Editing Economic growth (section)

== Growth theories {{anchor|theory}} ==

=== Adam Smith ===

Adam Smith pioneered modern economic growth and performance theory in his book [[The Wealth of Nations]]'','' first published in 1776. For Smith, the main factors of economic growth are division of labour and [[capital accumulation]]. However, these are conditioned by what he calls "the extent of the market". This is conditioned notably by geographic factors but also institutional ones such as the political-legal environment.<ref>Adam Smith, ''The Wealth of Nations'' (1776).  ''Adam Smith's The Wealth of Nations: A Translation into Modern English'', ISR Publications, 2015.</ref>

=== Malthusian theory ===
{{Main|Malthusianism}}
Malthusianism is the idea that population growth is potentially exponential while the growth of the food supply or other resources is linear, which eventually reduces living standards to the point of triggering a population die off. The Malthusian theory also proposes that over most of human history technological progress caused larger population growth but had no impact on income per capita in the long run. According to the theory, while technologically advanced economies over this epoch were characterized by higher population density, their level of income per capita was not different from those among technologically regressed society.

The conceptual foundations of the Malthusian theory were formed by Thomas Malthus,<ref>{{Cite book|title=An Essay on the Principle of Population|last=Malthus|first=Thomas R.|publisher=Oxford University Press|year=1798|editor-last=Gilbert|editor-first=Geoffrey|location=Oxford|publication-date=1999}}</ref> and a modern representation of these approach is provided by Ashraf and Galor.<ref name=":1">{{Cite journal|last1=Quamrul|first1=Ashraf|last2=Galor |first2=Oded|date=2011|title=Dynamics and Stagnation in the Malthusian Epoch|url=https://ideas.repec.org/a/aea/aecrev/v101y2011i5p2003-41.html|journal=American Economic Review|volume=101|issue=5|pages=2003–2041 |doi=10.1257/aer.101.5.2003|pmid=25506082|pmc=4262154}}</ref> In line with the predictions of the Malthusian theory, a cross-country analysis finds a significant positive effect of the technological level on population density and an insignificant effect on income per capita significantly over the years 1–1500.<ref name=":1" />

===Classical growth theory===
In classical ([[David Ricardo|Ricardian]]) economics, the theory of production and the theory of growth are based on the theory of sustainability and law of variable proportions, whereby increasing either of the [[factors of production]] (labor or capital), while holding the other constant and assuming no technological change, will increase output, but at a diminishing rate that eventually will approach zero. These concepts have their origins in [[Thomas Malthus]]’s theorizing about agriculture. Malthus's examples included the number of seeds harvested relative to the number of seeds planted (capital) on a plot of land and the size of the harvest from a plot of land versus the number of workers employed.{{sfn|Bjork|1999|pp=297–298}} (See also [[Diminishing returns]])

Criticisms of classical growth theory are that technology, an important factor in economic growth, is held constant and that [[economies of scale]] are ignored.{{sfn|Bjork|1999|p=298}}

One popular theory in the 1940s was the [[big push model]], which suggested that countries needed to jump from one stage of development to another through a [[virtuous cycle]], in which large investments in infrastructure and education coupled with private investments would move the economy to a more productive stage, breaking free from economic paradigms appropriate to a lower productivity stage.<ref>[[Paul Rosenstein-Rodan]] {{specify|date=November 2010}}</ref> The idea was revived and formulated rigorously, in the late 1980s by [[Kevin Murphy (economist)|Kevin Murphy]], [[Andrei Shleifer]] and [[Robert Vishny]].<ref>{{cite journal|last1=Murphy|first1=Kevin M.|last2=Shleifer |first2=Andrei|last3=Vishny|first3=Robert W.|year=1989|title=Industrialization and the Big Push|journal=[[Journal of Political Economy]] |volume=97|issue=5|pages=1003–1026|doi=10.1086/261641|citeseerx=10.1.1.538.3040 |s2cid=222424224}}</ref>

