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The Economics of Growth Hardcover – Dec 19 2008
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A central puzzle of growth theory is to account for sustained productivity increase in the face of diminishing returns. Aghion and Howitt describe, with great clarity and verve, the main explanations that growth theory has proposed: from denial of the reality of diminishing returns to capital to Schumpeterian creative destruction, with intervening stops for exogenous and endogenous technological progress. An industrious reader can end up poised at the current analytical frontier, prepared to think about open questions and new issues.(Robert Solow, Department of Economics, MIT)
This text is both a clear and a concise survey of several approaches in the study of economic growth and an excellent introduction to the authors' impressive extensions of the Schumpeterian approach to market innovation and innovation policy.(Edmund S. Phelps, Director, Center on Capitalism and Society, Columbia University, and Winner of the 2006 Nobel Prize in Economics)
About the Author
Philippe Aghion is Robert C. Waggoner Professor of Economics at Harvard University. Peter Howitt is Lyn Crost Professor of Social Sciences at Brown University. Aghion and Howitt are the authors of Endogenous Growth Theory (MIT Press, 1997).
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At the beginning the four growth models are presented. The Solow model of growth theory explains stable growth equilibrium, but cannot explain the growth of the model, as all factors of production (labor and capital) to be paid and the innovation are no longer remunerated. This may explain the AK model. Here growth is explained by the model, but it cannot explain the convergence of countries. The other two models show that innovation and product variation lead to better results. The Schumpeterianische growth model is the best model which is consistent with the practice. In the second part the technical requirements and levels are described for growth. How to finance influences growth and the Club theory is explained. It explains the direction of growth and convergence. What factors bring the countries together at the various levels of the growth process and which hinders an approximation. The strength of the book lies in the discovery of the relationship between competition, innovation, growth and regulation.
The third part looks at the economic policies and apply the theory to different aspects. Education policy is shown. As institutions on growth and international trade and environmental policy are explained and theorized.
The reader requires a certain macroeconomic basic knowledge and theory is very demanding. But also easy to understand in the conclusions.
-- Acemoglu, "Introduction to Modern Economic Growth" (2009)
-- Aghion and Howitt, "The Economics of Growth" (2009)
-- Weil, "Economic Growth" (2nd ed., 2009)
As a Ph.D. economist who has resided and worked for the past thirty years in low-income areas of several continents, in countries of which the wealthiest was Egypt, "Economic Growth" is a daily interest. How does the enterprise sector relate to what attracts our attention to low-income countries in the first place: hunger, physical insecurity, abusive social relations? Does it pass these problems by, or does it alleviate them? Should interested outsiders care about "the economy" and if so what should they do? Or should they concentrate on relief, or on political reform?
This review of the three texts listed above looks at them from the point of view of their usefulness in relation to this particular interest.
Although Weil's undergraduate text stays away from the mathematics that dominate the other two, all three books are quite similar in that each is an encyclopedic exposition of models of aggregate growth, along with numerous factors that have been suggested to affect it. None is a monograph that states and defends a thesis. They all prepare a student to grapple with problems in the hope that the students will solve them.
Perhaps that is the fate of a textbook: anything more assertive would be commercially limiting.
Nonetheless, the result is a certain defensiveness. The task of the two graduate texts in particular seems to be to demonstrate that, if observation of low-income countries or of growth should give rise to an idea, then the economics profession can model it.
This is not to say that the authors haven't had ideas. But none of these texts is a handbook of things to be done: how to create economic growth or improve its quality. The implication, unfortunately, is that the authors don't have that toolkit to offer. (The graduate texts are, however, handbooks on how to model.)
The reader will learn quite a bit about the world from Weil's book, which is more descriptive than the other two. Aghion and Howitt's is immensely learned, but Acemoglu's book stands out in a couple ways. First, it is the only one to cross the line and become an applied mathematics textbook pure and simple. Secondly, however, its great length affords space for an "Epilogue," an explicit outlier that contains some non-mathematical statements. And it's here where I can pin-point what seems to me to be the underlying methodological limitation.
Acemoglu says about Chinese history, on page 867 (!): "When prospects for economic growth conflicted with political stability, the elite opted for maintaining stability, even if this came at the expense of potential economic growth. Thus China tightly controlled ... ."
Let me state the principle that is illustrated here but that Acemoglu has perhaps overlooked: Things don't happen for causes. Things happen because people do them.
If things happened for causes, then we might indeed model cause and effect -- and probably conclude that that's all we could do.
But all the models and history are after the fact. If the fact were different, we'd be modeling that instead. And it always might have been different. China's history, in point of fact, finally did read: "Even though the measures required for economic growth conflicted with political stability, the elite found a way to take the measures and preserve political structures, resulting in massive benefits that ultimately were both economic and political." China's elite might very well have done this at any time; it's not for us to say that they couldn't have.
Acemoglu also overlooked this principle of action in the section on pp. 868-70 about Western Europe's growth after 1800. He says that two things were different in the pre-1800 period: no systematic investment in human capital, and the presence of "authoritarian" political regimes. But he then ignores investment in human capital in his story of the post-1800 period.
This is a fatal error. People make the political institutions what they are, make the families what they are, and make the firms what they are. "Things happen because people do them."
People who bring about change do not drop from outer space; they "distill their frenzy" from somewhere, and it's usually from an intellectual outlook they encountered in schools and universities.
If we hope low-income countries' enterprises will become more world class, their owners and managers must have this as their vision. If we hope that international standards of human rights will prevail, then social leaders must have that as their vision. And if we hope that Total Factor Productivity will rise in low-income countries, it is people who will make that happen.
It is actually a bit odd that all three texts should tell the basic story whose thread runs through savings, capital accumulation, TFP, and innovation without tackling what Acemoglu calls (p. 873) "the industrial organization of innovation." I give Acemoglu credit for this excellent term.
Surely the industrial organization of innovation would include universities investing in human capital, but perhaps this kind of investment will have to have happened more widely in low-income countries before it's modeled.
I conclude by reiterating that each of these three texts is encyclopedic and extremely impressive.
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