International Trade and Economic Growth in Open Economies The Classical Dynamics of Hume, Smith, Ricardo and Malthus
The Classical Dynamics of Hume, Smith, Ricardo and Malthus
Chapter 8: Classical Political Economy: Back to Their Future?
8 Classical Political Economy: Back to Their Future? I The Changing Face of International Economics Had this work been written in the 1970s it would have set out in a very different direction, in good part because international economics has changed considerably in the intervening decades. Many forces have been working towards a reevaluation of trade’s contribution to economic growth, and their joint impact has led to the development of a new theoretical literature on the nature of open economic growth-a ‘new’ growth theory as well as a ‘new’ trade theory. New growth theory represents an important modification of the most popular (Solow) neoclassical growth models in which capital accumulation is essentially self-limiting due to the assumption of diminishing returns to variable factors. The ‘new’ part of growth theory lay in the introduction of various mechanisms that allow capital accumulation to counteract the downward movement in profits by raising productivity. Dowrick (1997) identifies three new growth mechanisms. Capital accumulation may be supposed to increase the flexibility with which capital may subsequently be substituted for other factors. It may create a virtuous cycle in which capital accumulation lowers the cost of making the next generation of capital. Lastly it could exhibit positive externalities (more capital lowers costs elsewhere). These theoretical mechanisms suggest that the openness of national economies may have a profound, if ambiguous, impact upon their growth rates. Thus the point of departure for new trade theory was the relationship between openness and efficiency, a relationship which the similarly named...
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