You are here

The Political Economy of Growth and Technology

Economic growth is typically understood as the percentage rate in the output of goods and services in an economy. The importance of economic growth is that it represents an improvement in our standard of living. However, this is not without some interesting challenges which are initially explored here, along with some basic algebra and measurement issues, which help us also determine what it doesn't represent. Following this, there is an exploration of the basic sources of growth especially in reference to the factors of production, and then an assessment of the "Solow residue", which recognises the importance of technology and education in growth. Finally, this review looks at the political economy of growth, and how particular distributions of ownership affect growth rates and aggregate economic welfare.

Growth in general

The basic claim of economic growth is that it represents improvements in goods and services. Whilst some growth is necessary as a replacement of the effects of depreciation, and measured with inflation, gross in excess of this replacement value represents a real improvement. As an economy grows there is increased demand for labour-inputs, and as a result, economic growth is usually correlated with improvements in the rate of employment. This in turn also reduces the requirement for government welfare-expenditure, borrowing, and allows for higher tax revenues. Redistribution policies are also politically more palatable as aggregate incomes rise; it is perceived as churlish and immature to argue against transfers when one has a high absolute level of wealth and income.

Economic growth can be measured in terms of absolute value and as a relative value, with the latter usually preferred. It is measured by aggregate income (Y), a reflection of aggregate demand, although in the longer run the supply-side, or production capacity is of greater importance. The basic algebra is as follows: Let Y_t and Y_t–1 be the values of GDP observed in periods t and t–1 respectively; the absolute change in the value of Gross Domestic Product measured from period t–1 to period t is defined as the difference: ∆Y_t = Y_t – Y_t–1, and the growth rate of GDP from period t–1 to period t is defined as the ratio between the absolute change in period t and the value of GDP in period t–1; g_Y,t = (Y − Y_t−1) / (Y_t−1). Further, because economic growth has to distributed among a population, the basic measure of a country's economic growth is measured per capita, y_t = Y_t/L_t, where Y_t measures real GDP at time t, and L_t the population at time t. Note that whilst most measurements of economic growth are based on GDP, a few prefer to use Gross National Product or Income (GNP/GNI). In a nutshell, GDP measures the value of goods and services produced within a country's borders by citizens and non-citizens, whereas GNP measures the value of goods and services by a country's citizens, whether domestic or in foreign lands.

It is not as if economic growth does not have its critics, in particular from the environmental movement. Expansion in economic productivity is often at the cost of the fixed supply of the environment. It doesn't have to this way of course, one can have an increase in economic growth with a reduced environmental impact ("doing more with less") but with a single economic figure reflecting the fixed asset class of "the environment" not incorporated in such calculations, GDP growth is a partially flawed measure on that account alone. Secondly, GDP growth is no guarantee of improvements in standard of living, utility or happiness. The Economist Quality of Life index showed a number of nations that had a significant divergence from Quality of Life and GDP per capita, both on a positive (Sweden, Italy, Spain and New Zealand) and negative (the United States, the United Kingdon, Saudi Arabia, Russia). Two other criticisms can be raised as well, which fortunately have some semblance of a solution. The first is that comparisons of GDP across countries is difficult, as something as simple as a common-exchange rate does not incorporate cost-of-living differences, especially with regard to the relatively high cost of services in advanced industrial economies. As a result, Purchasing Power Parity (PPP) is often used on a bundle of necessary goods. Finally, because GDP calculates output in the formal economy activities such as volunteer work or the informal economy are not typically included. Under such circumstances, GDP should be adjusted to use GDP per worker; i.e., y_t = Y_t/N_t, where N_t measures the number of people employed in the formal sector. The measure GDP per worker is also a measure of the average productivity of labour in a country, as it computes the average amount of output produced by each employed person.

Sources of Growth

The basic sources of production are tied with the economic factors of production; land, labour, and capital. Economic land (i.e., natural resources) is excluded as it is fixed in supply and our ability to access such resources constitutes a capital improvement to the location. Thus, the growth rate of increases in capital and labour represents the equivalent of the growth in labour and capital; e.g., if Y_t = Kt Lt , then the growth rate of Y is: g_Y,t ≅ g_K,t + g_L,t. The same calculations would apply if calculating the growth rate per capita, PPP, or as a measure of the formal sector of an economy, and extrapolated from there. Note that in the neoclassical production function, aggregate GDP(Y) is a function of capital and labour, Y_t = F( K_t , N_t ), with land combined with capital, perhaps one of the most curious and damaging abstractions in this sort of inquiry.

Increases in the production function inputs can either show increasing returns to scale (IRTS), constant returns to scale (CRTS), or decreasing returns to scale (DRTS). If inputs are increased by a proportion μ, and output increases by a factor greater than μ, then the production function is said to display increasing returns to scale, if output is equal to μ, the production function has CRTS, and if it is less than μ it has DRTS. Notably, from CRTS F(0) = 0; that is, an economy without capital and labour cannot produce any output. The marginal product of a factor (i.e., marginal product of capital, MLK, marginal product of labour, MPL) is the effect of a marginal increase of the a single unit production. Expressed over time, the "intensive form" of the production function is y_t = f ( k_t ), where f(k_t ) is defined as F(k_t,1). It is assumed that there is a diminishing marginal product of capital, that implies that the increase in output per worker from an extra unit of capital per worker declines as the ratio K/N increases.

