Page 122 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
conclusions that run counter to the ideas ofconventional neoclassical
economics regarding the role ofthe state in the economy, the institu-
tional framework of economic activities, and the highly uneven distri-
bution ofwealth in the international economy. To appreciate the sig-
nificance ofthe new growth theory, it is essential to review the
neoclassical theory oflong-term economic growth. These contradic-
tory theories disagree on economic policies and the role for govern-
ments in economic affairs.

Background. The neoclassical explanation oflong-term economic
growth is based on formal economic models set forth by Robert So-
8
low in the late 1950s; almost all subsequent work on economic
growth has been an elaboration ofhis pioneering ideas. He argued
that economic growth is a product ofcapital accumulation, labor in-
9
put, and technical progress. His theory is based on the “neo-classical
production function” in which the economic output of an economy
is dependent on the quantity ofcapital and labor employed, and the
theory ofthe production function itself is based on certain critical
assumptions. It assumes that there are constant returns to scale and
that ifthe amount ofboth capital and labor employed in producing
a widget are doubled, the output will double; phrased differently,
there are no increasing returns to scale. Another assumption is that
marginal returns diminish over time, that ifthere is no additional
technological progress, and ifeither the amount ofcapital is increased
while the size ofthe work force remains stable or vice versa, succes-
sive additional investments will produce only decreasing gains in out-
10
put (the law ofdiminishing returns). Following this reasoning, econ-
omists conclude that the larger the capital stock in place, the smaller
the benefit ofeach increment in capital investment. 11
The neoclassical theory ofeconomic growth concludes that eco-
nomic growth, or the rate ofgrowth in output, is a consequence of
the rate ofincrease in labor input, the rate of growth ofcapital input,
and the rate oftechnical progress, and that accumulation ofthe fac-

8
The theories are discussed in Jeffrey D. Sachs and Felipe Larrain, Macroeconomics
in the Global Economy (Englewood Cliffs, N.J.: Prentice-Hall, 1993), Chapter 18.
9
Ibid., 555–56.
10
Adam Szirmai, Bart Van Ark, and Dirk Pilat, eds., Explaining Economic Growth
(Amsterdam: North Holland, 1993), 8.
11
N. Gregory Mankiw, David Romer, and David N. Weil, “A Contribution to the
Empirics ofEconomic Growth,” Quarterly Journal of Economics 107, no. 2 (May
1992): 407–37.
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