Abstract
Thoughts and theories on economic growth can be traced back to the classical economists of the eighteenth and nineteenth century, whose works are briefly reviewed alongside the transition to neoclassical growth theory in Sect. 2.1. The basic outline of neoclassical growth models as first developed by Solow (1956) and Swan (1956) is presented in Sect. 2.2. The familiar but nonetheless special case of a Cobb-Douglas production function is examined in Sect. 2.3 in connection with the derivation of steady state levels of factors of production and output. Finally, Sect. 2.4 examines the inclusion of human capital as an additional factor of production and provides a note on endogenous growth theory.
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- 1.
Smith famously exemplifies this with the production of pins.
- 2.
“Das Kapital hat Kapital produziert.”
- 3.
It is also interesting to note that political arguments in defence of declining wage shares (i.e. rising rates of surplus value) nowadays often go like this: “The wage share may decline, but workers are still better off because wages and salaries continue to grow at real terms” (see, for instance, Der Standard, July 21, 2007, p. 32: “…die Verdienste der unselbständig Beschäftigten [schrumpfen] – statistisch gesehen – nicht. Ihre Einkommen wachsen nur langsamer als Kapital- und Unternehmensgewinne.”).
- 4.
The issue of what is actually “big enough” becomes relevant again when dealing with regions, and will be explored in Sect. 6.1.
- 5.
Gross national income is conceptually identical to gross national product.
- 6.
Except for the possibility that there is no physical capital at all, which corresponds to the second intersection of the two lines at the point of origin in Fig. 2.1. As this mathematically possible equilibrium represents a non-existing economy, it is of no further interest.
- 7.
A formal proof for the stability of the equilibrium can be found in Krelle (1988).
- 8.
The term steady state reminds one of the stationary state as discussed in Sect. 2.1. The difference is that at steady state, an economy continues to grow at constant rate along the steady state growth path. Note that growth at constant rates also includes the possibilities of zero or even negative growth.
- 9.
This residual has become known as the Solow residual.
- 10.
Definitions and discussions of the various ways of implementing technological progress in a neoclassical production function can be found in Beckmann and Künzi (1984).
- 11.
The terms “abstract knowledge”, “state of technology” and, if appropriate, “effectiveness of labour” are usually used as synonyms here as well as in the bulk of growth literature.
- 12.
The term human capital (“Humankapital”) has been voted Ghastly Neologism of the Year 2004 (“Unwort des Jahres”) in Germany, which provoked some controversy. It should be stressed that the jury was appalled by non-technical applications of the expression (Spiegel Online, 18th January 2005 (http://www.spiegel.de/kultur/gesellschaft/0,1518,337259,00.html, queried on 30-July-2007)).
- 13.
In analogy to Sect. 2.2, the possibility of initial values of either type of capital equalling zero is ignored.
- 14.
A formal proof of the stability of the Mankiw-Romer-Weil model can be found in Gandolfo (1997).
- 15.
Economic history is somewhat reflected in these two most important neoclassical growth models: the Solow model adjusts the focus on physical capital accumulation, and provides an explanation of worldwide economic growth after the Second World War; the Mankiw-Romer-Weil model adds a focus on human capital accumulation to the former, and provides an explanation of worldwide economic growth since the decline of industrial employment in Western Europe and North America. Seen from a meta-level, these two models perfectly mirror their respective ages of economic development.
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Sardadvar, S. (2011). Neoclassical Growth Theory and Standard Models. In: Economic Growth in the Regions of Europe. Contributions to Economics, vol 1. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2637-1_2
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