Chapter 2: The Conventional Wisdom of the Economist
The purpose of economic theory is to take a complicated world, abstract from many details, and express the key economic relationships in a way that enhances understanding. From this standpoint, the neoclassical model is still the most useful theory of growth we have. It will continue to be the first growth model taught to students and the first growth model used by policy analysts. (Mankiw 1995: 308) Despite various attempts to adopt an alternative approach to economic development, neoclassical economics still provides the only developed theory of economic growth, dominating the teaching of economics and the content of articles in the relevant journals. This may seem surprising given the richness of the debates which took place in the 1960s, and again in the 1990s, concerning how to explain modern economic development and the significance of the criticisms of the neoclassical approach (Harcourt 1972). Any exploration of the determinants of economic development must start with neoclassical theory since it is the conventional wisdom on the topic and unlikely to cease to be so. The aim of this chapter is to introduce that theory in an accessible manner, appraising its strengths and weaknesses, and identifying its place in an explanation of modern economic development. This chapter begins with the central concept of neoclassical growth theory, the notion of a long-term steady-state equilibrium growth path. Next it considers the nature of neoclassical theory, focusing on its reliance on the production function as a representation of the aggregate behaviour of an economy. The third...
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