The ‘New’ Growth Theory: Old Wine in New Goatskins

Abstract

With the inception of systematic economic analysis in the time of the classical economists the problem of what determines the dynamism and growth performance of the economy became a major focus of research in social sciences. Since that time it has always been felt that in order to understand the nature and causes of the wealth of nations and its growth one ought to study first and foremost the ‘causes of improvement in the productive powers of labour’, as Adam Smith put it, or the factors affecting the development of the ‘productive powers of society’, to use Karl Marx’s concept. It has also always been understood that there is an endogenous side to this process of improvement in social productivity. Reading authors such as Smith, Charles Babbage, Marx or Alfred Marshall one indeed gets the impression that there is no such thing as a purely exogenous change in productive powers. These are seen to rather depend on the actions of individuals and the impact these actions have in fostering economic growth. These actions and their ‘growth effectiveness’ are envisaged as being shaped by a variety of factors including cultural norms, social institutions, and a nation’s policy.1 In these authors’ works, technological and organisational change is portrayed consistently as being essentially endogenous. For example, in Smith’s concept of the division of labour, the pace at which capital accumulates (and thus markets expand) is singled out as the factor that is most important for the growth in labour productivity and income per capita (see Smith (1976) bk I, chs i— III; see also Negishi, 1993). The endogeneity of technological progress was also stressed in more recent times by authors such as Allyn Young and, particularly, Nicholas Kaldor, who even attempted — albeit with only limited success — to put the relationship between productivity growth and capital accumulation into algebraic form, in his so-called ‘technical progress function’. It was clear to these authors that ‘human capital’ and ‘technological knowledge’ do matter, and that improvements in the ‘skill, dexterity, and judgment with which labour is applied in any nation’ (Smith) are favourable to growth.