===Solow–Swan model===
{{Main|Solow–Swan model}}
[[Robert Solow]] and [[Trevor Swan]] developed what eventually became the main model used in growth economics in the 1950s.<ref>{{cite journal|last=Solow|first=Robert M.|year=1956|title=A Contribution to the Theory of Economic Growth|journal=Quarterly Journal of Economics|volume=70|issue=1|pages=65–94|jstor=1884513|doi=10.2307/1884513|url=http://rcin.org.pl/Content/39010|hdl=10338.dmlcz/143862|hdl-access=free}}</ref><ref>{{cite journal|last1=Swan |first1=Trevor W.|year=1956|title=Economic Growth and Capital Accumulation'|journal=Economic Record|volume=32|issue=2|pages=334–61|doi=10.1111/j.1475-4932.1956.tb00434.x}}</ref> This model assumes that there are [[diminishing returns]] to capital and labor. Capital accumulates through investment, but its level or stock continually decreases due to depreciation. Due to the diminishing returns to capital, with increases in capital/worker and absent technological progress, economic output/worker eventually reaches a point where capital per worker and economic output/worker remain constant because annual investment in capital equals annual depreciation. This condition is called the 'steady state'.

In the Solow–Swan model if productivity increases through technological progress, then output/worker increases even when the economy is in the steady state. If productivity increases at a constant rate, output/worker also increases at a related steady-state rate. As a consequence, growth in the model can occur either by increasing the share of GDP invested or through technological progress. But at whatever share of GDP invested, capital/worker eventually converges on the steady state, leaving the growth rate of output/worker determined only by the rate of technological progress. As a consequence, with world technology available to all and progressing at a constant rate, all countries have the same steady state rate of growth. Each country has a different level of GDP/worker determined by the share of GDP it invests, but all countries have the same rate of economic growth. Implicitly in this model rich countries are those that have invested a high share of GDP for a long time. Poor countries can become rich by increasing the share of GDP they invest. One important prediction of the model, mostly borne out by the data, is that of ''conditional convergence''; the idea that poor countries will grow faster and catch up with rich countries as long as they have similar investment (and saving) rates and access to the same technology.

The Solow–Swan model is considered an "exogenous" growth model because it does not explain why countries invest different shares of GDP in capital nor why technology improves over time. Instead, the rate of investment and the rate of technological progress are exogenous. The value of the model is that it predicts the pattern of economic growth once these two rates are specified. Its failure to explain the determinants of these rates is one of its limitations.

Although the rate of investment in the model is exogenous, under certain conditions the model implicitly predicts convergence in the rates of investment across countries. In a global economy with a global financial capital market, financial capital flows to the countries with the highest return on investment. In the Solow-Swan model countries with less capital/worker (poor countries) have a higher return on investment due to the diminishing returns to capital. As a consequence, capital/worker and output/worker in a global financial capital market should converge to the same level in all countries.<ref>{{cite journal|last=Lucas|first=Robert E.|year=1990|title=Why Doesn't Capital Flow from Rich to Poor Countries?|journal=American Economic Review|volume=80|issue=2|pages=92–6|jstor=2006549}}</ref> Since historically financial capital has not flowed to the countries with less capital/worker, the basic Solow–Swan model has a conceptual flaw. Beginning in the 1990s, this flaw has been addressed by adding additional variables to the model that can explain why some countries are less productive than others and, therefore, do not attract flows of global financial capital even though they have less (physical) capital/worker.

In practice, convergence was rarely achieved. In 1957, Solow applied his model to data from the U.S. gross national product to estimate contributions. This showed that the increase in capital and labor stock only accounted for about half of the output, while the population increase adjustments to capital explained eighth. This remaining unaccounted growth output is known as the Solow Residual. Here the A of (t) "technical progress" was the reason for increased output. Nevertheless, the model still had flaws. It gave no room for policy to influence the growth rate. Few attempts were also made by the RAND Corporation the non-profit think tank and frequently visiting economist Kenneth Arrow to work out the kinks in the model. They suggested that new knowledge was indivisible and that it is endogenous with a certain fixed cost. Arrow's further explained that new knowledge obtained by firms comes from practice and built a model that "knowledge" accumulated through experience.<ref>Warsh, David. Knowledge and the Wealth of Nations. W.W. Norton & Company 2006</ref>

