Theories of economic growth: A Historical Odyssey

Theories of economic growth have traversed a century-long journey marked by shifting paradigms and debates. From the classical views of Malthus, Smith, and Ricardo, with their “pessimistic” outlook on growth limited by finite resources, to the dynamic analyses of Schumpeter in the interwar period, the understanding of growth has evolved.

Classical Pessimism and Neoclassical Shifts

The classical economists, foreseeing growth stagnation once resources were fully exploited, set the tone for early economic thought. However, the neoclassical era of the 19th century was more concerned with equilibrium than dynamics, with the exception of the Marxist theory, emphasizing capital accumulation. It wasn’t until the interwar period that Joseph Schumpeter introduced a dynamic analysis centered on innovation.

Post-War Controversies: Neo-Keynesians vs. Neoliberals

Post-World War II, theorists engaged in fierce battles to analyze growth and identify its sources. Neo-Keynesians like Roy Forbes Harrod and Evsey Domar clashed with neoliberals like Robert Solow. Key questions arose: Is growth balanced or unbalanced? What role do the factors of production, capital, and labor play?

The traditional production function Y = f(K, L) (with Y = production, K = capital, L = labor) proved insufficient to explain real growth, especially during the “Trente Glorieuses” (the post-war boom). Even incorporating technological progress into both factors didn’t explain more than half of actual growth, as demonstrated by Jean-Jacques Carré, Paul Dubois, and Edmond Malinvaud in “La Croissance française” (1984).

To address this gap, the production function was modified to include Y = f(K, L) + r, introducing the mysterious “residual factor” (r), responsible for over half of the growth rate. Moses Abramovitz rightly observed that “the residual factor is the measure of our ignorance.”

Stages of Economic Growth and Critiques

Faced with complexities, theorists resorted to simplified (and flawed) models like W.W. Rostow’s “Stages of Economic Growth” (1960). Rostow outlined a linear progression through societal stages: traditional society, preconditions for take-off, take-off, maturity, and the age of mass consumption. Despite justified criticisms for poorly defined stages and oversimplifications, Rostow’s model gained traction in the 1960s globally.

Rise of Deceleration Theories and Sustainable Growth

In the late 1960s, amidst unprecedented growth (averaging 5% annually), critiques emerged, echoing the societal discontent of the 1968 protests. The MIT’s 1970 report on “zero growth,” prompted by the Club of Rome, posited that beyond a certain point, growth produces diminishing returns and escalating nuisances. Richard Easterlin’s 1974 study introduced the Easterlin Paradox, suggesting that increased wealth, beyond a threshold, doesn’t significantly enhance individual satisfaction.

The concept of “decroissance” (degrowth) was proposed by Nicholas Georgescu-Roegen in “The Entropy Law and the Economic Process” (1971). It draws on the principle of entropy, asserting the impossibility of “infinite growth in a finite world.” This idea became the basis for ecological demands for sustainable growth and a circular economy with minimal impact on resources and natural balances.

Growth Theories: A Recap

  • Economic growth, often considered a panacea, remains poorly understood.
  • Theories and historical analyses face numerous criticisms, requiring revisions for relevance.
  • Growth theories stimulate ongoing debates and challenges, necessitating continuous refinement.

In essence, the study of economic growth reflects the complexities and evolution of economic thought, with theorists grappling to unravel the dynamics of prosperity in an ever-changing world.

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1 COMMENT

  1. […] Traditional growth theories, dating back to the era of David Ricardo, were built upon the foundational belief that economic growth primarily stemmed from external factors such as labor and capital. The prevailing notion was that as these factors of production increased, their productivity would inevitably experience diminishing returns, creating a fundamental pillar in economic science. […]

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