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Economic Growth
“Once you start thinking about (growth), it’s hard to think about
anything else.”
Robert E. Lucas, Lectures on Economic Growth
Solow framework: Growth through accumulation
•Constant returns to scale + Decreasing returns to capital  steady state
•Augmenting Solow:
»Human capital
»Geography/Resources/Terms of trade
»Policies: Government consumption/Inflation/Openness/Aid
»Institutions: Property rights/Legal origin/Extractive institutions/
Convergence and conditional convergence
Penn World Table (Heston and Summers): PPP measures of GDP
•Technological advance  exogenous force driving growth
»Solow residual
Capitalist Dynamism -- Creative destruction
A leap over marginalism and decreasing returns
•Obstreperous student at U. of Vienna
•Advisor to Egyptian princess
•Austrian Finance Minister
•President of failed bank
•Itinerant professor -- settled @ Harvard
Theory of Economic Development, 1912
Stationary state  No profits
Joseph Schumpeter
Enter the entrepreneur -- the will to conquer, to create
1883 - 1950
Innovation  disruption of steady state  Profits
 Entry  Boom & Elimination of Profits  New Steady-state
Capitalism, Socialism and Democracy, 1942
Marx’s influence: Capitalism’s endogenous dynamism
But for Schumpeter, conflict and disruption  Change and GROWTH
Capitalism’s paradox: Rationalism undermines private property
Capitalism self-destructs
Joseph Schumpeter: Creative destruction
• Leading economist of the 21st century?
• Capitalism, then, is by nature a form or method of economic change
and not only never is but never can be stationary. And this
evolutionary character of the capitalist process is not … due to a
quasi-automatic increase in population and capital…The fundamental
impulse that sets and keeps the capitalist engine in motion comes
from new consumers, goods, the new methods of production and
transportation, the new markets, the new forms of industrial
organization that capitalist enterprise creates.
• The opening of new markets, foreign and domestic, from the craft
shop and the factory to such concerns as US Steel illustrate the
process of industrial mutation that incessantly revolutionizes the
economic structure from within, incessantly destroying the old one,
incessantly creating a new one. This process of Creative Destruction
is the essential fact about capitalism.
• Every piece of business strategy … must be seen in its role in the
perennial gale of creative destruction; it cannot be understood …on
the hypothesis that there is a perennial lull.
More Schumpeter:
• Economists are at long last emerging from the stage in which price
competition was all they saw. As soon as quality competition and
sales effort are admitted into the sacred precincts of theory, the price
variable is ousted from its dominant position.
• But in capitalist reality distinguished from its textbook picture, it is
…the competition from the new commodity, the new technology, the
new source of supply, the new type of organization -- competition
which commands a decisive cost or quality advantage and which
strikes not at the margins of the profits and the outputs of existing
firms but at their foundations and very lives [that counts].
• …it becomes a matter of comparative indifference whether
competition in the ordinary sense functions more or less promptly; the
powerful lever that in the long run expands output and brings down
prices is in any case made of other stuff.
• …competition of the kind we now have in mind acts not only when in
being but also when it is merely an ever-present threat. It disciplines
before it attacks.
Endogenous Growth
• Adam Smith,1776 Pin factory  Increasing returns
• Alfred Marshall, 1890, External increasing returns
• Allyn Young, 1928, Cumulative Causation
• Forward and backward linkages …knowledge spreads
• Kenneth Arrow, 1962, Learning - by - doing
• Jane Jacobs, 1969, The Economy of Cities
• Agglomeration economies: ideas - interactions - applications - ideas
• Paul David, 1985, QWERTY: Network externalities
• Paul Romer, 1986, Knowledge externalities
• Ideas embedded in cumulative capital  endogenous growth
• Robert Lucas, 1988, Mechanics of Economic Growth
• Learning from others  CBD rents
On the mechanics of economic development*1
Robert E. Lucas, Jr. University of Chicago, Chicago, IL 60637, USA
This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of
economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological
change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through
Arrow, 1962. Kenneth J. Arrow , The economic implications of learning by doing. Review of Economic Studies 29 (1962), pp. 155–173.
Baumol, 1986. William J. Baumol , Productivity growth, convergence, and welfare: What the long-run data show. American Economic Review 76 (1986), pp.
