Page 124 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
rowing technology from the technological leaders. Over time, the dif-
fusion of capital, technology, and know-how from rich to poor will
enable the less developed countries to increase their rates ofeconomic
growth both in absolute terms and in relation to the more advanced
economies. Moreover, investment in poor countries should produce
more rapid growth and greater increases in output than equivalent
investment in rich countries; in the former, there will be higher mar-
ginal returns to inputs, while in the latter, marginal returns will de-
cline. Thus, according to convergence theory, the rich will get rich
more slowly and the poor will get richer more rapidly so they will
gradually converge with one another and income inequalities between
rich and poor countries will be eliminated. 16

Limitations. An important criticism ofthe neoclassical growth theory
focuses on its treatment of technology. Although the theory teaches
that technological progress bears the primary responsibility for in-
creases in per capita income over the long run, the theory does not
explain the determinants oftechnological advance. Despite the central
importance oftechnology as the ultimate determinant of long-term
economic growth, the theory can explain neither economic change
nor innovation. 17 The theory considers technological progress to be
exogenous to economic growth and technology to be embodied in
capital investment. Moreover, technology is considered a public good
to which every firm anywhere in the world has access.
Furthermore, technology (unlike capital and labor) cannot be ob-
served or measured directly, so it must be the residual (or “Solow
residual”) after the contributions of the other two factors to “total
factor productivity” and to overall economic growth have been taken
into account. 18 The term “residual,” however, is quite misleading.
Whereas 12 percent ofthe doubling of American productivity growth
between 1909 and 1949 can be explained by the expansion ofcapital
per worker, the residual or total factor productivity accounted for the
other 88 percent increase. Some residual! As Sachs and Larrain have
19
commented, the residual “is really a measure ofour ignorance.” As
a consequence, the neoclassical theory, based on factor accumulation,

16
Walter Rostow, Why the Poor Get Richer and the Rich Slow Down: Essays in the
Marshallian Long Period (Austin: University ofTexas Press, 1980).
17
Joseph Stiglitz, “Comments: Some Retrospective Views on Growth Theory,” in
Peter Diamond, ed., Growth/Productivity/Unemployment: Essays to Celebrate Bob So-
low’s Birthday (Cambridge: MIT Press, 1990), 50–68.
18
Ibid., 556.
19
Sachs and Larrain, Macroeconomics in the Global Economy, 556.
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