EC104 (World Economy History and Theory) – Reading List 1
Introduction: Tools for Quantitative Economic History
Baten, J. (2016). A History of the Global Economy: 1500 to the Present, Chapter I9: Institutional development in world
economic history. pp. 310-315.
A. Growth: sources and development
1. Production function: 𝑂 = 𝐹(𝐾, 𝐿, 𝑅)! + 𝐴 + 𝑃
O: output
K (capital), L (labour), R (natural resources): primary factors of prod°
e: efficiency (with which the primary factors are used to transform intermediate inputs into final goods and services)
A: net income (from K investments) // net factor income (from L abroad)
P: negative (colonial expropriation) // positive (transfers and development aids)
2. Sources of GPD:
1. Discovery and exploitation of natural resources: K acc° – OR: not sustainable unless the revenues are transformed into
more durable sources of growth
2. Effort: work (hours and discipline) ®growth
3. Saving and accumulating capital: savings ®invest these ®L productivity
4. Investing in human capital: education // health ®L productivity
5. Theft: appropriation of resources from other societies ®K accu° – OR: need to be reinvested for sustainable effects
6. Efficiency (use of K, L, intermediate inputs): right combinations of K and L, country specialisation structural change (ex.
shifting resources to more dynamic sectors ®positivity)
7. Economies of scale: scale of prod° // prod° variety ®¯prod° cost
8. Technological change: knowledge ®productivity //prod°
3. Sources of growth and development:
1. Proximate sources (refers to directly measurable sources of growth of GDP (above):
- important source ® disembodied technological change: tech knowledge concerning products and prod° processes (ex.
machinery, forms of organisation…) ®transferred through educat° ®virtuous circle
- include behaviour of economic actors (ex. saving and K acc°, I in human K) ®changes in immediate sources of growth
® OR: Dani Rodrik in “Growth Strategies” (2003): K acc° and efficiency in the use of resources = endogenous ® causality =
may run backwards (from growth to acc° and prod°)
2. Intermediate sources:
- 3 factors: domestic and international demand trend (1), economic, social and technology policies (ex. industrial
interventions, social protection…) (2), changes in terms of trade (3)
- D. Acemoglu, S. Johnson, J. A. Robinson in “The Colonial Origins of Comparative Development” (2001): policy =
endogenous (variable explained by the balance of power between classes (elites and masses) ® economy influenced by
interests and power structures
3. Ultimate sources (see below)
4. Socio-economic outcomes (see below):
- outcomes = what matters in development (ex. growth // = living conditions ® no development)
- necessary condition: long-run of productive capacity ® degree of transfor° into social outcomes (depends on the nature
of social and economic policy (intermediate causality)
- Figure Causality: circular at all levels (ex. health and educat° (social outcomes) ®L quality inputs (proximate causality)
// longer-run in changes in absorptive capacity (ultimate causality)
4. Ultimate sources of growth and development:
1. Geographic locat°: climate and natural resources ®exploitable? ®determine rich and poor countries
2. Demographic conditions and trends
3. History of political centralisat°, state format° and external dominat°
4. Dynamics of class relationships (balance of power between elites and mass pop°)
5. Culture and values: cultural and religious evol° ® values affecting economic behaviour (ex. attitude towards work and
effort, saving risk, entrepreneurship…)
6. Inst° evol° ® incentive for eco behaviour: political (ex. maintenance of law…), economic (ex. private and intellectual
property rights, central planning…), L market and social protect° inst°
7. Int. order developments (ex. changing international trades regimes)
8. Long-run developments in science and technology (distance to the technological frontier)
,EC104 (World Economy History and Theory) – Reading List 2
