Edited by William F. Shughart II and Laura Razzolini
Chapter 28: Institutions, Policy, and economic growth
Gerald W. Scully 1 Introduction Capitalism and freedom, along with the Industrial Revolution, stand among the greatest achievements of Western civilization. After more than a millennium of stagnation (Maddison 1982, p. 6), innovation and mass production made possible by the application of new sources of power and the rise and spread of freer markets, protection of private property, rule of law, and representative government brought sustained economic growth – a thirteenfold increase in the real living standard between 1820 and 1980 (ibid.). Economic growth remains high in the West today. After decades of neglect, the unrelieved impoverishment of the Third World renewed interest in the theory of economic growth. The classic paper on exogenous neoclassical economic growth is that of Solow (1956). In that model, with a constant savings rate, s, a constant population growth rate, n, and no technical progress, economies continue to accumulate capital per head, k, and to have economic progress (yt = f(kt), dyt /dt > 0), until capital per head reaches its steady-state level, k0, which is the solution to the differential equation sf(k) – nk = 0. At that point, economic progress ceases. Mature nations naturally have high capital–labor ratios and hence lower rates of economic growth than do immature nations. Hence, given the assumptions and the logic of the model these poor nations will converge toward and eventually catch up to the per-capita incomes of the developed nations. The prospect of convergence inherent in the Solow model completely vanishes if one assumes neutral technical change,...
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