In his book Mokyr discusses the sources of long-run economic growth across time and space. “The lever of riches” covers an enormous time period, ranging from the Antiquity to the modern era. Geographically, the author’s focus
In his book Mokyr discusses the sources of long-run economic growth across time and space. “The lever of riches” covers an enormous time period, ranging from the Antiquity to the modern era. Geographically, the author’s focus is mainly directed towards Europe and its periphery, and to a somewhat lesser extent North America and China.
In what follows I will not have time to cover all the different growth regimes that occurred in the two millennia stretching from the Antiquity to the Industrial Revolution and will leave that open for a future blog post. Instead, I will briefly outline the four different types of economic growth that can occur within an economy. Moreover, I will discuss in depth what Mokyr identifies as the source of long-run economic growth, that is, innovation and technological progress.
1. Solovian growth:
Named after Nobel prize winner Robert Solow who is famous for the so-called Solow growth model from 1956, one of the first formal models describing the process of long-term economic growth. The Solow framework shows that an economy can achieve transitory growth via capital accumulation. All else equal, an increase in the capital stock will make labor more productive and can thus lead to income gains. This process, however, is bound to run out of steam eventually as more and more capital gets accumulated. That is, of course, because additional units of capital are increasingly less productive, the concept of diminishing returns. As a sidenote one could mention that the Chinese economy adopted a growth model over the last few decades, which relied to a large extent on the accumulation of physical capital. One of the reasons for the current China slowdown is that the investment share of GDP is absurdly high and that additional increases in the capital stock simply don’t yield the same return (in terms of economic growth) as previously. The country thus has to switch towards a more consumption-based economy, but the adjustment process is painful in the short-run.
2. Smithian growth:
Based on Adam Smith’s “Wealth of Nations” in which he explains the concept of specialization of labor. The basic idea is that individuals are more productive if they specialize into one occupation and then trade with each other instead of producing a variety of goods at the household level. The argument equally holds on a bigger scale, that is between regions and even countries. Increased specialization in the production of goods combined with gains from trade are thus an alternative source of economic growth. Smithian growth is, of course, only possible if a critical mass of population is reached so that increased specialization can actually occur.
3. Size/scale effects:
The scale effect is all about how population size can lead to economic growth. There are, in fact, several mechanisms through which increased urbanization, for example, can boost productivity. First, there are very good reasons that there are various externalities associated with the emergence of cities. People are more productive in cities because productivity is to a big extent dependent on the people who are around us.
Furthermore, it makes sense to spread out the fixed cost of infrastructure investments over as many individuals as possible. It is self-evident that certain types of infrastructure investments, no matter how growth enhancing, only pass a cost/benefit test at a certain population size.
4. Schumpeterian growth:
Schumpeterian growth relies on technological progress as a source of income gains. Innovations to the production process can for example increase efficiency, i.e. firms can adopt new technologies to produce the same amount of output with fewer inputs (of labor, energy, or capital). But advances in sciences and technologies are, of course, not only limited to increasing the efficiency of current production. Some innovations create entirely new products, some of them so pathbreaking that they potentially might have huge effects on the larger macroeconomy. This type of growth based on technological change is named after Joseph Schumpeter, the Austrian economist who proposed the concept of “creative destruction”, the process in which new production units replace outdated ones. Firms with new technologies or just better production methods drive uncompetitive firms out of business over time. The de