Some of the history is a bit off. The “oldest” growth model would be something like the Walras/Cassel/Von Neumann balanced growth model, then the similar Harrod Domar model, which is basically the thinking on growth that preceded Solow and that he was responding to in his 1951/3 papers. Then when the endogenous growth models came out later these early growth models got rebranded as the AK model. Solow wasn't all that impressed saying it was just the old models again (to be fair with some extra “microfoundations)
Also growth in solow model does not depend on the saving rate or population growth. Thats actually kind of the point.
Finally the idea of conditional convergence had/has pretty strong empirical support which is why Solow model became so widely adopted. The trick is to explain what determines technological growth AND convergence within the same framework
I think that Aghion and Howitt finds- "that economic competition and the incentives it generates to improve and innovate products is the ultimate driver of economic growth." could be accurate. We've witnessed through the years the fierce tech. competition between the U.S. and China, and how this has lead to innovation in technology like EV with China on the lead. Although the U.S has the most advanced semiconductors, the problem is that they are still based in Taiwan (which is part of China), and has to move faster to bring these factories to U.S. territory or risk losing them to China.
One can only wish that the U.S. government could put its act together and agree in policy instead of becoming 100% political, dividing the country, and choosing to ignore how bad the U.S. economy currently is.
I agree with you I believe if the government did get its act together the market wouldn't be affected by competition but focusing on the supporting the innovation through other investments, the U.S policy just puts a hold on productivity.
I always wonder what solid practical guidance could be delivered from these big development theories. Regrettably I haven't red Mokyr yet, but it sounds like one more "improve institutions" case but with extra steps.
It would be interesting to read what do you think on this matter (just to mention, it would be a great opportunity to say that "why nation fails" fails one more time, it deserves it anyway)
The basic context is that during the 90s, El Salvador adopted all the right "neoliberal" economic policies, but it has subsequently failed to achieve catch-up growth, averaging roughly 2% year.
From the authors:
"Producing new is a different proposition from producing more. Entrepreneurs need to undertake investments in new areas where profitability is inherently uncertain [...] New activities often require complementary and lumpy investments to be made simultaneously (a coordination externality). Regardless of whether they are successful, they generate valuable information for other entrepreneurs who can then choose to imitate incumbents (an information externality)."
So the hypothesis of the authors is that absence of growth is generated by the Salvadoran entrepreneurs being too risk-averse, such that they don't invest enough in new high-productivity sectors.
Their policy proposal is basically for the government to consider implementing an Industrial Policy, but the soluction could also come from a "Schumpeterian" entrepreneur who is willing to take high risks. (Or from *many* such entrepreneurs, because some of them will inevitably fail).
The guidelines mention the concept of a "maverick" firm ("a firm that plays a disruptive role in the market to the benefit of customers") as one of the considerations for approving, conditioning, or denying a merger.
A few years ago I worked at a national competition authority (I'm not an American) and I could witness first hand how the concept of a "maverick firm" was key in conditioning a merger:
The basic idea was that this "maverick" firm is the one keeping competition alive, benefitting consumers by reducing prices and spoiling the coordination of the incumbents. This is similar to the way that the Scuhmpeter entrepreneur is the "engine" behind the increases in quality of life for the masses.
The difference is that for Schumpeter, the entrepreneur's objective was to become a monopolist, which he will. For modern economics, the maverick firm will inevitably fail on its quest to capture all the market share (unless it finds a government who would carve regulations that benefits it).
***
When I look at this and your summary of the Nobel laureates, I believe that the existence of "Schumpeterian" entrepreneurs with high risk tolerance is necessary for a nation to acquire *and maintain* growth.
I don't believe that America specifically is "cooked", because I think that there is no shortage of entrepreneurial Americans (both natives and foreign-born) willing to take risks and prove that they can still build great things.
Of course, there are many who want to keep the foreign-born out, but the most entrepreneurial and successful of them all will find a way. Life always finds a way.
The Nobel Committee in their 51 page assessment document mentions the word 'ENERGY' once: "The three-field crop rotation system, the heavy plow, windmills, and bigger and better water wheels all served to increase agricultural production and energy utilization, resulting in urbanization and population growth."
We can be sure - even after today's prize economists do not understand economic growth.
Some of the history is a bit off. The “oldest” growth model would be something like the Walras/Cassel/Von Neumann balanced growth model, then the similar Harrod Domar model, which is basically the thinking on growth that preceded Solow and that he was responding to in his 1951/3 papers. Then when the endogenous growth models came out later these early growth models got rebranded as the AK model. Solow wasn't all that impressed saying it was just the old models again (to be fair with some extra “microfoundations)
Also growth in solow model does not depend on the saving rate or population growth. Thats actually kind of the point.
