classical growth theory-aftermarx

8/3/2019 Classical Growth Theory-AfterMarx

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Classical Growth Theory

After Marx:

Structural Change and Steady States

Marx's frightening vision did not carry over into Neoclassical theory.

But then, it is hard to say the early Neoclassicals had a substantial

theory of growth at all. The possible exception was Marshall, but

even he improved little upon the Classical system (of Smith andRicardo, not Marx). That was only to be really developed in later

years.

Concern with growth was then largely confined to the German and

English Historical Schools, although these thinkers did little more

than improve the recording and collection of facts on economic

history. They did explore, for instance, institutional and cultural

roots of productivity and factor changes (especially regarding

population growth and the social-cultural habits that induced capital

accumulation), but the essence of their system were only footnotes

to the Classical theory. The American Institutionalists also did little

beyond this - except that their massive empirical efforts on business

cycles and national incomes accounts might have spurred new

interest into the phenomenon of growth. Simon Kuznets, in

particular, was instrumental in this respect.

However, in the 1920s and 1930s, three new sets of storiesemerged which improved upon the Classical theory substantially.

They all drew, to a good extent, from Karl Marx's theoretical schema

that had been channeled by a European tradition that ran through

Tugan-Baranovsky, Spiethoffand Aftalion. Specifically, two themes

ran through the new stories: firstly, that the economy should be

considered explicitly in its disaggregated, multi-sectoral structure;

secondly, the concept of a steady-state growth path is introduced as

a a reference point for such an economy.

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The first of these "structural" theories was that developed by Joseph

A. Schumpeter in his 1911 classic, Theory of Economic Development

and then further explored later on in his Business Cycles (1939) and

his Capitalism, Socialism and Democracy(1942). His system was,again, supply driven: the main secular engine of growth was the

increase in factor supplies. The difference, however, was

Schumpeter's resurrection ofSmith's concern with the entrepreneur

as an innovator who improved growth by efficiently combining

resources, adopting new technical improvements in machinery and

conducting the division of labor.

Schumpeter's starting point is the steady state, or rather, a

smoothly expanding economy. Unlike Smith, his population growth

was exogenous and his savings rate rather constant or, at best, a

residual and not a driver of growth - he was not very much

concerned with distribution. In Schumpeter's view, the driver of

"development" (as opposed to boring "growth") were discontinuous

punctuated changes in the economic environment. These, he

claimed, were brought about by a variety of things (e.g. sudden

discoveries of new factor supplies), but entrepreneurial innovation

was the central one.

The entrepreneur's innovations drive development but their motive,

like Marx had argued, was "raw instinct" - profit-derived wealth

being merely an "index" of that instinct. Innovation, again like Marx,

was not wholly exogenous: quite the contrary, competition for small

profits "induced" entrepreneurs to innovate, whereas uncompetitive

periods with high profits were a brake on the rate of innovation.

It only takes a few leaders. From a steady economy, a technical

innovation by a single entrepeneur opens up new profitable avenues

- therefore, more entrepreneurs are induced to innovate, thereby

increasing the profits in the economy as a whole, thereby driving

growth. But as as the "supply of entrepreneurs" in any generation is

numerically exhausted, capitalists turn upon each other and

compete away the existing profits. Profits begin to decline and the

economy slows down. However, the decline in profits will eventually,

again, induce those with entrepreneurial inclinations to once again

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innovate.

One may think of this as more of a cycle theory than a growth

theory, but Schumpeter claimed that there were ratchet effects in

innovation so that entrepreneurial-driven spurts of economic activity

led to progressively higher levels of income. And there is no long

run need to slow down: unlike Ricardo, Schumpeter claimed that

there were no diminishing returns to innovation. The only reason

one may be driven towards slower, steady-state is that all the

entrepreurs in a generation might be already "used up".

There are also institutional preconditions for innovation: a capitalist

system (private ownership of property) was one, existence andavailability of plentiful credit is another. Like Wicksell, Schumpeter

abandoned Say's Law and claimed that credit made present activity

independent of past activity and thus enabled entrepreneurship.

Hence, since entrepreneurial innovation could be arrested by lack of

credit, then financial innovation was also an important factor for

increasing growth.

