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Thursday, July 09, 2009

"The New Kaldor Facts"

What does growth theory need to explain? Has there been progress?:

The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital, by Charles I. Jones and Paul M. Romer, NBER WP 15094, June 2009 [open link]: 1. Introduction ...[I]t is easy to lose faith in scientific progress. ... In any assessment of progress, as in any analysis of macroeconomic variables, a long-run perspective helps us look past the short-run fluctuations and see the underlying trend. In 1961, Nicolas Kaldor stated six now famous “stylized” facts. He used them to summarize what economists had learned from their analysis of 20th-century growth and also to frame the research agenda going forward (Kaldor, 1961):

    1. Labor productivity has grown at a sustained rate.
    2. Capital per worker has also grown at a sustained rate.
    3. The real interest rate or return on capital has been stable.
    4. The ratio of capital to output has also been stable.
    5. Capital and labor have captured stable shares of national income.
    6. Among the fast growing countries of the world, there is an appreciable variation in the rate of growth “of the order of 2–5 percent.”

Redoing this exercise nearly 50 years later shows just how much progress we have made. Kaldor’s first five facts have moved from research papers to textbooks. There is no longer any interesting debate about the features that a model must contain to explain them. These features are embodied in one of the great successes of growth theory in the 1950s and 1960s, the neoclassical growth model. Today, researchers are now grappling with Kaldor’s sixth fact and have moved on to several others that we list below.

One might have imagined that the first round of growth theory clarified the deep foundational issues and that subsequent rounds filled in the details. This is not what we observe. The striking feature of the new stylized facts driving the research agenda today is how much more ambitious they are. Economists now expect that economic theory should inform our thinking about issues that we once ruled out of bounds as important but too difficult to capture in a formal model.

Here is a summary of our new list of stylized facts, to be discussed in more detail below:

    1. Increases in the extent of the market. Increased flows of goods, ideas, finance, and people — via globalization as well as urbanization — have increased the extent of the market for all workers and consumers.
    2. Accelerating growth. For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.
    3. Variation in modern growth rates. The variation in the rate of growth of per capita GDP increases with the distance from the technology frontier.
    4. Large income and TFP differences. Differences in measured inputs explain less than half of the enormous cross country differences in per capita GDP.
    5. Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.
    6. Long-run stability of relative wages. The rising quantity of human capital relative to unskilled labor has not been matched by a sustained decline in its relative price.

In assessing the change since Kaldor developed his list, it is important to recognize that Kaldor himself was raising expectations relative to the initial neoclassical model of growth as outlined by Solow (1956) and Swan (1956). When the neoclassical model was being developed, a narrow focus on physical capital alone was no doubt a wise choice. The smooth substitution of capital and labor in production expressed by an aggregate production function, the notion that a single capital aggregate might be useful, and the central role of accumulation itself were all relatively novel concepts that needed to be explained and assimilated. Moreover, even these small first steps toward formal models of growth provoked substantial opposition.

The very narrow focus of the neoclassical growth model sets the baseline against which progress in growth theory can be judged. Writing in 1961, Kaldor was already intent on making technological progress an endogenous part of a more complete model of growth. ...

Growth theorists working today have not only completed this extension but also brought into their models the other endogenous state variables excluded from consideration by the initial neoclassical setup. Ideas, institutions, population, and human capital are now at the center of growth theory. Physical capital has been pushed to the periphery.

Kaldor had a model in mind when he introduced his facts. So do we. ... In the near term, we believe that this model should capture the endogenous accumulation of and interaction between three of our four state variables: ideas, population, and human capital. For now, we think that progress is likely to be most rapid if we follow the example of the neoclassical model and treat institutions the way the neoclassical model treated technology, as an important force that enters the formalism but which evolves according to a dynamic that is not explicitly modeled. Out on the horizon, we can expect that current research on the dynamics of institutions and politics will ultimately lead to a simple formal representation of endogenous institutional dynamics as well.


4. Conclusion ...[T]he facts we highlight ... reveal important complementarities among the key endogenous variables [ideas, population,  human capital, and institutions]... Such complementarities exemplify the value of the applied general equilibrium approach. They are the fundamental reason why we seek a unified framework for understanding growth. Going forward, the research agenda will surely include putting ingredients like those we have outlined in this paper together into a single formal model. Further out on the horizon, one may hope for a successful conclusion to the ongoing hunt for a simple model of institutional evolution. Combining that with the unified approach to growth outlined here would surely constitute the economics equivalent of a grand unified theory—a worthy goal by which we may be judged when future generations look back fifty years from now and quaintly revisit our “ambitious” list of stylized facts.

    Posted by on Thursday, July 9, 2009 at 12:11 AM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (20)


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