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Unied growth theory

Unied growth theory was developed to address the in-ability of endogenous growth theory to explain key em-pirical regularities in the growth processes of individualeconomies and the world economy as a whole. Endoge-nous growth theory was satised with accounting for em-pirical regularities in the growth process of developedeconomies over the last hundred years. As a consequenceit was not able to explain the qualitatively dierent em-pirical regularities that characterized the growth processover longer time horizons in both developed and less de-veloped economies. Unied growth theories are endoge-nous growth theories that are consistent with the entireprocess of development, and in particular the transitionfrom the epoch of Malthusian stagnation that had char-acterized most of the process of development to the con-temporary era of sustained economic growth.Unied growth theory was rst advanced by Oded Galorand his co-authors who were able to characterize in a sin-gle dynamical system an initial stable Malthusian equilib-rium which due to the evolution of latent state variables,ultimately vanishes endogenously, causing a transitionalgrowth take o before the system gradually converges toa modern growth steady-state equilibrium. The Malthu-sian state is characterized by slow technological progressand population growth, where the benets of technologi-cal progress are oset by population growth. In the mod-ern growth state technological progress does not encour-age population growth but human capital accumulationinstead which then further spurs technological progress.The theory captures in a single analytical frameworkthe main characteristics of the process of development:(i) the epoch of Malthusian stagnation that character-ized most of human history, (ii) the escape from theMalthusian trap, (iii) the emergence of human capital for-mation in the process of development, (iv) the onset of thedemographic transition, (v) the origins of the contempo-rary era of sustained economic growth, and (vi) the di-vergence in income per capita across countries.Unied growth theory suggests that the transition fromstagnation to growth has been an inevitable by-product ofthe process of development. It argues that the inherentMalthusian interaction between the rate of technologicalprogress and the size and composition of the populationaccelerated the pace of technological progress and ulti-mately raised the importance of education in coping withthe rapidly changing technological environment. The risein industrial demand for education brought about signi-cant reductions in fertility rates. It enabled economies todivert a larger share of the gains from factor accumulation

and technological progress to the enhancement of humancapital formation and income per capita, paving the wayfor the emergence of sustained economic growth.The theory further explores the dynamic interaction be-tween human evolution and the process of economic de-velopment and advances the hypothesis that the forces ofnatural selection played a signicant role in the evolutionof the world economy from stagnation to growth. TheMalthusian pressures have acted as the key determinantof population size and conceivably, via natural selection,have shaped the composition of the population as well.Lineages of individuals whose traits were complemen-tary to the economic environment generated higher lev-els of income, and thus a larger number of surviving o-spring, and the gradual increase in the representation oftheir traits in the population contributed to the process ofdevelopment and the take-o from stagnation to growth.Unied Growth Theory sheds light on the divergence inincome per capita across the globe during the past twocenturies. It identies the factors that have governed thetransition from stagnation to growth and have thus con-tributed to the observed worldwide dierences in eco-nomic development. It highlights the persistent eectsthat variations in historical and prehistorical conditionshave had on the composition of human capital and eco-nomic development across countries. Finally, it uncoversthe forces that have led to the emergence of convergenceclubs.

1 References Galor, Oded (2011). Unied Growth Theory.Princeton: Princeton University Press. ISBN 978-0-691-13002-6.

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