10. Absorptive capacities and evol° of tech and social capacities: extent to which a country and its firms can benefit form
international knowledge flows
B. Classical thinking: growth, development and stagnation
1. Adam Smith in “The wealth of Nations” (1961):
- needs for economic development: free trade and competition (ex. attacks Royal and Guilds monopolies) ® free
individuals in pursuing their own interests // L division (in product° process) ® specialisat° ®productivity ®scale of
prod° ®“invisible hand” promotes collective welfare
2. Classical economists (Ricardo, Malthus, Mill):
a. Institutional explanation of eco growth: free-market and “laissez-faire” policies (government = no role in the economic
process) ®tendency in exchange and trade ®efforts ®growth // overall prosperity
- more emphasis than Smith on: K acc°, stock of K goods used in the prod° process and international trade
b. Ricardo in “Principles of Political Economy and Taxation” (1817):
- law of comparative advantage: countries entering into international trade will profit from such trade if they concentrate
on the production of those products in which they are relatively most efficient (the greatest superiority or the less
inferiority)
- fear = eco. dev. stagnation in the long run (agriculture workers ®¯soils fertility ®¯returns ®food price wage costs
®¯investments ®stagnation) ®solution: abolishing tariffs on food imports and keep its prices from rising
3. Friedrich List in “The national system of political economy” (1840):
- infant industry argument: temporary protectionism in order protect young activities from foreign competition
(competitive because having already accumulated more experiences and reduced costs) ® free trade = perpetuation of
dominant nations who developed their industries first ® needs: protectionism (ex. customs duties) ® domestic
industries competitiveness
4. Classical sociologists (Spencer, Tönnies, Durkheim):
a. Herbert Spencer in “The right to ignore the State” (1851):
- societies adapts to changing environmental conditions: individual choices and actions ® social evolution (process of size,
differentiation, interaction and integration) ® market competition: survival of the most efficient ®welfare
b. Ferdinand Tönnies in “The Community and Society” (1887):
- modernisation: communal social patterns (Gemeinschaft) ®individualistic, specialised and impersonal relationships
(Gesellschaft) ®destruct° off traditional behaviours ® society division in multiple patterns
c. Emile Durkheim in “Le Suicide” (1897):
- social effects of economics transf°: traditional societies (mechanical solidarity: well-integrated local communities rather
isolated from each other) ®L division ® anomie: social norms erosions leading to negative society behaviours (ex.
suicide) ®modern societies (organic solidarity: extended networks of interdepence ad exchange between individuals
performing specialised actions)
5. Karl Marx in “Das Kapital’ (1867):
1. Capitalism birthday: substructure (developments in the economic sphere of society) ® determines superstructure
(culture, religion, politics and law) and its performance
- capitalism essence: prod° for profit and reinvestment rather than prod° for the satisfaction of human needs (®K acc° ¹
harmonious process leading to collective welfare)
2. Capitalism inevitable self-destruction: capitalists richness ® K acc° ®modernized prod° ®K utilisation (dead L)
//¯L (living K) ®productivity ® // L poverty ®L competit° ®¯wages ®”industrial reserve army” ®¯goods
consumpt° ®overproduct° crises®proletarian revolut°
6. Theories of Imperialism:
- Karl Marx: socialist revolut° will only take place in the most advanced capitalist countries ® false = communist revolut° in
agrarian societies (ex. Tsarist Russia, China, Cuba) ® New theorists (ex. Lenin): reason = W. World transferred its internal
contradiction to colonised and exploited developing countries
,EC104 (World Economy History and Theory) – Reading List 3
7. Max Weber and Joseph Schumpeter:
