PART ONE: INTRODUCTORY COMMENTS
The long buggy article that follows was originally published as the 3rd installment in a long strung-out 8-article series on economic development that began in early April 2004 and ended in July of the same year. It's reprinted here on January 14, 2009 with some minor changes.
The chief reason for the reprint? Quite simply, to bring down to earth with lots of concrete examples some of the high-flying comments found in a buggy post published at the buggy site earlier this month --- to be specific, January 3rd, 2008 --- on the standard neo-classical theory of economic growth.
The Solow Model Rehearsed
You might look at prof bug's January 3rd, 2009 article on the subject.
It delves into the Solow theory and model from one angle. Here we'll confine ourselves to some introductory comments.
Introduced in the mid-1950s by Robert Solow of MIT. Solow eventually won a Nobel prize for this theory, which has been modified in a variety of ways that "augment" his original modeling of his theory. It has also spun off at least one major alternative theory.
Solow's model, you see, did lead to the conclusion that long-term economic development depended on constant technological progress, but it did not incorporate technology as a causal variable within his model's framework. Instead, technology acted as an "exogenous" variable that --- like manna from heaven --- would work its influence to save a country with abundant cumulative capital from an inevitable "steady-state of growth". This state would be caused by ever greater diminishing returns on cumulative capital, which --- interacting with a growing labor force (the only "endogenized" explanatory variable in the model) --- would mean that the rate of economic growth couldn't be increased in the future . . . unless --- well, unless technological innovations occurred to offset the steady-state.
The Challenge of the Romer Variant
The alternative model --- usually called endogenized economic growth --- was developed in the 1980s by Paul Romer. It directly incorporated technological progress as a key explanatory variable, alongside Solow's two variables of capital accumulation and the growth of the labor force. The exact differences --- including how Romer and his followers sought to find proxy measures of technology (such as R&D expenditures) --- don't need to bother us in the buggy argument that follows.
The same is true of the rejoinders offered by Solow and his followers: most notably, "augmenting" the original Solow model by adding qualitative improvements in the educational levels and workplace skills of the labor force. It's a change called human capital. And the claim of the Solow-inspired economists is that once it's instrumentally proxied --- say, by average years of education of the labor force (or the percentage of the total labor force with post high-school education) --- there's no need to "endogenize" techology itself as an explanatory variable, though somehow it still manages to save the economy from a descent into a state of steady-growth.
The Buggy View
For our purposes right now (January 15th, 2008), observe that the buggy analysis that unfolds here is something of a summary statement of what he argued in the first two bugged-out articles --- published back in 2004 --- about economic development. It seeks to distill the necessary changes that any country's policymakers need to undertake --- institutional, cultural, and policy-oriented --- if they hope to launch their country onto a growth-path of out of poverty and sustain it over the long-term, for decades or even generations, narrowing the gap with the rich countries in the process.
The summary will uncoil in a set of simple, straightforward theoretical propositions --- exactly four in all, each then clarified and illustrated with concrete examples. Grasp those four theoretical propositions and their implications, and you'll be well situated to make sense of why the world is divided into rich and poor countries, with fortunately several others rapidly growing and converging toward the levels of productivity and per capita income in the rich countries.
PART TWO: LONG-TERM SUSTAINED GROWTH REFINED THEORETICALLY: FOUR SUMMARY PROPOSITIONS