Theories of growth

In addition to the theories discussed above, a large body of literature has developed involving abstract mathematical models. Because this field of analysis is so technical, only a general picture of the kinds of problems and questions discussed can be given. First, a set of equations is drawn up describing what the model builder feels are the important relations between economic variables such as output, capital, investment, and consumption. These equations must relate economic variables to one another at different points in time: for example, output last year determines consumption this year, which in turn helps to determine output this year and therefore consumption and output next year. It is possible to work out the movements of the variables over as long a period as desired. At the centre of much of this analysis is the concept of a steady-state rate of growth: one in which all the economic variables contained in the set of equations grow at the same constant rate equal to the growth of the labour force.

A related class of studies attempts to take account of the welfare of workers and consumers in the maximization of growth. These “optimal growth” models seek to maximize consumer satisfaction over time. In a model such as this the solution will not be the highest possible growth rate but one that will maximize the welfare of consumers. The importance of such models for planners would seem to depend on the realism of their assumptions as to consumer desires and technology.

Model building and theorizing about growth has proceeded on various levels of abstraction. Some of the work is of little practical value, in the sense that its explanatory value is negligible. Such studies, however, may stimulate other work that is helpful in an understanding of the growth process. Some models, while realistic, are not applicable to all economies. Thus, a model that neglects international trade is of little use to a European economist trying to understand the more basic causes of differences in growth rates between countries.

Simon Kuznets, Capital in the American Economy: Its Formation and Financing (1961), a description of trends in capital formation in different sectors of the American economy from the mid-19th to the mid-20th century; W.W. Rostow, The Stages of Economic Growth, 2nd ed. (1971); Ezra J. Mishan, The Cost of Economic Growth (1967), a critique of rapid economic growth as a policy goal; John Kenneth Galbraith, The Affluent Society, 4th ed. (1984), a critique of modern capitalism written for the layman; Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, 2 vol. (1939, reprinted 1982), a pioneering work in the field of growth and cycles that stresses the importance of entrepreneurship; and James S. Duesenberry, Business Cycles and Economic Growth (1958, reprinted 1977), a theoretical study of a developed economy of the American type, with emphasis on the importance of demand in growth. Later studies include Dan Usher, The Measurement of Economic Growth (1980), an explanation of the difficulties inherent in such measurement; John Cornwall, The Conditions for Economic Recovery: A Post-Keynesian Analysis (1983), an analysis of the causes and consequences of economic stagnation; Martin Ricketts, The New Industrial Economics: An Introduction to Modern Theories of the Firm (1987), stressing the role of entrepreneurship in modern economics; and on government intervention, Stephen Wilks and Maurice Wright (eds.), Comparative Government-Industry Relations: Western Europe, the United States, and Japan (1987).