Economic Growth and Development

Peter Boettke

Econ 881/Spring 2005

11 April

A Tell All Tale

Sen and the differences in development economics in 1964 and 2004 1964 – exploitation theme

Western Wealth is a consequence of exploitation of the Third World

2004 -- gains from trade theme Wealth is a consequence realizing mutually beneficial

exchange

A Short History of Modern Development Economics 19th Century Development Theory

Theory Why No Capitalism in China?

Underdeveloped World and the Developed World Policy

Trade and/or Colonialism 20th Century Development Theory

Theory Socialist Industrial Planning

First, Second, Third World Policy

Economics of Backwardness Keynesianism

21st Century Development Theory

New Growth Theory and Institutionalism Policy

Washington Consensus Shock Therapy versus Gradualism

Growth Theory

Birth of the Solow model Soviet debate on Industrialization

Harrod, Domar, and Solow Y = f(K + L) + e

Solow conclusion Bohm-Bawerkian presumption

Capital intensity doesn’t explain different performance of economies Explanation is to be found in the error term

Solow problem Leaving unexplained what must be explained Lack of convergence

Lucas revolution The reason why Capital Doesn’t Go from Rich to Poor Countries

is because of human capital differences

Lucas, Lectures on Economic Growth, p. 95.

The main engine of growth is the accumulation of human capital – of knowledge – and the main source of differences in living standards among nations is differences in human capital. Physical capital accumulation plays an essential but decidedly subsidiary role. Human capital accumulation takes place in schools, in research organizations, and in the course of producing goods and engaging in trade. Little is known about the relative importance of these different models of accumulation, but for understanding periods of very rapid growth in a single economy, learning on the job seems to be by far the most central. For such learning to occur on a sustained basis, it is necessary that workers that workers and managers continue to take on tasks that are new to them, that they continue to move up … the quality ladder. For this to be done on a large scale, the economy must be a large-scale exporter.

But is this confusing cause and consequence? Human Capital

Why is it attractive to invest in your human capital? Mobility Rate of return (schooling and growth)

Quality Ladder Organization and opportunity

Exporter Trading opportunities

Basic Economic Reasoning of Development Increases in Real Income Can Only Come

From Increases in Real Productivity Real Productivity results from:

Improvements in labor skill Human capital

Increases in capital Technological improvements

Refinements in managerial and organizational form New techniques of organizing and motivating teams

“Tell me as if I was in kindergarten.” People

Treat as given Resources

Treat as given Rules

How people interact with each other, and how they utilize resources Policy framework Policy within the framework

What Role for Entrepreneurship in Economic Development? Productive

Arbitrage Closing price gaps

Innovation New products and/or new methods of production

Unproductive Wealth transfers

Rent-seeking Predation

Theft

Austrian Conundrums of Their Own Making Universal nature of alertness

Is entrepreneurship something that can be cultivated? Is there a supply curve for entrepreneurship?

Extreme subjectivism Wealth creation is not about material progress, but utility

gains. Thus, what does it mean to discuss wealth creation as a goal of public policy?

Anti-equilibrium Since the preoccupation with equilibrium ignores change as

a consequence of formalism does that mean that all attempts to explain mechanism and processes that tend toward an equilibrium must be rejected as too mechanistic and not grounded in human action? Issue of context dependence

The Multifaceted Explanation for Development Economic/Financial

Economic Calculation Risk Assessment Financial intermediation

Political/Legal Constraining Predation

Rule of law Constitutionalism

Social/Cultural Liberalism

Individualism Egalitarianism in process not results