Question

Evaluate the extent to which endogenous growth theory and post keynesian growth theory explain the role of technical progress in economic growth.

Answer 1

• The endogenous growth theory was developed as a reaction to omissions and deficiencies in the Solow- Swan neoclassical growth model

• It is a new theory which explains the long-run growth rate of an economy on the basis of endogenous factors as against exogenous factors of the neoclassical growth theory.

• The new growth theory does not simply criticise the neoclassical growth theory.

• Rather, it extends the latter by introducing endogenous technical progress in growth models.

• The Endogenous Growth Models:

  • The endogenous growth models emphasise technical progress resulting from the rate of investment, the size of the capital stock, and the stock of human capital.

  • According to Scott and Auerbach, the main ideas of the new growth theory can be traced to Adam Smith and increasing returns to Marx’s analysis.

  • Srinivasan does not find anything new in the new growth theory because increasing returns and endogeneity of variables have been taken from the neoclassical and Kaldor’s models.

  • Fisher criticises the new growth theory for depending only on the production function and the steady state.

  • To Olson, the new growth theory lays too much emphasis on the role of human capital and neglects the role of institutions.

  • In the various models of new growth theory, the difference between physical capital and human capital is not clear. For instance, in Romer’s model, capital goods are the key to economic growth. He assumes that human capital accumulates and when it is embodied in physical capital then it becomes a driving force. But he does not clarify which is the driving force.

• Endogenous growth models, developed by Paul Romer and Robert Lucas placed greater emphasis on the concept of human capital

• How workers with greater knowledge, education and training can help to increase rates of technological advancement.

• They place greater importance on the need for governments to actively encourage technological innovation. They argue in the free market classical view, firms may have no incentive to invest in new technologies because they will struggle to benefit in competitive markets.

• Places emphasis on increasing both capital and labour productivity.

• States that increasing labour productivity does not have diminishing returns, but, may have increasing returns

• They argue that increasing capital does not necessarily lead to diminishing returns as Solow predicts. They say it is more complicated; it depends on the type of capital investment.

• Increased importance of spillover benefits from a knowledge-based economy.

• Emphasis is placed on free-markets, reducing regulation and subsidies. The argument is that we need to keep economies open to the forces of change.

• The policy conclusion that post-Keynesians draw on the "international debt" problem are different from main line theorizing

• According to the post-Keynesians such a policy will not work. There are two sets of opinions held by the post-Keynesians

• ne group would emphasize the fact that export-led growth if it were possible would be more efficient

• Kaldor was a leading advocate of export-led growth for countries which are in an intermediate stage of development

• The export component of total demand appeared to him to be very important and he used to recommend a "dual exhange" rate for developing countries such as Chile, India, etc, along with more liberal import policy on the part of developed market economies

• The other group of post-Keynesians are much more concerned about the home market and they would say, depending on the size of the country, that what is critically needed is an expansion of productivity in the principal wage good sector, namely agriculture.

• and so the agricultural growth will set the pace for industrial growth and for further adjustments

• Now this is of course again different from Keynes; it is post-Keynesian, because Keynes was not concerned about the sectoral composititon of outputs because he was primarily directing his policy advice to the mature capitalist economies in the depth of depression.

• The post-Keynesians make a distinction between sectors such as primary, secondary and tertiary. Some of the classical ideas about the terms of trade between industry and agriculture have been revived by them along with the need for having "appropriate" terms of trade from the point of view of maintaining a momentum of the growth process along with an equitable distribution of incomes.

• So there is an extension of thinking to a more disaggregated point of view.

• The other point is that many post-Keynesians would maintain that the balance of payments deficit is not a cause but rather the effect of a "disarticulation" of the economic structure.

• In other words, monetary imbalances reflect certain major structural imbalances in the economy. These structural problems emerge stronger because of balance of payment reasons and they, in turn, are related to the inappropriate structure of production and demand at home or to a deep "fiscal crisis" of a sociological nature.

• An essential part of the structural problem is the resistance on the part of labour and/or the unwillingness or inability of the capitalists to reduce their current consumption.

• According to post-Keynesians, these are the reasons why the balance of payment adjustment through exchange rate manipulation will not work. Because it will lead to "real wage resistance"

• To summarize, there is a fundamental difference of perspectives between the neo-classical approach to development and the post-Keynesian approach towards development. This difference in my opinion rests on four major grounds.

• One is the post-Keynesian opinion that the problem of demand is a very important factor along with problems of supply.

• Secondly, post-Keynesians emphasize a particular classical structure of the production process which emphasize the distinction between luxury goods, wages goods and capital goods.

• Thirdly, post-Keynesians emphasize the distinction between capital as a "fund of value" and capital as "a concrete stock of means of production".

• Fourthly, post-Keynesians do not accept the view that in all situations there exists a set of market clearing prices, which defines an efficient economic configuration.

• Given these four propositions, post-Keynesians believe that neo-classical errors arise from not taking into account the disaggregated structure of the production process along with relative fixity of techniques.

• According to the post-Keynesians the two gap model is an insufficient specificaton of the problem of the growth process

• It is not that they would deny that those two gaps are interdependent. But they would add that the fundamental cause of these financial imbalances lies in the fact that countries are unable to restructure their production