Discussion on the Motivations of Economic Growth

【摘要】At the latter part of the 19th century, Neoclassical Economics, with the representative of Alfred Marshall, advocates a neoclassical economic growth theory. In 1920, he...

Abstract.What factors have promoted the human economic to transform, from stagnation to substantial growth? Why there are great differences between the average incomes of all countries in the world? These questions have caused the economists to argue on the motivations of the economic growth. They have superlatively put forward ideas such as environmental determinism, system determinism, and human capital accumulation as well as cultural determinism and so on. Through summarizing and analyzing all kinds of methods and ways of thoughts, the authors hold the idea that economic growth is not the result of a single factor. It is the product of all kinds of factors and as well the process with the co-existence of gradual change and abrupt change.

Key words： Economic growth； growth motivations；environmental determinism； system；human capital

Economic growth is always a new topic that people talk about. Through summarizing and analyzing all kinds of methods and ways of thoughts, the authors hold the idea that economic growth is not the result of a single factor. It is the product of all kinds of factors and as well the process with the co-existence of gradual change and abrupt change. The reason only final consumer goods are included is that care must be taken to avoid double counting; the output of bread is included, but the output of wheat used to produce the bread is not. In this paper, the motivations on the economic growth are focused on. It hopes to have deeper understandings on the theories and offers references to the thoughts of the relevant problems.

1.From Classical Economists’ Thoughts on Economic Growth to the Theory of Endogenous Growth

Among the Classical Economists, Adam Smith pointed out in his work in 1776 that As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

At the latter part of the 19th century, Neoclassical Economics, with the representative of Alfred Marshall, advocates a neoclassical economic growth theory. In 1920, he thought that the work should gradually extend to a two-volume compilation on the whole of economic thought. It decisively shaped the teaching of economics in English-speaking countries. Its main technical contribution was a masterful analysis of the issues of elasticity, consumer surplus, increasing and diminishing returns, short and long terms, and marginal utility. Marginal Utility theorists had elaborated a theory of value based on the idea of maximizing utility, holding that value depends on demand. Marshall's work used both these approaches, but he focused more on costs. He noted that, in the short run, supply cannot be changed and market value depends mainly on demand. In an intermediate time period, production can be expanded by existing facilities, such as buildings and machinery; but since these do not require renewal within this intermediate period their costs have little influence on the sale price of the product. Marshall pointed out that it is the prime or variable costs, which constantly recur, that influence the sale price most in this period. In a still longer period, machines and buildings wear out and have to be replaced, so that the sale price of the product must be high enough to cover such replacement costs. This classification of costs into fixed and variable and the emphasis given to the element of time probably represent one of Marshall's chief contributions to economic theory. He was committed to partial equilibrium models over general equilibrium on the grounds that the inherently dynamical nature of economics made the former more practically useful.

The modern economic growth theory is founded on the basis of the HarrodDomar model. It is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. Harrod and Domar have separately set up the economic growth theory in 1946, which is the HarrodDomar model.

The neoclassical growth model, also known as the SolowSwan growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics. Neoclassical growth models attempt to explain long run economic growth by looking at productivity, capital accumulation, population growth and technological progress. In neoclassical growth models, the long-run rate of growth is exogenously determined in other words, it is determined outside of the model. A common prediction of these models is that economies will always converge towards a steady state rate of growth, which depends only on the rate of technological progress and the rate of labour force growth. Ramsey-Cass-Koopmans is built.

In the middle and later part of the 1980s, Increasing Returns and Long-Run Growth by Romer and on the economic development mechanism by Lucas have been the symbols. An economic theory which argues that economic growth is generated from within a system as a direct result of internal processes. More specifically, the theory notes that the enhancement of a nation's human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production. Endogenous Growth Theory has been formed.

2.Arguments on the Basic Factors that Promote Economic Growth

2.1.Environmental determinism

Environmental determinism, also known as climatic determinism or geographical determinism is the view that the physical environment sets limits on human environment. There are at least three parts of content, which are shown in the followings:

1)Climatic determinism is an aspect of economic geography, also sometimes called the equatorial paradox. According to this theory, a majority of the economic development of a country can be predicted from the distance between that country and the equator. In other words, the further from the equator the more developed a country tends to be.

2)The fundamental argument of the environmental determinists was that aspects of physical geography, particularly climate, influenced the psychological mind-set of individuals, which in turn defined the behaviour and culture of the society that those individuals formed. This is particular the case in agricultural production.

3)Because these environmental influences operate slowly on human biology, it was important to trace the migrations of groups to see what environmental conditions they had evolved under. The relationship between environmental influences and poorness has been stressed as well in the environmental determinism.

Key proponents of this notion have included Bloom, Caming and Sevilla（2003）, Przeworski（2003）. Although their work does make connections between environmental and climatic conditions and societal development, it is published with the stated intention of disproving racist and Eurocentric theories of development.

2.2.System determinism

System determinism considers system as the fundamental reason for the economic growth. Simon Kuznets held the ideas that in poor countries, economic growth increased the income disparity between rich and poor people. In wealthier countries, economic growth narrowed the difference. By noting patterns of income inequality in developed and underdeveloped countries, he proposed that as countries experienced economic growth, the income inequality first increases and then decreases. The reasoning was that in order to experience growth, countries had to shift from agricultural to industrial sectors. While there was little variation in the agricultural income, industrialization led to large differences in income. Additionally, as economies experienced growth, mass education provided greater opportunities which decreased the inequality and the lower income portion of the population gained political power to change governmental policies. He also discovered the patterns in savings-income behavior which launched the Life-Cycle-Permanent-Income Hypothesis of Modigliani and Friedman.

