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Lecture Two SlidesEcon 560

Barry W. Ickes

The Pennsylvania State University

Fall 2008

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IntroductionTime Scale of Modern Economic Growth

Conservative estimates suggest that humans were alreadydistinguishable from other primates 1 million years ago.Imagine placing a time line corresponding to this millionyear period along the length of a football �eld. On thistime line, humans were hunters and gatherers until theagricultural revolution, perhaps 10,000 years ago that is,for the �rst 99 yards of the �eld. The height of the Romanempire occurs only 7 inches from the right most goal line,and the Industrial Revolution begins less than one inchfrom the �eld�s end. Large, sustained increases instandards of living have occurred during a relatively shorttime equivalent to the width of a golf ball resting at theend of a football �eld.

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Distribution of Countries

Figure: Estimates of the distribution of countries according to logGDP per capita in 1820, 1913 and 2000.

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Convergence

Figure: 2000 compared with 1960

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Convergence?

Figure: Annual growth rate of GDP per worker between 1960 and2000 versus log GDP per worker in 1960 for core OECD countries.

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Multiple Equilibria

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Growth by Groups

Figure: Evolution of GDP per-capita by groups

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The Long View

Figure: The evolution of average GDP per capita in WesternO¤shoots, Western Europe, Latin America, Asia and Africa,1000-2000.

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Evolution of per-capita GDP

Figure: Evolution of Per-Capita GDP, selected economies

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Capital and Labor Shares

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Dynamic Adjustment

Figure: Dynamics following rise in savings rate

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Estimates of the Basic Solow Model

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Estimates of the Augmented Solow Model

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1996 Price of Machinery and Equipment

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Schumpeter

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Creative Destruction

The fundamental impulse that sets and keeps the capitalistengine in motion comes from the new consumers�goods,the new methods of production or transportation, the newmarkets,. . . . [This process] incessantly revolutionizes theeconomic structure from within, incessantly destroying theold one, incessantly creating a new one. This process ofCreative Destruction is the essential fact about capitalism.Joseph Alois Schumpeter (1942): Capitalism, Socialismand Democracy. New York: Harper and Brothers. p. 83

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Schumpeter on Competition

Economists are at long last emerging from the stage inwhich price competition was all they saw.. . . In capitalistreality. . . it is not that kind of competition which countsbut the competition from the new commodity, the newtechnology, the new source of supply, the new type oforganization. . . competition which. . . strikes. . . existing�rms. . . at their foundations and their very lives. This kindof competition is. . . much more e¤ective than theother. . . and [is]. . . the powerful lever that in the long runexpands output. CSD, 84 �85.

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Basic Model

Figure: Basic Setup of the Model

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Steady State Equilibrium

      L    nn

A

Lω

Figure: Steady-State Equilibrium

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Comparative Statics

Fall in r , increase in λ, increase in γ =) A shifts up

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Output Growth

    t=1   t=2  t=3     t=4 τ

1ln y

0ln y

γln

γln

γln

γln

2ln y

3ln y

4ln y

Figure: Output Growth

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Gerschenkron on Backwardness

�... in a number of important historical instancesindustrialization processes, when launched at length in abackward country, showed considerable di¤erences withmore advanced countries, not only with regard to thespeed of development (the rate of industrial growth) butalso with regards to the productive and organizationalstructures of industry... these di¤erences in the speed andcharacter of industrial development were to a considerableextent the result of application of institutional instrumentsfor which there was little or no counterpart in anestablished industrial country.�Gerschenkron (1962, p. 7)

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GDP relative to US

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Growth Trap

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Political Economy Trap

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Theory of Institutions

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TFP Decline in China

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Trigger Strategy