a. Max Weber in “The Protestant Ethic and the Spirit of Capitalism (1905:
1. capitalism birthday: Protestantism favoured eco. dev. ® disciplined work and sobriety in consumption religiously
motivated (prod° = serving God’s project) ®saving ®K acc°
2. Profit motive: common to all times (cannot differentiate capitalism) ® dev. of capitalism = long-run social trend of
rational° and bureaucrat° in W. societies
- new in capitalism: rational org° of prod° (ex. accounting methods) // bureaucrat° (used by governments and firms)
®exploit° of human capabilities to organisational goals ®sustained profitability
3. State format°: ultimate source of growth and dev.:centralisat°, stabilisat°,standardisat° (rules and regulations)
®safe of trade (rational assessment of costs and benefits of long-term invest. possible) ®market improvement
b. J. A. Schumpeter in “Capitalism, Socialism and Democracy” (1942):
1. Capitalism: economic system both destructive and dynamic (but would not be destroyed by its own inefficiencies)
characterized by a “gale of creative destruct°” (old production techniques becoming obsolescent ®destroyed ®replaced
by modern ones)
2. Tech. importance: long cycles of eco. growth driven by major tech. breakthroughs (ex. new forms of org°, new prod°
tech, markets and sources of raw materials)
J. A. Schumpeter in “Business Cycles?” (1939):
Capitalism = undermined by its successes: innov° process routinized ®role of entrepreneur taken over by research
laboratories of monopolistic enterprises ® creative dest° prevents political support for capitalist instit° ®socialist system
C. Internal/External approaches:
1. dualism: existence side by side of a modern sector (tech. developed, commercialised, in or around urban centres
®outside oriented) and traditional sector (traditional tech, prod° for own consumption, rural)
2. internal approaches: factors within a society which promote or hinder its development
- Boeke in “Indonesian Economics” (1961): lack of trad. sector dev. in Indonesia = characteristics of oriental culture
(individual economic incentives are not operative) ® needs limited // social needs > individual needs
3. external approaches: negative external influences from advanced economies ® dualistic structure ® situat° in
developing countries
D. Economic backwardness ® explanations:
1. Rostow in “The Stages of Economic Growth” (1960):
- theory of the stages of economic growth (same. for every society): traditional society (1) ® preconditions to take-off (2)
® take-off (3) ® “drive to maturity” (4) ® mass consumption society (5) = some have taken the lead and others lag behind
1. trad. society: people = mercy of external forces of nature (patterns of though) ® tech. prod° = static
2. precondit°: external threats ® undermined stability of trad. society ® idea = people can improve their living condit° by
their own efforts ®productivity in a non-industrial sector (ex. mining) ®surplus above subsistence //agri. prod°
®invest. in indust. sector (ex. railways, canals) //modernising elites striving for industrialisat° ®creation: industrial goods
market
3. take-off stage: loans // entrepreneurship ®invest (indus. sector) ®sustained growth ® economy structure changes
drastically (20 years)
4. “drive to maturity”: new prod° techniques ® spread from leading sectors to the entire society
5. “mass cons°”: opportunities of cons° ®whole pop° benefits
2. Kuznets in “Economic Growth and Structure” (1965)
a. Rostow criticism:
1. stage of growth: impossible to distinguish empirically (no “take-off” = changes in investment and growth rate ® gradual)
, EC104 (World Economy History and Theory) – Reading List 4
2. every society does not follow the same path of dev. (ex. big difference = whether a country is an early or late
industrialiser, whether indust° takes place in a large country with a large domestic market or in a small domestic market)
3. stages of development = wrong ® countries can move backward
b. Indust° ® importance in dev.:
- “changes in the structure of prod°”: main characteristics of modern eco. dev.