It confirms from the mathematical-model perspective Acemoglu's proposition that institution matters. It is found that economic growth cannot be achieved through increasing savings rate or capital input. Institution plays a significant role in affecting the economic performance of a country. As the most important factor of economic growth, institution bears a complicated non-linear relationship with economic growth rate. Also, the use of mathematical model has provided substantial evidence for empirically studying the non-linear relationship between institution and economic growth. His principal interests are political economy, development economics, economic growth, technology, income and wage inequality, human capital and training, and labour economics. His most recent works concentrate on the role of institutions in economic development and political economy.

In the argument of “system determinism”, it stresses the primitive geographical condition is to influence the economic performance through the system. It is the product of all kinds of factors and as well the process with the co-existence of gradual change and abrupt change. The reason only final consumer goods are included is that care must be taken to avoid double counting; the output of bread is included, but the output of wheat used to produce the bread is not. The environmental factors rank second. It should work through the system.

2.3.Human capital accumulation

The human capital thought originated from the explorations on human economic value from the economists. Human capital is the stock of competencies, knowledge and personality attributes embodied in the ability to perform labour so as to produce economic value. Human capital is vitally important for an organization's success; human capital increases through education and experience. Many early economic theories refer to it simply as workforce, one of three factors of production, and consider it to be a fungible resource -- homogeneous and easily interchangeable. Other conceptions of this labour dispense with these assumptions.

The concept of Human capital has relatively more importance in labour-surplus countries. These countries are naturally endowed with more of labour due to high birth rate under the given climatic conditions. The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource. This human resource can be transformed into Human capital with effective inputs of education, health and moral values. The transformation of raw human resource into highly productive human resource with these inputs is the process of human capital formation. The problem of scarcity of tangible capital in the labour surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in education and health sectors of their National economies. The tangible financial capital is an effective instrument of promoting economic growth of the nation. The intangible human capital, on the other hand, is an instrument of promoting comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable.

Unified growth theory was first advanced by Oded Galor. Later Galor and Weil（2000）, Galor and Moav（2002）, Doepke（2004）, Fernandez-Villaverde（2005） and Lagerlof（2006） have developed the theory. Unified growth theory was developed to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole. Endogenous growth theory was satisfied with accounting for empirical regularities in the growth process of developed economies over the last hundred years. As a consequence it was not able to explain the qualitatively different empirical regularities that characterized the growth process over longer time horizons in both developed and less developed economies. In the modern growth state technological progress does not encourage population growth but human capital accumulation instead which then further spurs technological progress. Unified growth theory suggests that the transition from stagnation to growth has been an inevitable by-product of the process of development. It argues that the inherent Malthusian interaction between the rate of technological progress and the size and composition of the population accelerated the pace of technological progress and ultimately raised the importance of education in coping with the rapidly changing technological environment. The rise in industrial demand for education brought about significant reductions in fertility rates. It enabled economies to divert a larger share of the gains from factor accumulation and technological progress to the enhancement of human capital formation and income per capita, paving the way for the emergence of sustained economic growth.

On the argument of “system determinism”, Glaeser et al.（2004）pointed out again that the theory further explores the dynamic interaction between human evolution and the process of economic development and advances the hypothesis that the forces of natural selection played a significant role in the evolution of the world economy from stagnation to growth.

2.4.Cultural determinism

On advocating cultural factors, the opinion sheds light on the divergence in income per capita across the globe during the past two centuries. It identifies the factors that have governed the transition from stagnation to growth and have thus contributed to the observed worldwide differences in economic development. It highlights the persistent effects that variations have had on the composition of values and preferences and believes across countries. Cultural factors have played an important role in creating the economic performance.

3.Viewpoint commentary

3.1.Economic growth is not the result of a single factor

Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product. Growth is usually calculated in real terms, like inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced.

3.2.Economic growth is the process with the co-existence of gradual change and abrupt change

Unified growth theory was first advanced by Oded Galor. Later Galor and Weil（2000）have developed the theory. Unified growth theory was developed to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole. Endogenous growth theory was satisfied with accounting for empirical regularities in the growth process of developed economies over the last hundred years. New lands would then be cleared and settled. Or a wave of immigrants might descend on the system. But adjustments to one-time exogenous causes are not at issue. Steady growth means a regular, normal pattern of expansion, and this will not result from a one-time exogenous shock.

3.3. Economic growth stresses on different points in different development phrases in different areas

A society that is successfully functioning in a condition of natural order does not one day start to swell up. In its natural condition it reproduces itself; it is stable and static. Nothing changes. An exceptional surplus will be put aside and stored against bad times- but saving or investment for growth is simply unknown. Steady growth is not possible in these conditions. Economic growth stresses on different points in different development phrases in different areas. Exogenous factors may lead to expansion, of course. Exceptionally good weather could lead to bountiful harvests over a number of years, resulting in a better diet, improved health, and a population increase.

4.References

[1]Acemoglu, D., Johnson, S., Robinson, J.A., “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”, Quarterly Journal of Economics, 2002, 117, 12311294.

[2]Acemoglu, D., Johnson, S., Robinson, J.A., "The Rise of Europe: Atlantic Trade, Institutional Change and Economic Growth", American Economic Review, 2005, 95(3), 546-579.

[3]Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S., Wacziarg, R., “Fractionalization”, Journal of Economic Growth, 2003, 8, 155194.

[4]Arrow, Kenneth J., “The Economic Implication of Learning by Doing”, Review of Economic Studies, 1962, 29, 155-173.

[5]Becker, Barro Robert, “A Reformulation of the Economic Theory of Fertility”, Quarterly Journal of Economics, 1988, 103, 1-25.