Although he did not have diminishing returns to innovation,

Schumpeter did have long-run elements in his theory which induced

a breakdown in growth. These are rooted in social-cultural changes:

enterprise may grow to the point entrepreneurial function may be

replaced by bureaucratic managers who are less apt to innovate;

growth uncovers economies of scale and may lead to permanently

high industrial concentration and high profits (which again, are a

brake on innovation); also, entrepreneurial activity will be

progressively viewed as "bad" because capitalism leads to the

breakdown of social and family relations and alienates the

bourgeoisie and, in particular, is despicable to intellectuals who are

highly influential upon public attitudes; this negative view of

rapacious entrepreneurship will then conspire, culturally speaking,

to diminish the supply of entrepreneurs. (Also, that same breakdown

in the family may also take away from the "dynastic" aspirations

which often lies behind the "raw instincts" of entrepreneurs).

The concept of "steady-state" was still primitive in Schumpeter. It

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was given more precision in the second set of theories we consider,

namely the "steady-state" multi-sectoral growth theories of Gustav

Cassel (1918) and John von Neumann (1937). Both Cassel and von

Neumann presented growth models which are akin to Marx'sreproduction scheme in many respects but differed essentially in

the absence of "crisis". One can argue that it was probably more

inspired by the general equilibrium theory of Ln Walras (1874),

who also referred to the concept of steady state growth in his theory

of capital.

John von Neumann, in particular, followed the Classical idea that

surplus is the determinant of growth but, contrary to the Classicals,

did not concern himself with any falling rates of profit. John von

Neumann's concern was in the formalization ofsteady-state growth,

but without reference to any Classical constraints that might bring

the surplus down and bring the economy to a stationary state

without growth. To some extent, this was due to the fact that, as a

mathematician, von Neumann abstracted much from the "social

considerations" that often went into the Classical theories, i.e. he

did not concern himself with possible resource constraints presented

by land, or changes in fertility, or "entrepreneurial" behavior or anyother such concepts. His exercise was a thoroughly mathematical

one -- foreshadowing the later formalization of the Classical theory

by Sraffa and Leontiefin many ways.

As a result, the dynamic models of Gustav Cassel and John von

Neumann have a perpetual multi-sectoral, steady-state growth rate

which they saw as perpetual and constant. They identified the rate

of growth to be identical to the rate of profit - the "Golden Rule"

already implicit in the Classicals, Schumpeter and Walras. For more

on all this, see our reviews of the Walras-Cassel model and the von

Neumann system.

The final set of growth theories that emerged in the 1920s and

1930s are the "structural" theories of growth developed by the

Soviet economist Grigory Fel'dman (1928) and the Kiel School (e.g.

Adolph Lowe (1926, 1954, 1976), Fritz Burchardt (1928, 1931),

Alfred K ler (1933), Emil Lederer (1931), Hans Neisser (1933, 1942

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), Wassily Leontief(1941)). They effectively take the story up where

Cassel-von Neumann drop off. They are more explicitly indebted to

Marx's theory, particularly his schema of extened reproduction and

his recognition of technological unemployment.

The Kiel School was particularly interested in what happens offthe

steady-state path. They focus on technological change as the big

crucial variable that is constantly leading to increases in the rate of

return on capital and thus higher investment. The difference is that

the resulting growth is not steady, but rather "disproportionate".

For instance, after technical progress, investment goods sector

output increases while that of consumer goods industries lags

behind, leading thereby to changes in relative prices during the

process of adjustment. These changes in relative prices can lead to

technological unemployment in certain industries (e.g. consumer

goods) while growth proceeds at bursting speed in others. There is,

as Neisser expressed it, "a race" betwen technical displacement of

labor in some sectors and the rate of absorption of labor in other

sectors from capital accumulation. Notice that "traditional" recipes

for curing unemployment, e.g. lowering wages or stimulating

demand, will not affect the technological unemployment problem asthese are aggregate measures, not designed for the specific

sectoral problems. As they Lederer noted:

"The primitive conception that, wheneverunemployment exists one

could always restore equilibrium by a reduction in wages belongs

into the junk-room of theory" (E. Lederer, 1931: p.32)

Several aspects of the structural theories of growth of the Kiel

School were absorbed by dynamic input-output models (e.g.

Leontief, 1953; Samuelson and Solow, 1953; Morishima, 1964,

1973). They were more directly influential on the development of

Friedrich von Hayek's (1928, 1931) theory ofmacrofluctuations and

John Hicks's (1973) theory of the disequilibrium growth "traverse".

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