Innovation, Unemployment and Policy in the Theories of Growth and Distribution
Edited by Neri Salvadori and Renato Balducci
Edward Elgar, Cheltenham, UK, 2005, pp. 301 $45.00/£62.96 (Hardback).
ISBN 1-84542-321-6
Innovation, Unemployment and Policy in the Theories of Growth and Distribution attempts to answer an interesting question: what are the linkages between new (i.e. endogenous) growth theory and classical economics? The possibility of such a link is described by the editors in their introduction (pg. xii--xiv)
...the role played by `labour' in the classical authors is assumed by `human capital' or `knowledge'. Both labour, on the one hand, and human capital or knowledge, on the other, are taken to be productible; with constant returns to scale the rate of profit and, therefore, the rate of growth are determined and constant over time. The use of externalities allows the presence of increasing returns similar to the division of labour found in Adam Smith's reasoning.
The idea of the book is to look at the linkages between economic growth and distribution, tying in in successive sections the theories of human capital and development, research and development, consumption variety and quality of investment, analysis of imperfect labour markets and closing the book with the linkages between growth and distribution.
The chapters display a variety of methodological approaches, from dynamic programming via the Grossman-Helpman model (Chapters 1, 2, 3, 5, 6, 9, 10, 13), analysis of structural change (Chapter 4), social network analysis using graph theory (7), overlapping generations (Chapter 8 and 14), Bellman equation style search theory with behavioural traits (Chapter 9) and Social Accounting Matrices through structuralist macroeconomics (Chapter 12).
For my money, the best chapter in the book is La Marca's development of a complex though analytically tractable open economy Social Accounting Matrix with explicit transition dynamics to focus on the effects of foreign debt on growth, distribution, wealth, capacity utilisation and employment. The model is similar in spirit and in implementation to Foley and Taylor's heterodox growth model (2006), published in the successor to this volume. The model simultaneously describes the relationship of foreign debt holdings to distribution, terms of trade and growth when the economy has a tight investment constraint. This model offers quite persuasive evidence against a statement like Robert Lucas (2004) on the relationships between inequality (proxied in Chapter 12 through the relationship of aggregate demand to the distribution of wages and prices in the economy in equation 12.15) and other macro variables when the economy is investment-constrained. Lucas (2004) contends
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution... The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
Chapter 12 shows an explicit mechanism which calls Lucas optimism about the ``limitless potential of increasing production", when growth through production is limited by finite levels of investment. This chapter taught me a lot, and is a good example of the SAM methodology developed by Lance Taylor, Wynne Godley, and others. It shows via a simple SAM model how a credit constrained and highly indebted country, even though it `follows the rules' by keeping savings level and cutting wages, keeping favourable terms of trade, etc, can still end up circling a vicious cycle of debt and spiraling interest payments. Partial debt forgiveness, on the other hand, shifts the economy into a more virtuous path. Very nice.
The other chapters mostly mix heterodox thinking with standard endogenous growth models, stemming from the seminal contributions of Aghion and Howitt in harnessing Schumpeterian insights into New Growth Theory.
This volume presents the reader with a coherent vision of heterodox approaches to modern endogenous growth theories of growth and distribution, and in that the editors and authors are to be applauded. The stated intention of the book, however, is to provide sound theoretical and methodological linkages from the classical economists to modern endogenous growth theory, from Smith to Romer-Aghion-Howitt via the Bellman equation, in a sense. The book is missing a crucial final chapter summarising all these approaches, to provide the answers to the question the editors pose in their introduction. In such a technical volume, it is easy to miss the wood for the trees. The central message of the book is not conveyed in a clear fashion; that is, the links between the classics and modern growth theorists are not made explicit. We do have a brief 4 page summary of each chapter's contribution from the editor on pages xx--xxiv, but this is in overview and obviously assumes the reader has not read the chapters themselves. The individual chapters are all very strong, but it is a struggle to see the common threads by the end. Perhaps a future volume may correct this error.
References
Foley D.K. and Taylor, L. A heterodox growth and distribution model. In Neri Salvadori, editor, Economic Growth and Distribution: On the Nature
and Causes of the Wealth of Nations. Edward Elgar, 2006.
Lucas, R. The Industrial Revolution: Past and Future, The Region (2003 Annual Report of the Federal Reserve Bank of Minneapolis), pp. 5–20. 2004.