Economics Economic Growth Models - Essay Example

This paper is a detailed summary of the following broad types of economic growth models: Neo ical, New Growth Theory, and Keynesian. The effects of war on each model is also explored. The Neoclassical growth model has its origins in 1800's through the works of William Stanley Jevon (Theory of Political Economy, 1871), Carl Menger (Principles of Economics, 1871), and Leon Walras (Elements of Pure Economics, 1874). Neoclassical economics gained further with the work of Joan Robinson and Edward Chamberlin. Robinson's The Economics of Imperfect Competition and Chamberlin's The Theory of Monopolistic Competition (both published in 1933) focused on models of imperfect competition. Their work led to theories of market forms and industrial organization. Robert M. Solow (MIT) and Trevor Swan (Economic Growth and Capital Accumulation, Economic Record, 32 (1956)) of Australia, furthered the movement of neoclassical growth models during their time at MIT. Their work led to the Solow-Swan Growth Model which shows growth and the relationship between labor, capital, and investment (increases in capital stock). Solow's work (his theory of capital and economic growth) and writings (A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, 70 (1)) earned him the 1987 Nobel Prize in Economics. The Neoclassical growth model is a model of economic growth that focuses on income derived from neoclassical production functions (Deardorff, 2000). These functional properties are diminishing returns to savings and capital accumulation. Technical progress acts to increase output the same as increased labor would (economic growth). This model is also referred to as the Exogenous Growth Model and refers to the input of the many people who have contributed to the neoclassical growth model. One common theme of these models is that the economy will have a steady growth rate that depends on labor force growth and technological growth. New Growth Theory came about because of discontent within the circle of economists with the Neoclassical Growth Model. New Growth Theory was developed during the 1950's and 1960's. It returned to the forefront of economic thought during the 1980's because many felt that the old theories were outdated and did not fit the modern world. The new theory, based on knowledge and creativity, was developed to fit modern economic growth. This new theory is also called Endogenous Growth Theory because changes are made within the model rather than exogenously (outside the model). According to this theory mind power (knowledge) and creativity are important factors in production and, added to labor and capital, increase economic growth. This theory states that creativity added to labor increases growth, creativity improves both capital and labor, and creativity extends resources and tends to abundance. In New Growth Theory creativity rearranges resources and thus resources become unlimited. In the neoclassical growth model resources are limited. Subsidies in research and development are argued to increase growth due to an increase in knowledge and innovation. Big players in the development of this model were Theodore Schultz, an economist at the University of Chicago, and Gary Becker, Nobel Prize winner for economics in 1992. Schultz, also a Nobel Prize winner, developed theories about the use of human capital to increase agricultural production. Shultz theorized that investing in education would invariably increase agricultural output. Becker added on to Shultz's theory by explaining that expenditures on education, skills training, and medical care can be considered human capital and can, if invested in, increase productivity and output. There is not one version of Post Keynesian Growth Theory but several such as the basic model by Joan Robinson (Robinson, 1956) and another by Michael Kalecki (Kalecki, 1986). There is also a version that Nicholas Kaldor promoted. Nicholas Kaldor (1908-1986) was a staunch critic of the neoclassical growth model. He was a promoter of the Keynesian theory of economic growth. Kaldor was a Cambridge University economist who developed the "Cambridge" approach to growth theory that became a central part of Post Keynesian growth theory. According to Kaldor the process of economic growth consists of these facts: "1. Per capita output grows over time, and its growth rate does not tend to diminish. 2. Physical capital per worker grows over time. 3. The rate of return to capital is nearly constant. 4. The ratio of physical capital to output is nearly constant. 5. The shares of labor and physical capital in national income are nearly constant. 6. The growth rate of output to worker differs substantially across countries."(Kaldor, 1963) Joan Robinson's model focuses on the assumption that the economy is running at full capacity. Faster growth equals higher profits and savings are more sensitive to income than investment. Profits and demand are determined endogenously (within the model). Robinson's model also assumes full employment (Robinson, 1962). Michael Kalecki developed a model that uses variable capacity utilization and sets income distribution (profit sharing) exogenously (outside the model) (Kalecki, 1986). It is interesting to note that Keynes developed his model to help explain the business cycle. His model includes aggregate expenditures (demand side) and aggregate investment in costs and capital stocks (supply side). Daniel Morales-Gomez asserts in his writings that the "Keynesian model expresses the notion that state intervention is needed to bring about economic development." (Morales-Gomez, 1999). During World War II the U.S. economy maintained growth by adjusting to wartime demand for products and services. Auto maker stopped making cars and made wartime vehicles such as tanks. The labor force continued to be employed and technological growth continued (neoclassical model of growth). After the war the U.S. economy stopped making wartime products and services and returned to producing (autos, homes, etc) products saleable in the peacetime economy. The United States spurred economic growth during peacetime by helping to create the International Monetary Fund and the World Bank thus infusing money into the global economy. This is in keeping with Morales-Gomez' assertion that state intervention is needed to bring about economic growth (Post Keynesian growth model). The Employment Act of 1946 (U.S. Department of State) made it government policy to promote maximum employment, production, and purchasing power (again Post Keynesian). Technological innovations and post war education of soldiers spurred a new, larger, white collar working class in the United States. This is in keeping with New Growth Theory that asserts that investment in human capital and technology can spur economic growth. It must be noted that this did not work as well for the agricultural segment of the economy. Technology and investment in human capital proved to decrease the number of persons employed in that segment of the economy as it took fewer people to produce a larger crop (U.S. Department of State). Works Cited Barro, Robert J and Xavier Sala-I-Martin. Economic Growth. MIT Press. 2003 Blanchard, Oliver. Macroeconomics. . Pearson. 2002 Bookrags.com. Neoclassical Economics. 12/24/2006. www.bookrags.com/printfriendly/p=wiki&u=Neoclassical_economics. Bookrags.com. Economic Growth. 12/26/2006. www.bookrags.com/printfriendly/p=wiki&u=Growth-theory Deardorff, Alan V. Deardorff's Glossary of International Economics. 2000-2001. 12/29/2006 Free World Academy. New Growth Theory. 12/18/2006. www.freeworldacademy.com/globalleader/ecodev.htm Gordon, Robert J. Productivity Growth, Inflation and Unemployment: The Collected Essays of Robert J. Gordon. Cambridge University Press. 2003 Kaldor, Nicholas. A Model of Economic Growth. EJ LXVII:591-624 Kalecki, Michal. Krise und Prosperitt im Kapitalismus. Ausgewhlte Essays. Marburg Metropolis. 1986. Morales-Gomez, Daniel. Transnational Social Policies: The Development Challenges of Globalization. Ottawa, ON Canada. International Development Research Centre Romer, Paul. The Origins of Endogenous Growth, JEP, Winter 1994. Robinson, Joan. The Accumulation of Capital. London. Macmillan. 1956 Robinson, Joan. Essays in the Theory of Economic Growth. Macmillan. 1962 Solow, Robert M. Perspectives on Growth Theory, JEP, Winter 1994 Solow, Robert M. Technical Change and the Aggregate Production Function. Review of Economics and Statistics, 39. Stockhammer, Engelbert. Robinson Kaleckian Growth, An Update on Post Keynesian Growth Theories. Working Paper No. 67. Oct 10/1999. U.S. Department of State. The Post War Economy: 1945-1960. . Read More