Page 128 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
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gests. Although Solow himselfhas praised the new growth theory,
he believes that the theoretical foundations underlying the theory are
simply not credible; the absence or presence ofdiminishing returns,
he points out, is difficult to test. Arguing that the forces governing
economic growth “are complex, mostly technological, and even a lit-
tle mysterious,” Solow has commented that economists are ignorant
ofthe forces propelling the growth process and thus are incapable of
providing governments with policy advice that would enable them to
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raise substantially the national rate ofeconomic growth. Perhaps, I
would add, one cannot improve significantly on Keynes’s attribution
ofeconomic growth to the existence of“animal spirits.”
Despite the controversy surrounding the new growth theory, Elha-
nan Helpman’s conclusion that it is an important complement to the
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neoclassical theory does appear warranted. As he argues, few of the
variations in economic growth among national economies are ex-
plained by the neoclassical formulation, which has been primarily
concerned with capital accumulation. Romer and Lucas, on the other
hand, rely on the proposition that “learning by doing” can result in
decreasing costs and scale economies. They have applied this impor-
tant idea to the accumulation ofknowledge and human capital, and
this, Helpman believes, may be their most important contribution.
Romer and Lucas have taken the view that aggregate production ex-
hibits increasing returns to scale, and they have noted that some of
those returns accrue to a specific economic sector rather than just to
an individual firm. The inability ofa firm to monopolize all the results
ofits investment inR&Dandthe presence ofspillovers mean that
the social rate ofreturn on such investment is more than twice the
private rate ofreturn. Thus, by combining imperfect competition or
economies ofscale with learning by doing and innovation, Helpman
argues, Romer and Lucas have developed a model that helps explain
long-term growth in per capita income.
The implications ofthe new theory for economic policy are very
important. As Helpman suggests, the new theory means that public
policy can significantly increase the rate ofeconomic growth. In the
new growth theory, technical progress is recognized as being profit-
motivated, endogenous, and driven by the investment rate. The rate
ofinnovation and hence ofeconomic growth can be increased by
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N. Gregory Mankiw, “The Growth ofNations,” Brookings Papers on Economic
Activity No. 1 (Washington, D.C.: Brookings Institution, 1955).
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Robert Solow, IMF Survey, 16 December 1991, 378.
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Elhanan Helpman, “Endogenous Macroeconomic Growth Theory,” European
Economic Review 36, nos. 2/3 (April 1992): 237–67.
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