Stylized Facts About Economic Growth

Here is a list of 'stylized' facts from the economic growth literature:

1. Output per capita (YIN) grows monotonically over time, during 'normal' periods.

2. Capital-labor ratio (K/L) grows also.

3. Rate-of-return on capital is nearly constant over time.

4. Capital-output ratio (K/ Y) is nearly constant.

5. Share of labor and capital in national accounts is nearly constant.

6. Growth rate of output per worker differs substantially among countries.

7. Factor accumulation cannot explain increase in Y/N.

8. Fertility rate declines as output/capita grows, except at very low levels of Y/N.

9. (Hence) growth of population N is negatively correlated with Y and growth of Y.

10. Investment as a fraction of GDP (I/Y) and savings rate s tends to increase slightly with Y.

11. Workers tend to emigrate from poor countries to wealthy countries, as opportunity arises.

12. Cross-country convergence of Y/N is conditional on country characteristics.

13. Statistically robust determinants include initial level of GDP, life expectancy, investment, literacy, religious mix, and 'openness' (that is, to foreign investment and trade.

The first six items on the list were set forth originally by Kaldor (1961) while the others are extracted from the empirical growth literature of recent years, especially the work by Barro and Sala-I-Martin (Barro 1991; Barro and Sala-i-Martin 1992, 1995; Sala-I-Martin 1996, 1997; Mulder et al. 2001; OECD 2003; Baily 2003).

Much of the recent literature concerns the extent to which various modifications of the neoclassical model can explain why 'the poor get richer and the rich slow down' (or not), as the case may be. We suspect that neoclassical economics can never explain very much of the specific differences between countries, because institutional factors, especially political ideology, form of government and political stability, are so crucial. We do not doubt that sound macroeconomic policy, investment, education (investment in human capital), R&D spending, 'openness' (trade exposure), religion, natural resource endowments and others of the 60 factors that Barro and Sala-i-Martin and subsequently the OECD considered in their regressions are relevant, to various degrees in different countries. But that is the problem. There is no single overriding lexicographic hierarchy of importance among them that can be uncovered by elaborate multiple correlation analysis and used in a 'one size fits all' formula.

We add four more stylized facts that we think a theory of growth should explain, as follows:

14. Technological progress occurs in two varieties. Most progress (quantitatively) consists of incremental improvements to existing products or processes, but these improvements have no spillover effects and contribute little to growth. Radical innovations are much rarer but more important in the long run.

15. Technological progress is not homogeneous across sectors or continuous in time. The spillovers that drive long-term growth result from a few radical innovations that are discontinuous at the sectoral level. New sectors are created only by radical innovations.

16. Energy prices and growth are negatively correlated, while consumption of raw materials (exergy), exergy services (physical work, finished materials) are positively correlated with economic growth.

17. Economic growth is positively correlated with most kinds of waste generation, at least in the long term.

The first two items on our supplementary list (14, 15) are empirical observations that actually contradict most of the so-called 'endogenous growth' theories. In particular, they explain why 'human capital' as measured in the usual terms (years of school, educational expenditures, R&D, patents, etc.) cannot explain actual growth patterns as observed in the most technologically advanced societies, especially the US. During a 100-year time horizon this is a crucial point.

The last two items (16, 17) are directly linked to each other but also cannot be explained by neoclassical growth theory because the latter reserves no primary role for the production and consumption of materials, energy (exergy) or exergy services. In neoclassical theory these are assumed to be consequences of economic activity but not as causal factors. In fact, as we have emphasized several times previously in this book, the laws of thermodynamics are inconsistent with the standard theory of growth, which treats the economy, in effect, as a perpetual motion machine in which consumption of natural resources, and potential scarcity of resources, play no role. We think that resource consumption plays a central role in economic development.

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