Growth Theory

aje on February 7, 2020

Reading: Solow, R., 1956, “A Contribution to the Theory of Economic Growth” The Quarterly Journal of Economics, 70(1):65-94
Lecture handout: Growth theory*

Textbook Reading: Chapter 7 (Section 7.4; pp. 225-227) and Chapter 12 (Section 12.1; pp. 399-403)

Consider this photo of Nik Wallenda, cycling across a tightrope:

  • The Solow model shows how he remains balanced (investment and depreciation delivers k*)
  • But any forward movement is exogenous (i.e. technology, population changes)
  • Endogenous growth theory adds some rocket boosters!

In the lecture I showed the dramatic transformation of Hong Kong harbour, as an example of fast economic growth.

Here is a 52 year time lapse of Kowloon peninsula:

In 1945 Hong Kong was a poor territory. After war and Japanese occupation many of its 600,000 people were starving. They had no traditionally considered natural resources, and yet soon became a major manufacturing location, the busiest port in the world, and a centre of the global financial market.

According to reasonable internet sources, by 2018 Hong Kong’s GDP per capita had become bigger than the UK’s.

What happened? In 1945 civil servant John Cowperthwaite made Hong Kong a free port, which meant no tariffs for most goods, no export subsidies, and few restrictions on imports. Trade grew quickly.

On the supply side, it is not as though Hong Kong’s services lack in any way. The territory has the fourth best education system in the world, according to Pearson, and it ranks top of Bloomberg’s healthcare index. Its public transport system was ranked the world’s best last year, and it is consistently used as a model elsewhere (Frisby, 2019, p.13)

Perhaps even more powerfully, Hong Kong has been used as a model for other areas on mainland China. In 1980 Shenzhen became a “special economic zone” with low taxes and market-friendly regulation. The population rose from 30,000 to 13 million. Here’s Hong Kong in 12 amazing photos.

In 2014 I attended a Mont Pelerin Society meeting in Hong Kong. Here I am in front of that amazing skyline, with my undergraduate econ study partner!

For more see Frisby 2019, Chapter 2.

 

 

 

 

 

 

Unfortunately, events in Hong Kong now threaten that prosperity. For all of the gains of economic progress, there is always a threat or political intervention to undermine it.

Here is an example of Singapore: growth is an aesthetic and it’s ok to be pro:

Some nice examples of side by side growth include this view of London from Greenwich, 40 years apart:

And here is Phnom Penh, just 9 years apart:

One of my favourite examples of how to notice intergenerational progress and increased material prosperity is Vic Wilcox’s thoughts on toilets, from David Lodge’s ‘Nice Work’ (1988) – see here.

🎧 Recommended podcasts

🗒️ Recommended articles

📚 Recommended books

💻 Recommend websites

Here is an introduction to the Solow model (more videos in the series are here)

Growth is like an iPhone:

See my Country competitiveness Dashboard.

Here is Tyler Cowen’s claim that economic growth is a moral imperative (which is based on his book, Stubborn Attachments):

For more on the economic influence of rabid supply siders…

Not everyone supports economic growth as a policy objective. Consider the following:

  • Degrowth can work — here’s how science can help, Nature, December 12th 2022 – the authors claim that economic growth is based on production for its own sake and the necessary depletion of natural resources required to fuel it. But this is a fundamental misconception of economics, which is about increasing utility (i.e. people’s subjective judgment of what improves the quality of their life) in the most efficient way possible. As Sam Bowman said, economic growth is about “innovations that use fewer resources & less labour to produce more wellbeing – the thing the blurb says we should do”.
  • Degrowth and the Monkey’s paw, by Stian Westlake, Works in Progress, May 15th 2023 – Stian Westlake points out that “the UK has been remarkably successful in weaning itself off its growth addiction. I’m surprised that supporters of degrowth don’t celebrate these charts more.”

Jason Hickel’s ‘Less is More’ argues that we need to “shift to a post-capitalist economy that is focused on human well-being and ecological stability rather than on perpetual growth” yet this desire to overthrow the economic system is misguided and counter productive. As Martin Wolf responds, “The transformation he desires could only be implemented by a dictatorship, and a global dictatorship at that. No such regime is (happily) in prospect. That is at best unrealistic utopianism. At worst, it is yet another in a long succession of “progressive” calls for tyranny” (2023, p. 223).

Learning Objectives: Understand the foundations of economic growth. See how economic growth theories inform development economics. 

Cutting edge theory: This session defines cutting edge growth 

Focus on diversity: One of the most widely respected economic historians of the factors that led to industrialisation is Deidre McCloskey

Spotlight on sustainability: This session defines the sustainable growth rate as the balanced path between capital accumulation and capital consumption.