===Endogenous growth theory===
{{Main|Endogenous growth theory}}
Unsatisfied with the assumption of exogenous technological progress in the Solow–Swan model, economists worked to "[[Exogenous and endogenous variables|endogenize]]" (i.e., explain it "from within" the models) productivity growth in the 1980s. The resulting [[endogenous growth theory]], most notably advanced by [[Robert Lucas, Jr.]] and his student [[Paul Romer]], includes a mathematical explanation of technological advancement.<ref name="Lucas1988" /><ref>{{cite journal|last=Romer|first=Paul|year=1986|title=Increasing Returns and Long-Run Growth|journal=[[Journal of Political Economy]]|volume=94|issue=5|pages=1002–1037|doi=10.1086/261420|citeseerx=10.1.1.589.3348|s2cid=6818002}}</ref> This [[Uzawa–Lucas model|model]] was notable for its incorporation of [[human capital]], which is interpreted from changes to investment patterns in education, training, and healthcare by private sector firms or governments. Notwithstanding the implications this component has for policy, the endogenous perspective on human capital investment emphasizes the possibility for broad-based effects which can be realized by other firms in the economy. Accordingly, human capital is theorized to deliver increasing rates of return unlike [[physical capital]]. Research done in this area has focused on what increases human capital (e.g. [[education]]) or technological change (e.g. [[innovation]]).<ref name="mystery">{{cite book|title=The Mystery of Economic Growth|last=Helpman |first=Elhanah|publisher=Harvard University Press|year=2004|isbn=978-0-674-01572-2|url=https://archive.org/details/mysteryofeconomi00help}}</ref> The quantity [[Technological theory of social production|theory]] of endogenous productivity growth was proposed by Russian economist [[Vladimir Pokrovskii]]. It explains growth as a consequence of the dynamics of three factors, including the technological characteristics of production equipment. Without any arbitrary parameters, historical rates of economic growth can be predicted with considerable precision.<ref>Pokrovski, V.N. (2003). Energy in the theory of production. Energy 28, 769-788.</ref><ref>Pokrovski, V.N. (2007) Productive energy in the US economy, Energy 32 (5) 816-822.</ref><ref>{{Cite journal |last=Pokrovskii| first=Vladimir |year=2021| title=Social resources in the theory of economic growth |journal=The Complex Systems |issue=3 |pages=32–43 |url=https://thecomplexsystems.com/}}</ref>

On Memorial Day weekend in 1988, a conference in Buffalo brought together influential thinkers to evaluate the conflicting theories of growth. Romer, Krugman, Barro, and Becker were in attendance along with many other high profiled economists of the time. Amongst many papers that day the one that stood out was Romer's "Micro Foundations for Aggregate Technological Change." The Micro Foundation claimed that endogenous technological change had the concept of Intellectual Property imbedded and that knowledge is an input and output of production. Romer argued that outcomes to the national growth rates were significantly affected by public policy, trade activity, and intellectual property. He stressed that cumulative capital and specialization were key, and that not only population growth can increase capital of knowledge, it was human capital that is specifically trained in harvesting new ideas.<ref>Warsh, David. Knowledge and the Wealth of Nations: A Story of Economic Discovery. W.W. Norton & Company, 2006.</ref>

While intellectual property may be important, Baker (2016) cites multiple sources claiming that "stronger patent protection seems to be associated with slower growth". That's particularly true for patents in the ethical health care industry. In effect taxpayers pay twice for new drugs and diagnostic procedures: First in tax subsidies and second for the high prices of diagnostic procedures treatments. If the results of research paid by taxpayers were placed in the public domain, Baker claims that people everywhere would be healthier, because better diagnoses and treatment would be more affordable the world over.<ref>{{cite Q|Q100216001}}<!-- Rigged:  How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer -->.</ref>