- cond° of indust° = productivity in indust. sectors (ex. mining), sufficient supply of L,K, entrepreneurship and demand
c. Kuznets in “Economic Growth and Income Inequality (1955):
- indust° and urbanisat° ®income inequalities = why? ® urban/industrial incomes and inequalities > rural incomes and
inequalities ® OR: income distribution become more equal (demography, democratisat°, trade unions and political
pressure groups)
3. Neoclassical theories of growth:
- Neoclassical theories of growth: analyse the relationships between input growth (K,L, land, tech.) and output growth in
the form of mathematical models of growth
- OR: focus on proximate sources ® does not take into account = social mechanisms and institutions
a. Robert M. Solow in “A Contribution to the Theory of Economic Growth” (1956):
Uses Cobb-Douglas function: 𝑂 = 𝐴𝐾 " 𝐿#$"
a and 1-a: elasticity of output to K and L
O: Output
A: Tech. change (exogenous factor)
K: Capital (physical)
L: Labour
Solow Model:
1. importance = efficient allocat° of factors of prod° in eco. dev. processes (K and L can be substituted) (ex. L cheap and
abundant ® labour-intensive forms of prod°)
2. profit-maximising behaviour (ex.K and L use as long as their marginal costs < marginal returns) ® free markets, perfect
competit° and informat° ® equalisat° of marginal costs and marginal returns and to constant returns to scale (ex. K and L
x2 ® output x2)
3.L = depends of pop° // K stock = depends of savings rate // share of savings in national income = constant
® Steady state mechanism: L savings ®K per worker ®L productivity // ¯returns ®¯marginal returns to capital ®¯L
productivity increase rate ® developed economy = steady state ® cached up by developing countries (if neoclassical free-
markets and regulation are in place)
- OR: empirical analysis ®inequalities between rich and poor countries
4. Growth accounting:
- growth accounting: empirical measurement and quantificat° of different proximate sources of growth contribut° by taking
the neoclassical prod° funct° framework as an initial point of departure
- distinction: inputs (K and L quantity and quality) // outputs per unit of input ® big growth part cannot be accounted
by inputs (even after 4djusted by education and quality)
- total factor productivity (output per unit of input): explained by various factors (ex. structural shifts from low to high-
productivity sectors, tech. change)
5. New growth theory (since 1980s):
- X old theories: technological change ¹ exogenous (“came from heaven”) but endogenous (result of: human K invest.
®R&D ®knowledge)
1. Paul Romer in “Increasing Returns and Long Run Growth” (1986):
- strong correlation between: acc° of fixed K rate and rate of growth
a. growth ® explains rate of invest = prod° // demand ®equipment use ®close to saturation ®new equipment
purchased by companies when their production capacity approaching saturation
b. invest ® explains growth = fixed K ®prod°
2. Robert Lucas:
- human K investments ®innovations ®returns to scale ®long-term growth
Introduction: Tools for Quantitative Economic History
Baten, J. (2016). A History of the Global Economy: 1500 to the Present, Chapter I9: Institutional development in world
economic history. pp. 310-315.
A. Growth: sources and development
1. Production function: 𝑂 = 𝐹(𝐾, 𝐿, 𝑅)! + 𝐴 + 𝑃
O: output
K (capital), L (labour), R (natural resources): primary factors of prod°
e: efficiency (with which the primary factors are used to transform intermediate inputs into final goods and services)
A: net income (from K investments) // net factor income (from L abroad)
P: negative (colonial expropriation) // positive (transfers and development aids)
2. Sources of GPD:
1. Discovery and exploitation of natural resources: K acc° – OR: not sustainable unless the revenues are transformed into
more durable sources of growth
2. Effort: work (hours and discipline) ®growth
3. Saving and accumulating capital: savings ®invest these ®L productivity
4. Investing in human capital: education // health ®L productivity
5. Theft: appropriation of resources from other societies ®K accu° – OR: need to be reinvested for sustainable effects
6. Efficiency (use of K, L, intermediate inputs): right combinations of K and L, country specialisation structural change (ex.
shifting resources to more dynamic sectors ®positivity)
7. Economies of scale: scale of prod° // prod° variety ®¯prod° cost
8. Technological change: knowledge ®productivity //prod°
3. Sources of growth and development:
1. Proximate sources (refers to directly measurable sources of growth of GDP (above):
- important source ® disembodied technological change: tech knowledge concerning products and prod° processes (ex.
