perjantai 19. maaliskuuta 2010

Economic growth theories on focus

Economic growth theories on focus

In the global economy, there are at least a billion educated people out of the economic system. Most of them are young and they are living in Asia, Africa and Latin America. The current financial crisis in the US and EU will have extremely serious implications. The downsizing of jobs will further accelerate and billions of people are marginalized. The implication is that the trend cannot continue for ever without violating the institutional foundations of democratic nations and IIGOs[1], such as the UN or the WTO. Mobility, adaptability, and creativity are the best characteristics of school children all around the world. In our globe, there are at least one billion young, education people without jobs. The best resource is unused. There must be some systematic failure in the economic growth theories. Robert Solow from the MIT, the Nobel-prize winner, is the developer of the neoclassical or exogenous growth theory[2] that dominates public policies. In Solow’s model (Formula 1), the economic growth is caused by capital accumulation and autonomous technological change.

Y = F(K, L)


K = the capital stock and
L = the labor force

Formula 1: Solow’ model

Solow postulated that the production function displays constant returns to scale, so that doubling all inputs would double output. This kind of a simplifying assumption is the major weakness, since holding one input constant (labor) and doubling capital will yield less than double the amount of output. This is the law of diminishing marginal returns. Solow’s model is an example of the exogenous growth theories that are no more capable to explain the global economic growth. Solow received his main result through the residual analysis. Solow broke down changes in labor productivity into two parts: (1) increase in the amount of capital per unit of labor and (2) technological progress. Solow found that the technology progress has in western countries been the most important input factor allowing long-run growth in real wages and the standard of living. In his Nobel Prize lecture, Solow referred to the rivalry (or complementarities) as the catalyst of innovations. Solow highly appreciated Schumpeter’s thinking. Solow admitted in his lecture[3].

The new or endogenous growth theory was initiated by Paul Romer[4] who found that an economy’s increased openness use to raise domestic productivity, and hence must have a positive effect on the living standards of a nation. The new growth theory is based on the idea that the long-run growth is determined by economic incentives. These incentives created by the markets affect profoundly on the pace and direction of economic progress. In Romer's view, the global economy is not defined by scarcity and limits on growth. Instead, there are huge opportunities for new ideas to create wealth. The neoclassical theory of how to allocate scarce resources among alternative uses through price systems is not good enough. This was known since the 1950s, when Solow reported that technological changes accounted for about 80% of economic growth. An educated work force plays a special role in determining the rate of long-run growth. Still neoclassical economics dominates all around the world. Romer constructed a model in which he splitted the world into tow parts: physical objects and ideas. Physical objects are scarce and subject to the law of diminishing returns. They cannot drive economic growth as ideas.

Human beings possess a nearly infinite capacity to reconfigure physical objects. Humans can boost productivity, spawn new opportunities for profit, and ultimately drive economic growth. When humans do set to work in an unexplored area, important new discoveries will emerge. Mobility, adaptability, and creativity of school children all around the world need to be accounted that is the mission of the HopeEconomics. The key in the growth process is the market system, supported by the hybrid institutions like universities or R&D labs and by other informal networks like technology parks. Romer maintains that inventions are intentional and generate technological spillovers that lower the cost of future innovations. Schumpeter used the concept of innovation chain to describe the same. The new growth theory has become popular during the two last decades in the USA and, later, in newly industrialized countries like China and India that invest in innovations.

MNCs are as a group the winners of globalization[5]. Their role is to maintain the static efficiency in markets. They are actively renewing their structures. The HopeEconomics has much to do with the dynamics, relying on people networks as the Linux community. The hope economics provides the human agency of how to educate school children to cope and even win with globalization. Innovativeness, the scope economies, is the (only) positive strategy that people networks have for competition against the scale economies of MNCs. As Frank Knigth[6], we strongly believe that entrepreneurial profit resulting from an exercise of ultimate responsibility which in its very nature cannot be insured nor capitalized or salaried. Knight’s risk theory distinguishes between: the objective probability that an event will happen, and, the immeasurable unknown, such as the inability to predict the demand of a new product.

The HopeEconomics have huge expectations since 'true uncertainty’ is the contingency that school children have to tackle in all nations or continents. School children all around the world need entrepreneurship. A pessimistic view, arguing that, in the long run, economic growth is limited by progress in physics, biology, and engineering, rather than by incentives is impossible to accept since its means continous lost of jobs. Some writers, such as Tom Peters[7], have advanced Romer’s ideas. They believe that the global economy can solve or is obliged to solve many complex problems with collaboration over old barriers. This is the key notion in the HopeEeconomics.

[1]IIGO = International Inter-Governmental Organization
[2]Solow, Robert (2000) Growth Theory, An Exposition. Oxford, Oxford University Press.
[3]Solow, Robert (1987) Lecture to the memory of Alfred Nobel, December 8, 1987: Growth Theory and After.
[4] Romer, Paul (1989) Increasing Returns and New Developments in The Theory of Growth, University of Chicago, Chicago.
[5] It was Harvard’s professor Theodor Levitt who firstly discussed of the theme. His view is multionationals that operate in all continents, and in all markets (goods, sevices, financing, IPRs etc). Levitt, Theodore (1983) The Globalization of Markets, Harvard Business Review, May-June.
[6] Knigth, Frank (1920) Risk, Uncertainty, and Profit, Chicago, Universitiy of Chicago Press.
[7]Peters, Thomas (1990) Thriving on Chaos, Harper & Row, New York.

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