Becker, 1964. Gary S. Becker , Human capital. , Columbia University Press for the National Bureau of Economic Research, New York (1964).
Becker, 1981. Gary S. Becker , A treatise on the family. , Harvard University Press, Cambridge, MA (1981).
Becker and Barro, 1985. Gary S. Becker and Robert J. Barro , A reformulation of the economic theory of fertility. , University of Chicago, Chicago, IL (1985)
Unpublished working paper .
Boxall, 1986. Peter J. Boxall , Labor and population in a growth model. , University of Chicago, Chicago, IL (1986) Unpublished doctoral dissertation .
Burmeister and Dobell, 1970. Edwin Burmeister and A. Rodney Dobell , Mathematical theories of economic growth. , Macmillan, New York (1970).
DeLong, 1987. Bradford DeLong , Have productivity levels converged?. , MIT, Cambridge, MA (1987) Unpublished working paper .
Denison, 1961. Edward P. Denison , The sources of economic growth in the United States. , Committee for Economic Development, New York (1961).
Gordon, 1971. Robert J. Gordon , Measurement bias in price indexes for capital goods. Review of Income and Wealth, Income and wealth series 17 (1971).
Griliches and Dale, 1967. Zvi Griliches and Jorgenson Dale , The explanation of productivity change. Review of Economic Studies 34 (1967), pp. 249–282.
Harberger, 1984. Arnold C. Harberger, Editor, World economic growth, ICS Press, San Francisco, CA (1984).
Jacobs, 1969. Jane Jacobs , The economy of cities. , Random House, New York (1969).
Jacobs, 1984. Jane Jacobs , Cities and the wealth of nations. , Random House, New York (1984).
Krueger, 1983. Anne O. Krueger , The developing countries' role in the world economy. , Lecture given at the University of Chicago, Chicago, IL (1983).
Krugman, 1985. Paul Krugman , The narrow moving band, the Dutch disease and the competitive consequences of Mrs. Thatcher: Notes on trade in the
presence of dynamic scale economies. , MIT, Cambridge, MA (1985) Unpublished working paper .
Kuznets, 1959. Simon Kuznets , Six lectures on economic growth. , The Free Press, Glencoe (1959).
Maddison, 1982. Angus Maddison , Phases of capitalist development. , Oxford University Press, New York (1982).
Romer, 1986. Paul M. Romer , Increasing returns and long-run growth. Journal of Political Economy 94 (1986), pp. 1002–1037. Full Text via CrossRef
Rosen, 1976. Sherwin Rosen , A theory of life earnings. Journal of Political Economy 84 (1976), pp. 545–567.
Schultz, 1963. Theodore W. Schultz , The economic value of education. , Columbia University Press, New York (1963).
Stokey, 1987. Nancy L. Stokey , Learning-by-doing and the introduction of new goods. , Northwestern University, Evanston, IL (1987) Unpublished working
paper .
Summers and Heston, 1984. Robert Summers and Alan Heston , Improved international comparisons of real product and its composition: 1950–1980. Review
of Income and Wealth, Income and wealth series 30 (1984).
Tamura, 1986. Robert Tamura , On the existence of multiple steady states in one sector growth models with intergenerational altruism. , University of Chicago,
Chicago, IL (1986) Unpublished working paper .
Uzawa, 1965. Hirofumi Uzawa , Optimum technical change in an aggregative model of economic growth. International Economic Review 6 (1965), pp. 18–31. *1
This paper was originally written for the Marshall Lectures, given at Cambridge University in 1985. I am very grateful to the Cambridge faculty for this honor, and
also for the invitation's long lead time, which gave me the opportunity to think through a new topic with the stimulus of so distinguished an audience in prospect.
Since then, versions of this lecture have been given as the David Horowitz Lectures in Israel, the W.A. Mackintosh Lecture at Queens University, the Carl
Snyder Memorial Lecture at the University of California at Santa Barbara, the Chung-Hua Lecture in Taipei, the Nancy Schwartz Lecture at Northwestern
University, and the Lionel McKenzie Lecture at the University of Rochester. I have also based several seminars on various parts of this material.
Journal of Monetary Economics
Volume 22, Issue 1, July 1988, Pages 3-42
Paul Romer
1955 –
Ph.D. U. of Chicago, 1983
Professor, Graduate School
of Business, Stanford Univ.
Robert Lucas
Nancy Stokey