Some pertinent ideas about growth paths, long and short

Greg Hannsgen | January 4, 2012

In my last post, I reviewed an enjoyable book about some post-Keynesian economic economic thought and thinkers. To round things out a bit more, I thought I might offer a list of a few more often-overlooked but classical themes from economists who may be obscure to some blog readers or perhaps simply forgotten. Many of the points made in this post involve ways that economies change and develop, a topic that often brings “historical time” into the picture. (This list is by no means exhaustive or even carefully chosen.)

virtuous circles in economic growth: it’s often thought that the economy reverts to a steady and mediocre long-term growth trend following an especially good or bad economic year. Unfortunately, this may not be happening now (see Figure 1 in this Levy Institute one-pager). One theme of the Smithian growth theories pioneered for our era by Nicholas Kaldor and other economists profiled in A. P. Thirlwall’s excellent book The Nature of Economic Growth (2002; paperback 2003) is that a year or two of strong economic growth won’t necessarily increase the chances of a lean year in the future. (Some of the post-Keynesian economists and ideas discussed in my previous blog post also play important roles in Thirlwall’s readable but somewhat technical volume.) Instead, strong growth in the present can sow some useful seeds, for example, by allowing an economy to reap the benefits of economies of scale. One variation on this theme that I happen to agree with is that a well-designed, employment-focused stimulus plan might help the U.S. economy sail out of the doldrums of low growth and employment and reach a better long-term route.

differences in desirable growth strategies depending on the circumstances in an individual country. For example, some low-income countries are stuck in patterns of low economic growth may find it crucial to push upward with policies geared to their needs—perhaps including special kinds of protection for industries that are helpful to long-term growth. Also, countries that are relatively small and heavily involved in international trade often have small-open-economy policy constraints that are rooted in the need for balance-of-payments stability and sustainability. Thirlwall’s book concentrates on the problems encountered by such countries and some of the pioneering efforts to understand their predicaments.

confusion of cause with effect, and vice-versa, in growth models. For example, in some neoclassical growth models, the growth rate of output is constrained partly by a given labor supply that grows at a fixed rate. On the contrary, it was understood early on by certain economists mentioned in Thirlwall’s book that instead of eventually reaching a barrier where the economy runs out of unemployed labor, unused manufacturing capacity, etc., growing countries often continue to find avenues of growth, avoiding an inflationary spiral.  In particular, the availability of needed labor and capital is often stimulated by a self-reinforcing pattern of successful growth (see previous point). Also, technological progress is encouraged by healthy near-term growth, as well as the reverse. Finally, the growth-promoting effects of public education and R & D spending are brought to mind by reading again about the theories discussed in this book. Thirlwall discusses some interesting empirical tests of these theories about cause and effect.

Some concluding observations: Mainstream economic writers often unfortunately think of the themes above as being important only within the context of various relatively unfamiliar subdisciplines, rather than within the core of macroeconomics. Hence, many nonspecialists miss some insights relevant to current economic debates in countries like the US. Moreover, some of the themes are mistakenly assumed to be the province only of certain modes of thought that are highly mathematical and/or computationally advanced. Finally, in models less geared toward dynamics and history than those presented in the book, certain key macroeconomic variables (such as expectations of future demand) are usually viewed as relevant only for the short run; however, it is difficult to separate long-run dynamics from short-run forces of various kinds in a good model of the economy. Thirlwall’s book helps to rectify these and other shortcomings of the dominant view of the economy in today’s discourse.

More macroeconomic thoughts to come later in the new year.

(Revised slightly on January 10. -G.H.)


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