machinery, forms of organisation…) ®transferred through educat° ®virtuous circle
- include behaviour of economic actors (ex. saving and K acc°, I in human K) ®changes in immediate sources of growth
® OR: Dani Rodrik in “Growth Strategies” (2003): K acc° and efficiency in the use of resources = endogenous ® causality =
may run backwards (from growth to acc° and prod°)
2. Intermediate sources:
- 3 factors: domestic and international demand trend (1), economic, social and technology policies (ex. industrial
interventions, social protection…) (2), changes in terms of trade (3)
- D. Acemoglu, S. Johnson, J. A. Robinson in “The Colonial Origins of Comparative Development” (2001): policy =
endogenous (variable explained by the balance of power between classes (elites and masses) ® economy influenced by
interests and power structures
3. Ultimate sources (see below)
4. Socio-economic outcomes (see below):
- outcomes = what matters in development (ex. growth // = living conditions ® no development)
- necessary condition: long-run of productive capacity ® degree of transfor° into social outcomes (depends on the nature
of social and economic policy (intermediate causality)
- Figure Causality: circular at all levels (ex. health and educat° (social outcomes) ®L quality inputs (proximate causality)
// longer-run in changes in absorptive capacity (ultimate causality)
4. Ultimate sources of growth and development:
1. Geographic locat°: climate and natural resources ®exploitable? ®determine rich and poor countries
2. Demographic conditions and trends
3. History of political centralisat°, state format° and external dominat°
4. Dynamics of class relationships (balance of power between elites and mass pop°)
5. Culture and values: cultural and religious evol° ® values affecting economic behaviour (ex. attitude towards work and
effort, saving risk, entrepreneurship…)
6. Inst° evol° ® incentive for eco behaviour: political (ex. maintenance of law…), economic (ex. private and intellectual
property rights, central planning…), L market and social protect° inst°
7. Int. order developments (ex. changing international trades regimes)
8. Long-run developments in science and technology (distance to the technological frontier)
,EC104 (World Economy History and Theory) – Reading List 2
10. Absorptive capacities and evol° of tech and social capacities: extent to which a country and its firms can benefit form
international knowledge flows
B. Classical thinking: growth, development and stagnation
1. Adam Smith in “The wealth of Nations” (1961):
- needs for economic development: free trade and competition (ex. attacks Royal and Guilds monopolies) ® free
individuals in pursuing their own interests // L division (in product° process) ® specialisat° ®productivity ®scale of
prod° ®“invisible hand” promotes collective welfare
2. Classical economists (Ricardo, Malthus, Mill):
a. Institutional explanation of eco growth: free-market and “laissez-faire” policies (government = no role in the economic
process) ®tendency in exchange and trade ®efforts ®growth // overall prosperity
- more emphasis than Smith on: K acc°, stock of K goods used in the prod° process and international trade
b. Ricardo in “Principles of Political Economy and Taxation” (1817):
- law of comparative advantage: countries entering into international trade will profit from such trade if they concentrate
on the production of those products in which they are relatively most efficient (the greatest superiority or the less
inferiority)
- fear = eco. dev. stagnation in the long run (agriculture workers ®¯soils fertility ®¯returns ®food price wage costs
®¯investments ®stagnation) ®solution: abolishing tariffs on food imports and keep its prices from rising
3. Friedrich List in “The national system of political economy” (1840):
- infant industry argument: temporary protectionism in order protect young activities from foreign competition
(competitive because having already accumulated more experiences and reduced costs) ® free trade = perpetuation of
dominant nations who developed their industries first ® needs: protectionism (ex. customs duties) ® domestic
industries competitiveness
4. Classical sociologists (Spencer, Tönnies, Durkheim):
a. Herbert Spencer in “The right to ignore the State” (1851):
- societies adapts to changing environmental conditions: individual choices and actions ® social evolution (process of size,
differentiation, interaction and integration) ® market competition: survival of the most efficient ®welfare
b. Ferdinand Tönnies in “The Community and Society” (1887):
- modernisation: communal social patterns (Gemeinschaft) ®individualistic, specialised and impersonal relationships
(Gesellschaft) ®destruct° off traditional behaviours ® society division in multiple patterns
c. Emile Durkheim in “Le Suicide” (1897):
- social effects of economics transf°: traditional societies (mechanical solidarity: well-integrated local communities rather
isolated from each other) ®L division ® anomie: social norms erosions leading to negative society behaviours (ex.
