This article focuses on economic growth. It provides an analysis of the main theories of economic growth including neoclassical growth theory, new growth theory, and modern political growth theory. Economic growth trends in the U.S. economy and the global economy are discussed. The differences between economic growth and economic development are addressed.
Keywords Business Climate; Business Cycle; Competitiveness; Convergence; Developing Countries; Economic Development; Economic Growth; Extensive Economic Growth; Fiscal Policy; Global Economy; Globalization; Gross Domestic Product; Intensive Economic Growth; Modern Political Growth Theory; Monetary Policy; Neoclassical Growth Theory; New Growth Theory
Economics: Economic Growth
Economic growth, according to the World Bank, refers to the quantitative change or expansion in a country's economy. The economic growth of a nation is measured as the percentage increase in its gross domestic product during one year. Economic growth occurs in two distinct ways. Economic growth of a nation occurs when a nation grows extensively by using more physical, natural or human resources or intensively by using resources more efficiently or productively. Economic growth is generally considered to be either extensive or intensive in nature. Extensive economic growth refers to growth scenarios in which an increase in the gross domestic product is absorbed by a population increase without any increase in per capita income. Intensive economic growth refers to growth scenarios in which gross domestic product growth exceeds population growth creating a sustained rise in living standards as measured by real income per capita (Snowdon, 2006). According to the World Bank's approach to promoting and facilitating the economic growth of nations, intensive economic growth of nations requires economic development.
Economic growth is a focus of study and concern for economists, governments, and private sector development organizations. Economists are concerned with forecasting and measuring economic growth. Governments and private sector development organizations focus on forecasting and promoting economic growth of regions and nations. Economic growth is generally promoted through efforts to increase labor productivity. Labor productivity growth is crucial to the strength and growth of economies. Labor productivity is promoted in four main ways (Vanhoudt & Onorante, 2001):
- Expand the physical capital of workers through the purchase of better machines, tools, and infrastructure.
- Improve the knowledge capital of the workforce through education and training.
- Foster a new economy by introducing new technologies to improve the productivity of all workers.
- Strengthen relations between public and private sectors to facilitate the working of the labor market and limit economic distortions caused by taxes and passive labor market policies.
Economic growth is generally tracked and measured by national governments and non-governmental economic research organizations. For example, in the United States, the National Bureau of Economic Research (NBER), the United States's leading nonprofit economic research organization, determines and records dates for economic growth cycles and business cycles in the United States. The National Bureau of Economic Research published its first business cycle dates in 1929. The National Bureau of Economic Research has, since its establishment in 1920, worked in its capacity as a private, nonprofit, nonpartisan research organization to promote a better general understanding of the way the economy works. National Bureau of Economic Research associates, including 600 professors of economics and business, develop new statistical measurements, estimate quantitative models of economic behavior, assess the effects of public policies on the U.S. economy, and project the effects of alternative policy proposals. The National Bureau of Economic Research established itself as the predominant research organization on the topic of U.S. business cycles and economic growth tracking through the bureau's early research on the aggregate economy, business cycles, and long-term economic growth in the United States.
The following section provides an overview of the main theories of economic growth: Neoclassical growth theory, new growth theory, and modern political growth theory. This section provides the foundation for later discussion of economic growth trends in the U.S. economy and the global economy and the relationship between economic growth and economic development.
Theories of Economic Growth
Economic growth has been a focus of study by economists since the eighteenth century when Adam Smith published the "Wealth of Nations." Scholarly interest in economic growth reached its peak in the mid-twentieth century following World War II. Following World War II, economists and national governments worked to find the factors and variables that controlled post-war economic growth (Snowdon, 2006). Economic growth is considered by economists to be a natural result of market activity. Economists have long been interested in the relationship between income inequality and economic growth. Growth theories refer to the theories that explain the factors and relationships that promote the economic growth of nations. Economic growth theories incorporate variables representing the effects of production factors, public expenditure, and income distribution. The following factors influence the effect that income distribution has on growth: Investment indivisibilities, incentives, credit market imperfections, macroeconomic imperfections, macroeconomic volatility, political economy aspects, and social effects (Alfranca, 2003). In the history of economic growth theories, there are three main waves or theories of economic growth: Neoclassical growth theory, new growth theory, and modern political growth theory.
Neoclassical Growth Theory
The neoclassical growth theory, also referred to as the exogenous growth model, focuses on productivity growth. The neoclassical growth theory, promoted by economists Robert Solow and Trevor Swan, was the predominant economic growth theory from the nineteenth to mid-twentieth centuries. Exogenous growth refers to a change or variable that comes from outside the system. Technological progress and enhancement of a nation's human capital are the main factors influencing economic growth. Technology, increased human capital, savings, and capital accumulation are believed to promote technological development, more effective means of production, and economic growth. The neoclassical growth theory prioritizes the same factors and variables as neoclassical economics. The field of neoclassical economics emphasizes the belief that the market system will ensure a fair allocation of resources and income distribution. In addition, the market is believed to regulate demand and supply, allocation of production, and the optimization of social organization. Neoclassical economics, along with the neoclassical growth model, began in the nineteenth century in response to perceived weaknesses in classical economics (Brinkman, 2001).
There are numerous criticisms of neoclassical growth theory. Criticism of the neoclassical growth theory focuses on the long-run productivity limitation created from the theory’s exclusive focus on the addition of capital to a national economy. In addition, the neoclassical model predicts that different countries will have different levels of per capita income, depending on the variable factors which determine income levels. The range of income levels between countries shows the magnitude of international differences is actually vast and variable. The neoclassical model also predicts that an economy will reach its steady state, which is then determined by savings and population growth rates. Comparisons of the growth rates of rich and poor countries suggest that the neoclassical model does not successfully predict the rate of convergence of all countries as poor economies tend to grow more rapidly than rich economies (Mankiw, 1995).
New Growth Theory
New growth theory, also referred to as the endogenous growth theory, began in the 1980s as a response to criticism of the neoclassical growth theory. Endogenous growth refers to a change or variable that comes from inside and is based on the idea that economic growth is created and sustained from within a country rather than through trade or other contact from outside the system. The new growth theory identifies the main endogenous factors leading to sustained growth of output per capita including research and design, education, and human capital (Park, 2006). There are three main criticisms of new growth theories: First, the new growth theory is criticized for lack of conceptual clarity in its underlying assumptions. Second, the new growth theory is criticized for lack of empirical relevancy. Third, the new growth theory is criticized for claiming to be a wholly new theory when it's closely tied to growth theories that came before. Economists debate the significance of this last criticism. The new growth theory claims to represent a total break from neoclassical theory but the continued focus on technology (whether exogenous or endogenous technology) and its relationship to economic growth, connects the two main growth theories in significant ways (Brinkman, 2001).
Modern Political Growth Theory
The modern political growth theory focuses on the fundamental determinants of economic growth such as the quality of governance,...
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