Economic Growth and Development Peter Boettke Econ 881/Spring 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  gains from trade theme Wealth is a consequence realizing mutually beneficial exchange

A Short History of Modern Development Economics 19 th Century Development Theory  Theory Why No Capitalism in China?  Underdeveloped World and the Developed World  Policy Trade and/or Colonialism 20 th Century Development Theory  Theory Socialist Industrial Planning  First, Second, Third World  Policy Economics of Backwardness  Keynesianism 21 st 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