Academic journal article Quarterly Journal of Austrian Economics

A Capital-Based Theory of Secular Growth

Academic journal article Quarterly Journal of Austrian Economics

A Capital-Based Theory of Secular Growth

Article excerpt

Abstract: Roger Garrison (2001) provides a welcome diagrammatic exposition of Austrian, capital-based macroeconomics. The exposition attempts to account not only for Austrian Business Cycles (ABCs), but also for long-run, secular growth. Secular growth is a focus of mainstream growth theory that has arguably been neglected by Austrian analysis. However, Salerno (2001) argues that the type of secular growth described by Garrison (2001, p. 54) is implausible. He argues that, in the absence of technological or institutional change, time preferences must be falling over time for net capital accumulation to be sustainable. This paper outlines a capital-based theory of secular growth based on the consideration of intangible capital. The nonrivalrous nature of intangible capital goods allows for external effects. The technology becomes available to firms and individuals that (a) are not forced to wait through the innovative stages of production and (b) do not compensate those firms and individuals that do. Furthermore, (c) innovative stages of production may be viewed not only as aimed towards the production of consumption goods, but also towards further innovation-"standing on the shoulders of giants." The theory presented here reconciles Garrison's exposition to the Salerno critique. It also provides a bridge between many insights of mainstream,endogenous growth theory and Austrian, capital-based macroeconomics.

[O]ne should not limit oneself to a purely technological viewpoint. These new factors of production, too, are achievements of labor and natural gifts which have been used previously. If one thinks of these factors of production as the result of using originary factors of production, then the essence of this process lies in the fact that these originary factors of production were used at an earlier point in time.

Richard von Strigl (2000 [1934], p. 6)

1. INTRODUCTION

Roger Garrison (2001) provides a welcome diagrammatic exposition of Austrian, capital-based macroeconomics.1 Besides being valuable as a comprehensive, diagrammatic restatement of Austrian Business Cycle Theory (ABCT), Garrison's exposition also shares enough common pedagogical elements with popular mainstream textbook treatments to serve as an effective bridge between the mainstream and Austrianism.2 For example, Garrison's exposition claims to account not only for business cycles, but also for long-run, secular growth. This is a focus of mainstream growth theory that, arguably, has been neglected by Austrian theorists.

However, Joseph Salerno (2001) contends that the type of secular growth described by Garrison (2001, p. 54) is inconsistent with capital-based macroeconomics:

[Growth] occurs without having been provoked by policy or by technological advance or by a change in intertemporal preferences. Rather, [in Garrison's analysis,] the ongoing gross investment is sufficient for both capital maintenance and accumulation.

Salerno argues that, in the absence of technological or institutional change, time preferences must be falling over time for capital accumulation to be sustainable. Furthermore, Salerno's argument echoes one of the primary conclusions of neoclassical growth theory (Frank Ramsey [1928], Robert Solow [1956], David Cass [1965] and Tjalling Koopmans [1965]). As Robert Lucas (2002, p. 29) summarizes: the theory "emphasizes a distinction between 'growth effects' . . . and 'level effects.' . . . [C]hanges in savings rates are level effects (which transposes in the present context to the conclusion that changes in the discount rate, ñ , are level effects)." In the absence of technological change, only a continually rising savings rate (falling rate of time preference) can result in secular growth.

Salerno's point of view is focused on the observation that, "an immediate inference from what Mises (1998, pp. 480-81, 533-34) calls 'categorical' time preference-the preference for present over future satisfaction that is expressed in every action-is that an actor's 'period of provision' can never be infinite and must come to a close within a definite period of the future" (Salerno, pp. …

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