1. On the Mechanics of Economic Development: Marshall Lectures 1985 Robert E. Lucas, Jr. (presented by Chi-Wa Yuen)

2. Objective To construct (dynamic) “theories” that can be calibrated/simulated to exhibit mechanics (macro behavior) resembling their real-world counterpart in order to tackle the problem of economic development—i.e., the observed diversity in levels and growth rates of per-capita incomes across countries and across time, given no necessary correlation between income levels and income growth.

3. Main result #1 3 models are considered in the paper. The 1 st, neoclassical (Solow) growth model is useful in differentiating between level effects and growth effects and in quantifying them. But it fails to generate sustained growth—due to the law of diminishing returns—in the absence of exogenous technical progress  growth is left “unexplained.” It also produces a counter-factual “egalitarian” or “convergence” implication, esp. in the face of international capital and/or labor mobility.

4. Main result #2 The 2 nd, closed-economy human-capital-based (endogenous) growth model—where human capital is accumulated thru schooling—is capable of – fitting postwar US data just as well as the Solow model; – generating persistent growth; and – “explaining” cross-country differences in levels of income and of real wages (in terms of HC externalities), even in the presence of international factor mobility. Given the fundamentals, however, it fails to explain cross-country differences in income growth rates.

5. Main result #3 The 3 rd, open-economy human-capital-based (endogenous) growth model—where human capital is accumulated thru an external learning- by-doing effect—is capable of generating (but not truly explaining) cross-country diversity in income growth. This result is obviously driven by the assumptions of homothetic preferences (hence, unititary income-elasticities) over a fixed set of goods, and fixed learning rates (hence, static comparative advantage).

6. Cities and growth Results #2 and #3 draw heavily on the importance of an unobservable external effect—i.e., HC externalities or knowledge spillovers (which imply inefficiency of market equilibrium outcomes). Use Jane Jacobs’ observations from cities to provide indirect evidence on such effects.

7. Omissions and possible extensions Far too many, as with any first contribution. Why capital does flow from rich to poor countries. Population issues—the role of fertility, mortality, and demographic transition (tradeoff between quantity and quality of children), as well as international and rural-urban migration. Growth miracles —catch-up growth. Industrial revolution—preconditions for what- used-to-be stagnant economies to take off.

8. Other extensions Technical progress—R&D, invention/ innovation, imitation, creative destruction, … Product quality and variety; product cycles. Income distribution (under heterogeneous population). The environment and sustainable development. Structures of private property rights, markets, organizations, and institutions. Regulatory, industrial, and macro policies.