One branch of endogenous growth theory was developed on the foundations of the Schumpeterian theory, named after the 20th-century [[Austrians|Austrian]] [[economist]] [[Joseph Schumpeter]].<ref>{{cite book |url=https://archive.org/details/historyofeconomi0000land|url-access=registration|title=History of Economic Theory : Scope, Method, and Content|last=Landreth|first=Harry|publisher=Houghton Mifflin|year=1976|isbn=978-0-395-19234-4 |location=Boston|pages=[https://archive.org/details/historyofeconomi0000land/page/478 478]–480}}

</ref> The approach explains growth as a consequence of [[innovation]] and a process of [[creative destruction]] that captures the dual nature of technological progress: in terms of creation, entrepreneurs introduce new products or processes in the hope that they will enjoy temporary monopoly-like profits as they capture markets. In doing so, they make old technologies or products obsolete. This can be seen as an ''annulment'' of previous technologies, which makes them obsolete, and "destroys the rents generated by previous innovations".<ref name="Aghion2002">{{cite journal|last=Aghion|first=Philippe|author-link=Philippe Aghion|year=2002|title=Schumpeterian Growth Theory and the Dynamics of Income Inequality|journal=[[Econometrica]]|volume=70|issue=3|pages=855–82|doi=10.1111/1468-0262.00312|citeseerx=10.1.1.458.7383 |s2cid=1268535}}</ref>{{rp|855}}<ref>Also see {{cite book|title=Macroeconomics: Imperfections, Institutions and Policies|last1=Carlin|first1=Wendy|last2=Soskice|first2=David|publisher=Oxford University Press |year=2006|isbn=978-0-19-877622-2|pages=529–60|chapter=Endogenous and Schumpeterian Growth}}</ref> A major model that illustrates [[Schumpeterian growth]] is the {{ill|Aghion–Howitt model|ru|модель Агьона — Ховитта}}.<ref>{{cite journal|last1=Aghion|first1=Philippe|last2=Howitt|first2=Peter|year=1992|title=A Model of Growth Through Creative Destruction|journal=[[Econometrica]]|volume=60|issue=2|pages=323–51|doi=10.2307/2951599|jstor=2951599|url=http://nrs.harvard.edu/urn-3:HUL.InstRepos:12490578}}</ref><ref name="Aghion2002" />

===Unified growth theory===
{{Main|Unified growth theory}}
[[Unified growth theory]] was developed by [[Oded Galor]] and his co-authors to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole.<ref name=":2">{{Cite book|title=Unified Growth Theory|last=Galor|first=Oded|publisher=Princeton University Press|year=2011|location=Princeton}}</ref><ref name=":3">Galor O., 2005, "From Stagnation to Growth: Unified Growth Theory". ''Handbook of Economic Growth'', Elsevier {{doi|10.1016/S1574-0684(05)01004-X}}</ref> Unlike endogenous growth theory that focuses entirely on the modern growth regime and is therefore unable to explain the roots of inequality across nations, unified growth theory captures in a single framework the fundamental phases of the process of development in the course of human history: (i) the Malthusian epoch that was prevalent over most of human history, (ii) the escape from the [[Malthusian trap]], (iii) the emergence of human capital as a central element in the growth process, (iv) the onset of the fertility decline, (v) the origins of the modern era of sustained economic growth, and (vi) the roots of divergence in income per capita across nations in the past two centuries. The theory suggests that during most of human existence, technological progress was offset by population growth, and living standards were near subsistence across time and space. However, the reinforcing interaction between the rate of technological progress and the size and composition of the population has gradually increased the pace of technological progress, enhancing the importance of education in the ability of individuals to adapt to the changing technological environment. The rise in the allocation of resources towards education triggered a fertility decline enabling economies to allocate a larger share of the fruits of technological progress to a steady increase in income per capita, rather than towards the growth of population, paving the way for the emergence of sustained economic growth. The theory further suggests that variations in biogeographical characteristics, as well as cultural and institutional characteristics, have generated a differential pace of transition from stagnation to growth across countries and consequently divergence in their income per capita over the past two centuries.<ref name=":2" /><ref name=":3" />