Academic journal article Contemporary Economic Policy

The Wealth of Nations: Growth, Ideas, and Technology

Academic journal article Contemporary Economic Policy

The Wealth of Nations: Growth, Ideas, and Technology

Article excerpt

MICHAEL R. DARBY [*]

In the following aricles Freedman and Jordan examine institutional arrangements that promote high and rising incomes. The quality of institutions may be as important as human capital, investment, and population growth in determining which nations are most prosperous. (JEL E52, E58, E65)

The Wealth of Nations is the question that launched economics in 1776, and it remains a central issue today: Why do residents in one nation have higher incomes than those in others? Why do those incomes persistently rise in some countries and fluctuate around a stagnant level in others? One hundred and eighty years after Adam Smith's initial response to these questions, Robert Solow and Trevor Swan answered in terms of the neoclassical growth model. Theodore Schultz and Gary Becker taught us to measure labor in units of human capital. Policymakers play a fairly limited role in these formulations: Encourage saving, education, and research and development; discourage population growth.

In these "real" models, money does not matter. But macroeconomists looking around the world see that high and variable inflation rates tend to go together and also go with low per-capita incomes and low economic growth rates. Unstable monetary institutions seem to matter very much to the real economy. Without them, long-term investment and contracting generally is more costly and attenuated and some of the best minds are diverted from production to forecasting and profiting from variations in inflation.

Explicit inflation targets for central bank targets are a relatively new invention that is being increasingly implemented around the world. …

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