Processes of Economic Growth

1
Processes of Economic Growth
ECO 105 Lecture 3.6 24 October 2008
2
1. Solovian (Investment-Driven) Growth (Wednesday)
Y/L
Ao.F (K/L, H/Lo)
y2
Without improvements in technology, increases in
K/L lead to smaller and smaller increases in Y/L.
y1
y0
K/L
k0
k1
k2
3
2. Smithian Growth (Adam Smith)

• Commercial expansion
• Finer division of labor (specialization)
  increases
• Economies of scale
• Larger markets permit mass-produced goods to be
• Growth is limited by the

4
Example

• Dutch and English sailing prowess expanded
• First Industrial Revolution built on
• Large-scale production
• International markets had to be developed to
  justify

5
3. Schumpeterian Growth (Joseph Schumpeter)

• Growth driven by
• Technological
• Changes in
• Technological
• improve the ___________ of production (lower
  costs) or
• lead to new or better products

6
Examples

• Invention of the microchip created new industries
  and
• Fiber optics has revolutionized
• The development of markets revolutionized the way

7
Conditions for a Techno-logically Creative
Society

• 1. Resourceful innovators, willing and able to
• 2. Economic and social institutions that
  encourage
• 3.
• --Joel Mokyr, The Lever of Riches

8
1. Cultural Factors

• Openness to change vs.
• C
• Personal
• Max Weber on the

9
2. Institutional Factors

• Economic and political
• Property rights - people wont produce what
• Markets - More than simply a way to sell goods a
  structure that

10
The Importance of Incentives
People respond to incentives all the rest is
commentary. Steven Landsburg
11
The Importance of Markets

• Markets provide incentives for people to use
• Friedrich Hayeks contribution
• Markets make use of incredible amounts of
• No one knows more than a tiny fraction of all
• Markets transmit

12
3. Diversity and Tolerance

• Netherlands in the 17th century
• One of the little probed mysteries of social
  history is societys hostility to its greatest
  benefactors, the producers of wealth. On every
  continent and in every epoch the peoples who have
  excelled in creating wealth have been the victims
  of some of societys greatest brutalities.
• --George Gilder, Wealth and Poverty

13
The Growth Process

• 1. Necessary
• a. Political
• b. Meaningful
• c. Tolerance of
• 2. Proper
• a. Reward for
• 3. Efficient way to develop
• a. Market determination

14
A Bedtime (Growth) Story

• The automobile market and U.S. growth
• Henry Fords revolutionary production process
• Not all firms have
• General Motors - the
• General Motors - the
• All three growth processes

15
The Bottom Line

• Economic Growth is a disruptive, messy process of
• The economy doesnt simply get bigger it also
• Europe grew after 1700, and other economies have
  grown since, when theyve