A classic summary of predictive claims from "stylised facts" comes from Kaldor, initially developed in the late 1950s based on averaging empirical evidence from prior decades. It suggested that output per works constantly grows, that capital per worker increases over time and, as a result, the capital/output ratio is roughly constant. Further, the rate of return to capital is constant, the share of capital and labor in net income are nearly constant, and thus real wages grows over time. The evidence outside the OECD and even within it suggests that these stylised facts are not entirely accurate. One suggestion was that there would an absolute convergence of GDP per worker, which would suggest that lower initial standards of living correspond to higher average growth. Absolute convergence implied that poor countries would catch up with the standard of living of richer countries, and poverty would disappear around the world. Given that this has not happened has led to the development of conditional convergence, which states that a income per worker converges to a country-specific long-run level, determined by particular characteristics, such as higher saving and investment rates that accumulate in the form of physical capital to increase production. The implication of what happens when saving and investment are in speculative, non-productive "capital" (e.g., economic land) should be self-evident, and illustrates a problem with the neo-classical model which does not sufficiently differentiate on this matter.

Technology, Education, and Growth

One of the most important contributions to an understanding of economic growth comes from Solow, itself built on the Harrod-Domar model. It starts simply enough, noting that income is a function of consumption and investment, and that the factors of production are renumerated according to their marginal product, i.e., MPK = F_K = r (rents), MPL = F_N = w (wages). Saving is used to finance new investment and investments are used to increase capital stock and replace stock due to depreciation: I_t = K_t+1 − K_t + δK_t. In a steay-state economy, all endogenous variables are stable over time relative to one another and the growth rate of a ratio of two variables to one another in the steady state is zero. Output and consumption per worker are in a steady state when capital per worker is not growing. This is associated with long-run equilibrium and where steady-state stock of capital per worker exists when actual investment equals break-even investment. In the long run consumption, capital and output per worker all grow at the same rate, i.e. zero, and at this level one witnesses the golden rule (GR) level of capital per worker, kGR, is defined as the steady-state level of capital per worker that maximises consumption per worker.

Of course, economies are anything but steady-state. It is necessary to elaborate this basic model with the importance of technology (for physical capital), policy (for social institutions), and education (for labour).Production with exogenous technology can be represented ith the variable A_t, thus elaborating the production function to: Y_t = F(K_t, A_t, N_t ), which can also have a growth rate A_t = ( 1 + gA ) A_t − 1. It can be calculated also as "The Solow residual", accounting for any increase in growth that does not come from increases in growth in capital or labour, i.e., R = gY − [ αgK + ( 1 − α ) gN ]. In OECD countries more than half of GDP growth can be accounted from this "residual" and ultimately, the long-run growth rates of output, consumption, and capital per worker depend on this exogenous growth rate of productive technological progress. Even changes in the rate of savings, initially associated with the increase in growth, will only apply in the short run; in the long run, the higher savings rate will not generate growth in GDP per worker higher than gA. When the economy is in steady state, output per worker grows at the rate of technological progress, that is, a state of balanced growth.

Political Economy and Growth

It is necessary to iterate the relationship between the factors of production and renumeration according to economic classes as the foundation of political economy. Landlords are the owners of natural resources and receive rents as their income. As land exists a priori, landlords contribute nothing to production and rather, receive their income from the productive economic classes. Capitalists are those who own productive machinery and whose income depends on interest. Workers provide their mental, physical, or even social labour-power and receive wages. Note that an individual may belong to multiple classes simultaneously; a person who owns a second house and rents it out is both a landlord and a capitalist, the ratio derived the respective value of the two factors of production. A wage-earner may also have investments, for example in superannuation or shares. They are, a worker and a capitalist, again in proportion to income received from the respective factor of production. Economic classes do not depend on income; a rich worker (for example, one with a highly specialised technical skill), is still a workers and a poor capitalist is still a capitalist. Notably, for even their self-ownership of capital, most small-business owners are in fact working-class. Their income is not derived as interest from their capital ownership, but by their labour.

This exposition in mind, a political economy of economic growth can be derived. In the first instance, the landlord class is utterly parasitic, existing only off the incomes of the capitalist and worker. Not only is the class parasitic, but their presence actually retards economic growth, as it attracts the purchasing and holding of economic land without contributing to aggregate welfare. Fay Lewis' famous billboard "everybody works but the vacant lot", was a visceral example of how landlordism prevents growth. This same principle, of Ricardian rents, also applies to others areas of the productive process and with a careful distinction with Schumpeterian rents. In the former, an income is derived without an equivalent contribution to production. In the latter, an income is derived, but with a contribution to production; an example of this is the temporary monopolies applied to technologies. The problem being is, from the well-known perspective of institutional economics, temporary monopolies have a tendency to be extended in accordance to their political power rather than whether there has been just recompense. Because monopoly profits are enticing to the capitalist, increasingly there is a tendency towards unproductive investments, extensions of economic rents etc, instead of productive competition.

The position of the working class is increasingly difficult under these circumstances. Whilst technology increases productive output, resulting in cheaper goods, the worker must increase their skills and education at an equivalent rate in order to secure the proportionally higher-rates of pay. If the rate of technological begins to surprass the rate of educational growth, the working-class will lose ground equal to this divergence, and will only witness improvements in their standard of living due to the reduced price of some goods. At this point, external co-ordinating efforts in the form of democratic socialism is increasingly required; "democratic" in the sense that it co-ordinates public policy with a free and open source of opinions and information, "socialist" in the sense that it is interested in improving the public welfare. Capitalism, or for that matter, workers's cooperatives, are equally capable of engaging in productive investments in a competitive environment, but that environment must be established by an external governing body that also provides the social and physical infrastructure to help provide the playing field for these activities. As a priority the economic rents of the landlord class must be appropriated; their institutional power acts a deadweight upon the rest of society. As a subsequent rent-seeking activities by other organisations (in the form of patents etc) need to be restricted to the Schumpeterian levels alone.

Commenting on this Story will be automatically closed on June 25, 2021.