suicide) ®modern societies (organic solidarity: extended networks of interdepence ad exchange between individuals
performing specialised actions)
5. Karl Marx in “Das Kapital’ (1867):
1. Capitalism birthday: substructure (developments in the economic sphere of society) ® determines superstructure
(culture, religion, politics and law) and its performance
- capitalism essence: prod° for profit and reinvestment rather than prod° for the satisfaction of human needs (®K acc° ¹
harmonious process leading to collective welfare)
2. Capitalism inevitable self-destruction: capitalists richness ® K acc° ®modernized prod° ®K utilisation (dead L)
//¯L (living K) ®productivity ® // L poverty ®L competit° ®¯wages ®”industrial reserve army” ®¯goods
consumpt° ®overproduct° crises®proletarian revolut°
6. Theories of Imperialism:
- Karl Marx: socialist revolut° will only take place in the most advanced capitalist countries ® false = communist revolut° in
agrarian societies (ex. Tsarist Russia, China, Cuba) ® New theorists (ex. Lenin): reason = W. World transferred its internal
contradiction to colonised and exploited developing countries
,EC104 (World Economy History and Theory) – Reading List 3
7. Max Weber and Joseph Schumpeter:
a. Max Weber in “The Protestant Ethic and the Spirit of Capitalism (1905:
1. capitalism birthday: Protestantism favoured eco. dev. ® disciplined work and sobriety in consumption religiously
motivated (prod° = serving God’s project) ®saving ®K acc°
2. Profit motive: common to all times (cannot differentiate capitalism) ® dev. of capitalism = long-run social trend of
rational° and bureaucrat° in W. societies
- new in capitalism: rational org° of prod° (ex. accounting methods) // bureaucrat° (used by governments and firms)
®exploit° of human capabilities to organisational goals ®sustained profitability
3. State format°: ultimate source of growth and dev.:centralisat°, stabilisat°,standardisat° (rules and regulations)
®safe of trade (rational assessment of costs and benefits of long-term invest. possible) ®market improvement
b. J. A. Schumpeter in “Capitalism, Socialism and Democracy” (1942):
1. Capitalism: economic system both destructive and dynamic (but would not be destroyed by its own inefficiencies)
characterized by a “gale of creative destruct°” (old production techniques becoming obsolescent ®destroyed ®replaced
by modern ones)
2. Tech. importance: long cycles of eco. growth driven by major tech. breakthroughs (ex. new forms of org°, new prod°
tech, markets and sources of raw materials)
J. A. Schumpeter in “Business Cycles?” (1939):
Capitalism = undermined by its successes: innov° process routinized ®role of entrepreneur taken over by research
laboratories of monopolistic enterprises ® creative dest° prevents political support for capitalist instit° ®socialist system
C. Internal/External approaches:
1. dualism: existence side by side of a modern sector (tech. developed, commercialised, in or around urban centres
®outside oriented) and traditional sector (traditional tech, prod° for own consumption, rural)
2. internal approaches: factors within a society which promote or hinder its development
- Boeke in “Indonesian Economics” (1961): lack of trad. sector dev. in Indonesia = characteristics of oriental culture
(individual economic incentives are not operative) ® needs limited // social needs > individual needs
3. external approaches: negative external influences from advanced economies ® dualistic structure ® situat° in
developing countries
D. Economic backwardness ® explanations:
1. Rostow in “The Stages of Economic Growth” (1960):
- theory of the stages of economic growth (same. for every society): traditional society (1) ® preconditions to take-off (2)
® take-off (3) ® “drive to maturity” (4) ® mass consumption society (5) = some have taken the lead and others lag behind
1. trad. society: people = mercy of external forces of nature (patterns of though) ® tech. prod° = static
2. precondit°: external threats ® undermined stability of trad. society ® idea = people can improve their living condit° by
their own efforts ®productivity in a non-industrial sector (ex. mining) ®surplus above subsistence //agri. prod°
®invest. in indust. sector (ex. railways, canals) //modernising elites striving for industrialisat° ®creation: industrial goods
market
3. take-off stage: loans // entrepreneurship ®invest (indus. sector) ®sustained growth ® economy structure changes
drastically (20 years)
4. “drive to maturity”: new prod° techniques ® spread from leading sectors to the entire society
5. “mass cons°”: opportunities of cons° ®whole pop° benefits
2. Kuznets in “Economic Growth and Structure” (1965)
a. Rostow criticism:
1. stage of growth: impossible to distinguish empirically (no “take-off” = changes in investment and growth rate ® gradual)
, EC104 (World Economy History and Theory) – Reading List 4
2. every society does not follow the same path of dev. (ex. big difference = whether a country is an early or late
industrialiser, whether indust° takes place in a large country with a large domestic market or in a small domestic market)
3. stages of development = wrong ® countries can move backward
b. Indust° ® importance in dev.:
- “changes in the structure of prod°”: main characteristics of modern eco. dev.
