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2010 | OriginalPaper | Chapter

13. Questions Related to Economic Growth

Author : Lester D. Taylor

Published in: Capital, Accumulation, and Money

Publisher: Springer US

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Abstract

In this chapter, we shall turn our attention to economic growth.¹ There are obviously a variety of ways that economic growth can be defined, but the definition that shall be used in this chapter is an increase in income per capita.

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previous chapter Questions Related to Consumption and Saving

next chapter Themes and Counterthemes: Fluid Capital in Retrospect

Throughout this chapter, economic growth and economic development will be used interchangeably.

The expectations at issue here are not the same ones that drove the decision to invest in new capacity in the first place. The latter expectations were in place yesterday, and there is no guarantee that they have survived intact till today.

Cf. the discussion in Chap. 12 concerning the importance of a continuing appearance of goods with income elasticities of demand that are greater than one.

Alternatively (and almost equivalently), economic growth can be defined in terms of the increase in real output per unit of labor input – i.e., increases in labor productivity. Accordingly, to explain income and output differences across countries in terms of productivity differences essentially entails a tautology and is, therefore, not very informative. Hall and Jones (1999) offer a recent example.

Cf. the discussion in Chap. 12. For discussions of the unboundedness of wants, see (among others) Georgescu-Roegen (1954) and Ironmonger (1972). See also Hawtrey (1925).

Moreover, even the assumption of a decreasing marginal utility of income for individuals is questionable in my view, at least for large changes in income.

A minimum standard of living has, on occasion, been cast in terms of what an individual needs in order to appear in public without shame. When I was in early elementary school in rural Iowa, it was not unusual for me or my classmates to wear to school clothes that had been mended or patched. However, by late grade school incomes had advanced to the point where this was considered socially unacceptable.

See Lucas (1985), Romer (1986), and Arthur (1989).

It might be thought that this is simply a restatement of Say’s Law, but I do not see the point in these terms, as it is the expectation of demand that drives supply, rather than supply which creates demand. The only sense in which demand can be said to be created is in terms of the income that new production generates, which in current prices is just equal to the value of the new production. Whether or not the new income is spent is another matter. Expectations can fail, and at times massively so. This, of course, was one of the great insights of Keynes in the General Theory.

See Appendix A.

The analysis in this section is due to numerous discussions with Barbara N. Sands.

Obviously, most farmers in a low-income economy do not possess Old Masters. Old Master in this context is intended to refer to any non-income-generating asset that can be exchanged for money.

See Chap. 12.

I have always been perplexed by the implication of neoclassical growth models of the Solow–Swan type that the equilibrium rate of growth is independent of the rate of saving. As a statement about the real world, this has to be nonsense. In the framework of this book, the growth rate depends on both saving and investment. If both are high, then growth will be high. To me, at least, this is merely common sense.

The search for a “chemistry of growth” nevertheless remains an ignis fatuus, a deceptive hope. In a review of the recent book by Ashish Arora, Ralph Landau, and Nathan Rosenberg (Chemicals and Long-term Economic Growth, Wiley Interscience, 1999), in The Economist (March 6–12, 1999), the author of the review states: “Despite the effort expended over many years on understanding it, economic growth remains a mystery. And the harder you look, the more complicated it becomes.” How to put policies in place that foster saving and investment may be difficult, but the mechanics of growth are not themselves a mystery.

Arthur, W.B. (1989), “Competing Technologies, Increasing Returns, and Lock-in by Historical Events,” Economic Journal, Vol. 99, pp. 116–31.CrossRef

Georgescu-Roegen, N. (1954), “Choice, Expectations, and Measurability,” Quarterly Journal of Economics, Vol. 68, No. 4, pp. 503–34.CrossRef

Hall, R.E. and Jones, C.I. (1999), “Why Do Some Countries Produce so Much More Output per Worker than Others?” Quarterly Journal of Economics, Vol. 114, No. 1, pp. 83–116.CrossRef

Hawtrey, R.G. (1925), The Economic Problem, Longmans and Green, London.

Lucas, R.E. (1985), “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22, No. 1, pp. 3–42.CrossRef

Romer, P.M. (1986), “Increasing Returns and Long-Run Growth,” Journal of Political Economy, Vol. 94, No. 5, pp. 1002–37.CrossRef

Title: Questions Related to Economic Growth
Author: Lester D. Taylor
Publisher: Springer US
Book: Capital, Accumulation, and Money
Print ISBN: 978-0-387-98168-0

Electronic ISBN: 978-0-387-98169-7

Copyright Year: 2010
DOI: https://doi.org/10.1007/978-0-387-98169-7_13