Chapter 3: Theories of Root Causes of Economic Progress
One of the major predictions of the neoclassical growth model is that given the level of technology and income at a particular point in time, and a common growth rate of technology, a country accumulating more physical and human capital grows faster than a country accumulating less of the same. Empirical evidence suggests that this is only a part of the story. In a simple regression model with two factors of production, physical and human capital, and log initial income as an additional control, a large fraction of the cross-national growth variance remains unexplained. This leads to two types of reaction. First, a search for additional correlates of growth with the majority of the correlates having no or very little connection with theoretical models of optimizing behaviour. Second, a move towards more structured growth empirics with the primary objective of teasing out causality. The second approach is relatively recent and has gained a fair amount of acceptance of late. However, the question of how the literature has moved in this direction remains. To find an answer, we need to trace out the origin and the evolution of the growth regression. This is exactly what I seek to do in the following section. 3.1 THE NEOCLASSICAL GROWTH MODEL Let’s kick off with an illustration of the standard neoclassical growth model and show how the growth regression emerges from it. An earlier version of this model was independently developed by Robert Solow (1956) and Trevor Swan (1956) which only focused on physical...
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