- cond° of indust° = productivity in indust. sectors (ex. mining), sufficient supply of L,K, entrepreneurship and demand
c. Kuznets in “Economic Growth and Income Inequality (1955):
- indust° and urbanisat° ®income inequalities = why? ® urban/industrial incomes and inequalities > rural incomes and
inequalities ® OR: income distribution become more equal (demography, democratisat°, trade unions and political
pressure groups)
3. Neoclassical theories of growth:
- Neoclassical theories of growth: analyse the relationships between input growth (K,L, land, tech.) and output growth in
the form of mathematical models of growth
- OR: focus on proximate sources ® does not take into account = social mechanisms and institutions
a. Robert M. Solow in “A Contribution to the Theory of Economic Growth” (1956):
Uses Cobb-Douglas function: 𝑂 = 𝐴𝐾 " 𝐿#$"
a and 1-a: elasticity of output to K and L
O: Output
A: Tech. change (exogenous factor)
K: Capital (physical)
L: Labour
Solow Model:
1. importance = efficient allocat° of factors of prod° in eco. dev. processes (K and L can be substituted) (ex. L cheap and
abundant ® labour-intensive forms of prod°)
2. profit-maximising behaviour (ex.K and L use as long as their marginal costs < marginal returns) ® free markets, perfect
competit° and informat° ® equalisat° of marginal costs and marginal returns and to constant returns to scale (ex. K and L
x2 ® output x2)
3.L = depends of pop° // K stock = depends of savings rate // share of savings in national income = constant
® Steady state mechanism: L savings ®K per worker ®L productivity // ¯returns ®¯marginal returns to capital ®¯L
productivity increase rate ® developed economy = steady state ® cached up by developing countries (if neoclassical free-
markets and regulation are in place)
- OR: empirical analysis ®inequalities between rich and poor countries
4. Growth accounting:
- growth accounting: empirical measurement and quantificat° of different proximate sources of growth contribut° by taking
the neoclassical prod° funct° framework as an initial point of departure
- distinction: inputs (K and L quantity and quality) // outputs per unit of input ® big growth part cannot be accounted
by inputs (even after 4djusted by education and quality)
- total factor productivity (output per unit of input): explained by various factors (ex. structural shifts from low to high-
productivity sectors, tech. change)
5. New growth theory (since 1980s):
- X old theories: technological change ¹ exogenous (“came from heaven”) but endogenous (result of: human K invest.
®R&D ®knowledge)
1. Paul Romer in “Increasing Returns and Long Run Growth” (1986):
- strong correlation between: acc° of fixed K rate and rate of growth
a. growth ® explains rate of invest = prod° // demand ®equipment use ®close to saturation ®new equipment
purchased by companies when their production capacity approaching saturation
b. invest ® explains growth = fixed K ®prod°
2. Robert Lucas:
- human K investments ®innovations ®returns to scale ®long-term growth
