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A Short History of Economic Growth Theory. Economic growth is an important part of economic theory and one of the most significant problems economists tried to explain is the differences of growth rates of countries.
Economic progress has been discussed since the time of physiocrats and Adam Smith. In his book “Wealth of Nations” (1776), Adam Smith mentioned economic growth as the improving and increasing of capital. David Ricardo in “The Theory of Comparative Advantage” (1817) emphasized on the benefits of trade and its role in the expansion of economies.
Many economists argue that the differences in economic growth between countries have been created during the 19th and 20th century. Maddison (2001) estimated statistics of the world countries going back one thousand years. In his work “The World Economy: Historical Statistics” is mentioned the fact that the divergence of income between countries occurred during 1800s. Figure 1 below illustrates his findings.
Figure 2.: The evolution of average GDP per capita in Western offshoots, Western Europe, Latin America, Asia, and Africa, 1000-2000
Maddison (2001) discussed that the last millennium, the population of the world increased by 22 times, the world income by 300 times and the income per capita 13 times. During the first 800 years of the last millennium world income increased at approximately 50 per cent, and the growth flourishing started at the early 19th century. Following his research income was not the only progress in the quality of life, the portion of the educated people in society increased significant and the same happened for the life expectancy, which increased almost 3 times what it was at around 1000 (from 24 years to 66). The growth though was not equally distributed around the world, life quality rapidly changed for Western Europe, North America, Australia and Japan, while the rest of the world; Africa, Asia and South America, followed with a slower pace, resulting to increased divergence in income. It is mentioned that “by 1998, the gap was 7:1 between the United States and Africa, the gap is now 20:1.”
From Adam Smith, Robert Malthus and David Ricardo to Robert Solow and Paul Romer, many economists made efforts to shed light on the fundamental factors of growth and thus on the differences of the growth rates between countries. Malthus (1798) argued that as labor force grew faster than technology; the real wages would fall, due to the increased cost of living, causing the reduced growth of the economy. However, as economic progress pauses, population growth rates would fall as well and this would lead to higher real wages and so on. Joseph Schumpeter based on the Marxist economic theory, adopted the term “creative destruction” in order to describe the fact that economic progress may be accompanied by negative effects, as the old ways will be replaced by new (e.g. new technologies that may reduce the labor force needed). The research that set the foundations of modern economic growth theory was the one of Robert Solow and the exogenous growth models. In these models with no technological progress, the diminishing returns will cause the economic growth to slow down and eventually stop. The factor that determined the continuous growth of economies is a parameter A, which is assumed to grow at a constant and exogenous rate. This simple model revealed some valuable perceptions about the growth process, such as that the technological progress is one of the main factors that affect growth. However the limitations of exogenous growth model were the reason of new theoretical and empirical efforts from which emerged the endogenous growth model during the 1980s. Paul Romer in 1986 led the idea of endogenous growth, followed by Aghion, Howitt and others. In these models was introduced the term research and development and the human capital and the accumulation of it is what drives the technological changes. Later innovation and education were introduced to expand the abilities of endogenous growth models but still none of these could explain the large income differences between countries.
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Figure 1.: The relationship between average growth of income per capita and average years of schooling, 1960-2000. Source: Acemoglu, 2009.
—- One of the oldest growth theories is the one of Reverend Thomas Robert Malthus, who in his work “An Essay on the Principle of Population” described that the growth of population was supposed to be exponential while the growth of food supply was arithmetical, a fact that would lead to a reduction of population in the future. Following his analysis he proposed as measures moral restraints in order to control the growth of population and prevent serious problems that the society would face otherwise such as starvation, disease and war which is called Malthusian Catastrophe. Malthusianism was heavily criticized by David Ricardo and later by Karl Marx. In his work “Das Kapital” (1867) Carl Marx accused Malthus for blaming the poor and characterized him as a “lackey of the bourgeoisie.”
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