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5. Growth and Development

If growth economists will make an effort to overcome [their] fallacies, and break their guild’s stonewalling silence, then maybe we can have a productive dialog about whether or not what used to be economic growth has now become uneconomic growth, and what to do about it….

The elite-owned media, the corporate funded think tanks, the kept economists of high academia, and the World Bank—not to mention Goldman Sacks and Wall Street—all sing hymns to growth in harmony with class interest and greed. The public is bamboozled by technical obfuscation, and by the false promise that, thanks to growth, they too will one day be rich. The [i]ntellectual confusion is real….1Herman Daly, “A further critique of growth economics”, Ecological Economics 88 (2013), 20-24, http://www.elsevier.com/locate/ecolecon. Accessed May 26, 2019.

— Herman Daly, “A further critique of growth economics” (2013)

Today’s economists speak of “economic progress” and “economic development.” What do they mean?

Economic development is thought of as change that somehow improves the economic, political and social well-being of a community.

Economic growth is thought of differently, as a process by which a nation’s wealth increases over time.2The term ‘economic growth’ also is used in discussions of short-term economic performance (John L. Cornwall, “Economic Growth,” Encyclopædia Britannica, October 04, 2018, https://www.britannica.com/topic/economic-growth. Accessed April 27, 2019). Economic growth is usually measured by appealing to GDP or a similar quantity such as real GDP3Will Kenton, “Real Gross Domestic Product,” Investopedia, updated Mar 30, 2018, https://www.investopedia.com/terms/r/realgdp.asp. Accessed April 27, 2019., and GNP or GNI4GNI: Gross national income..

Questions arise. For instance, as presently conceived, are growth and development related? Part of the difficulty is that

[t]here is no universally accepted definition of … what constitutes the process of economic development. Developing countries are usually categorized by a per capita income criterion, and economic development is usually thought to occur as per capita incomes rise. … Although there are a number of problems of measurement of both the level of per capita income and its rate of growth, these two indicators are [thought to be] the best available to provide estimates of the level of economic well-being within a country and of its economic growth.5Anne O. Krueger and Hla Myint, “Economic development,” Encyclopædia Britannica, September 27, 2016, https://www.britannica.com/topic/economic-development. Accessed April 27, 2019.

As is well known, “per capita income” (an average) reveals little about how income is distributed. And so, while GDPs rise, about half of the world’s population lives in poverty.

A few excerpts from Mankiw’s introduction to growth theory shed light on the problem.

An economy’s output of goods and services—its GDP—depends on (1) its quantity of inputs, called the factors of production, and (2) its ability to turn inputs into output, as represented by the production function.6Mankiw, 8th, 49.

What are “factors of production”?

Factors of production are the inputs used to produce goods and services. The most important factors of production are capital and labor. Capital is the set of tools that workers use: the construction worker’s crane, the accountant’s calculator, and this author’s personal computer. Labor is the time people spend working. We use the symbol K to denote the amount of capital and the symbol L to denote the amount of labor.7Mankiw, 8th, 49.

The textbook then introduces the Cobb-Douglas production function:

α is a constant between zero and one that measures capital’s share of income. That is, α determines what share of income goes to capital and what share goes to labor. Cobb showed [by mathematical argument] that the function [with desired properties] is , where Α is a parameter greater than zero that measures the productivity of the available technology. This function became known as the Cobb−Douglas production function. Let’s take a closer look at some of the properties of this production function. First, the Cobb−Douglas production function has constant returns to scale. That is, if capital and labor are increased by the same proportion, then output increases by that proportion as well.8Mankiw, 8th, 59.

In later chapters, Mankiw’s textbook also introduces the Solow model of growth which includes an additional term  called “efficiency of labor.”9“The efficiency of labor is meant to reflect society’s knowledge about production methods: as the available technology improves, the efficiency of labor rises, and each hour of work contributes more to the production of goods and services. For instance, the efficiency of labor rose when assembly-line production transformed manufacturing in the early twentieth century, and it rose again when computerization was introduced in the late twentieth century. The efficiency of labor also rises when there are improvements in the health, education, or skills of the labor force” (Mankiw, 8th ed., 236). This yields a production function .10Mankiw, 8th ed., “Economic Growth I: Capital Accumulation and Population Growth,” in Part III, Growth Theory: Economy in the Very Long Run, ch. 8. In its original form, the Solow model is an ordinary differential equation with time dependence: Robert M. Solow, “A Contribution to the Theory of Economic Growth.” The Quarterly Journal of Economics, vol. 70, no. 1 (Feb., 1956): 65-94. The paper is available at http://piketty.pse.ens.fr/files/Solow1956.pdf, accessed April 14, 2019.  And, of course, more sophisticated models are in the literature.11There is, for instance, the Solow-Swan differential equation growth model. More sophisticated models are now part of the literature which include adjustments introduced by Mankiw, et al. Current literature continues the tradition of producing models remote from concrete situations. For this introductory series, entering into details of current models would not be appropriate. But there are fundamental problems that these models have in common, problems that present themselves in elementary contexts.

Consider, for instance, the expression “as represented by the production function.”12Mankiw, 8th ed., 49. From the beginning, discussion remains at several removes from actual economic events and occurrences. Notice, in particular, that the formula is in terms of averages (K, capital; and L, labor). However, the problem is not that they are statistical terms. Statistical analysis is a normal part of scientific development. The problem to which we invite your attention is that the terms  K (capital) and L (labor) are merely descriptive. Why “merely” descriptive? Just as in the circular-flow model, the Cobb-Douglas production model fails to distinguish basic and surplus flows13See section 3, “The Paint Industry and Beyond.”. That failure is carried forward into subsequent models and contemporary growth theory.

Work in economic development has been better at nudging economics toward understanding actual events:

[D]evelopment economics resembles economic history in that it seeks to explain the changes that occur in economic systems over time.14Mark Blaug, “Economics,” Encyclopædia Britannica, January 20, 2019, https://www.britannica.com/topic/economics/Fields-of-contemporary-economics. Accessed April 27, 2019.

However, the fundamental problem remains. In development economics, efforts to understand (and reform) are nuanced and reveal humanitarian concern. But, development economics is a branch of contemporary economics and, generally, results are framed in terms of current descriptive metrics15See note 5. There are, for instance, GDP, real GDP, GDP per capita, GNI per capita, Human Development Index, Happy Planet Index, Gini Index, Social Progress Index and Genuine Progress Indicator..

In the next section, we make a few elementary observations about economies as they are and how they change.

References   [ + ]

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