Growth Theory and Growth Policy

Growth Theory and Growth Policy

Growth Theory and Growth Policy

Growth Theory and Growth Policy


The theory of economic growth has been one of the most important issues in the study of economics since the days of Adam Smith. This collection examines the phenomenon of economic growth with an admirable economic vigor.


Harald Hagemann and Stephan Seiter

Since Adam Smith the analysis of economic growth was one of the main fields of interest in economic theory. Particularly from the late 1940s to the 1960s, many papers dealing with the explanation of growth were published. the controversy between Postkeynesian authors such as Harrod, Domar, Kaldor and Robinson and members of the neoclassical school such as Solow, Swan, Meade, Arrow or Phelps gave inspiring insights into the process of economic growth. the discussion focused on the question whether the long-run economic growth process would converge to a stable equilibrium or not. Besides many differences between these two schools of thought, most economists agreed, and still do, that technical progress is the main source of per capita income growth. For example, Solow (1957) gave evidence to this statement by applying the concept of growth accounting on the development in the usa in the period of 1909-49, and Kaldor (1957, 1961) stressed the key role of technological innovations for economic growth.

However, the overwhelming interest in growth theory declined from the early 1970s. the economic slowdown after the first oil price shock drew economists' interest to the explanation of business cycles, which had been the dominant theme in the interwar period but, after a short boom of multiplier-accelerator models after the war, had almost fallen into oblivion when the historically unprecedented growth process of the 1950s and 1960s had shifted economists' main research areas. the phenomenon of stagflation raised again the question whether monetary and fiscal policy should follow Keynesian theory or not. the period after 1973 differed from the post-war years not only with regard to the characteristics of the business cycle, but also with respect to the long-run development. the average growth rates of Gross Domestic Product as well as of productivity were significantly smaller after 1973 than before. the so-called productivity slowdown gave new impulses to growth theory, although first studies applied well-known approaches to explain this phenomenon (see, e.g. Bombach 1985).

In the 1980s, Paul Romer's seminal paper (1986) could be seen as the starting point of a renaissance of growth theory that has received greater attention in economic science since then. the so-called New Growth Theory challenged the traditional neoclassical approaches because of the latter's theoretical and empirical shortcomings. the Solovian-type models cannot explain endogenously steady-state per capita growth. Exogenous technical progress is the only source

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