Finally the idea of conditional convergence had/has pretty strong empirical support which is why Solow model became so widely adopted. The trick is to explain what determines technological growth AND convergence within the same framework
Very insightful. The growth culture aspect sounds intriguing.
I think that Aghion and Howitt finds- "that economic competition and the incentives it generates to improve and innovate products is the ultimate driver of economic growth." could be accurate. We've witnessed through the years the fierce tech. competition between the U.S. and China, and how this has lead to innovation in technology like EV with China on the lead. Although the U.S has the most advanced semiconductors, the problem is that they are still based in Taiwan (which is part of China), and has to move faster to bring these factories to U.S. territory or risk losing them to China.
One can only wish that the U.S. government could put its act together and agree in policy instead of becoming 100% political, dividing the country, and choosing to ignore how bad the U.S. economy currently is.
I agree with you I believe if the government did get its act together the market wouldn't be affected by competition but focusing on the supporting the innovation through other investments, the U.S policy just puts a hold on productivity.
This was so detailed and well explained. Thank you!
I always wonder what solid practical guidance could be delivered from these big development theories. Regrettably I haven't red Mokyr yet, but it sounds like one more "improve institutions" case but with extra steps.
It would be interesting to read what do you think on this matter (just to mention, it would be a great opportunity to say that "why nation fails" fails one more time, it deserves it anyway)
Thank you for this summary.
Embarassingly, I haven't read Mokyr, Aghion, and Howitt's work directly, but I have read Schumpeter's "Capitalism, Socialism and Democracy"!
I find echoes of this idea of the Schumpeterian entreprenur on the following sources:
***
1. Hausmann & Rodrik (2005) "Self-Discovery in a Development Strategy for El Salvador"
https://growthlab.hks.harvard.edu/publications/self-discovery-development-strategy-el-salvador
The basic context is that during the 90s, El Salvador adopted all the right "neoliberal" economic policies, but it has subsequently failed to achieve catch-up growth, averaging roughly 2% year.
From the authors:
"Producing new is a different proposition from producing more. Entrepreneurs need to undertake investments in new areas where profitability is inherently uncertain [...] New activities often require complementary and lumpy investments to be made simultaneously (a coordination externality). Regardless of whether they are successful, they generate valuable information for other entrepreneurs who can then choose to imitate incumbents (an information externality)."
So the hypothesis of the authors is that absence of growth is generated by the Salvadoran entrepreneurs being too risk-averse, such that they don't invest enough in new high-productivity sectors.
Their policy proposal is basically for the government to consider implementing an Industrial Policy, but the soluction could also come from a "Schumpeterian" entrepreneur who is willing to take high risks. (Or from *many* such entrepreneurs, because some of them will inevitably fail).
***
2. FTC's 2010 Horizontal Merger guidelines
https://www.justice.gov/atr/file/810276/dl?inline=
The guidelines mention the concept of a "maverick" firm ("a firm that plays a disruptive role in the market to the benefit of customers") as one of the considerations for approving, conditioning, or denying a merger.
A few years ago I worked at a national competition authority (I'm not an American) and I could witness first hand how the concept of a "maverick firm" was key in conditioning a merger:
The basic idea was that this "maverick" firm is the one keeping competition alive, benefitting consumers by reducing prices and spoiling the coordination of the incumbents. This is similar to the way that the Scuhmpeter entrepreneur is the "engine" behind the increases in quality of life for the masses.
The difference is that for Schumpeter, the entrepreneur's objective was to become a monopolist, which he will. For modern economics, the maverick firm will inevitably fail on its quest to capture all the market share (unless it finds a government who would carve regulations that benefits it).
***
When I look at this and your summary of the Nobel laureates, I believe that the existence of "Schumpeterian" entrepreneurs with high risk tolerance is necessary for a nation to acquire *and maintain* growth.
I don't believe that America specifically is "cooked", because I think that there is no shortage of entrepreneurial Americans (both natives and foreign-born) willing to take risks and prove that they can still build great things.
Of course, there are many who want to keep the foreign-born out, but the most entrepreneurial and successful of them all will find a way. Life always finds a way.
The Nobel Committee in their 51 page assessment document mentions the word 'ENERGY' once: "The three-field crop rotation system, the heavy plow, windmills, and bigger and better water wheels all served to increase agricultural production and energy utilization, resulting in urbanization and population growth."
We can be sure - even after today's prize economists do not understand economic growth.
Yawn