem we want to analyze from the older concept of Optimal Economic Growth. Most contemporary writers, I think, do not believe in the existence of “an” optimal growth path if the term “optimal” is to bear any precise meaning. In a model of economic growth there generally exists a variety of Pareto-optimal, i.e. efficient, growth paths, but other paths may well be inefficient. And this is the main issue we want to investigate: How can efficient growth paths be characterized? And can we believe that growth in our actual market economies is efficient indeed?

In the present chapter we first want to give a general characterization of dynamic efficiency by means of a microeconomic growth model which closely resembles the models known from static general equilibrium theory à la Arrow-Debreu. After having outlined the basic framework, we derive our main result and add some interpretations. Thereafter, a sequence of simpler conditions for dynamic efficiency will be given.

Since Samuelson’s (1958) pioneering paper, the nature of dynamic efficiency has often been characterized in terms of the relationship between the interest rate and the growth rate of national income. This is exactly what we want to do in the present chapter. Such an attempt is not too easy. Many prominent authors in the field, most notably Malinvaud (1953) and Starrett (1970), have argued that in a general equilibrium model of economic growth there is simply no such thing as an interest rate “because own rates of interest differ among commodities and there is no satisfactory aggregation procedure” (Starrett 1970, p. 706). There-fore, conditions for dynamic efficiency which make use of interest and growth rates have only been developed for one-sector (Cass (1972)) or stationary economies (Starrett (1970)) and the profession has refrained from extending these to the general case.

In the present chapter we want to introduce land into our growth model in order to show its relevance for the issue of dynamic efficiency. Such an attempt may appear somewhat far-fetched at first, because land is not a standard ingredient of growth models. There exists, of course, a vast variety of spatial, static models with land which are chiefly employed in the field of urban economics. But concerning dynamic theory, it is, indeed, very hard to find models with land even in the macroeconomic literature. Among the articles I encountered are Calvo (1978) who has shown that land can entail indeterminacy of equilibrium, and Feldstein (1977a) who has analyzed the incidence of a tax on pure rent.

Here the closing chapter of our study begins whose contents, as has been indicated in the introduction, will be more vivid and tractable than the theory developed so far, if also much more special. No new proposition will be derived. No attempt at generalizing the previous ones will be made. The stress will be on interpretation and evaluation. Each of the following sections is self-contained so that readers who are in a hurry may pick the topics they are most interested in and can skip other sections without loss of continuity.