Abstract
Thoughts and theories on economic growth can be traced back to the classical economists of the eighteenth and nineteenth century, whose works are briefly reviewed alongside the transition to neoclassical growth theory in Sect. 2.1. The basic outline of neoclassical growth models as first developed by Solow (1956) and Swan (1956) is presented in Sect. 2.2. The familiar but nonetheless special case of a Cobb-Douglas production function is examined in Sect. 2.3 in connection with the derivation of steady state levels of factors of production and output. Finally, Sect. 2.4 examines the inclusion of human capital as an additional factor of production and provides a note on endogenous growth theory.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Smith famously exemplifies this with the production of pins.
- 2.
“Das Kapital hat Kapital produziert.”
- 3.
It is also interesting to note that political arguments in defence of declining wage shares (i.e. rising rates of surplus value) nowadays often go like this: “The wage share may decline, but workers are still better off because wages and salaries continue to grow at real terms” (see, for instance, Der Standard, July 21, 2007, p. 32: “…die Verdienste der unselbständig Beschäftigten [schrumpfen] – statistisch gesehen – nicht. Ihre Einkommen wachsen nur langsamer als Kapital- und Unternehmensgewinne.”).
- 4.
The issue of what is actually “big enough” becomes relevant again when dealing with regions, and will be explored in Sect. 6.1.
- 5.
Gross national income is conceptually identical to gross national product.
- 6.
Except for the possibility that there is no physical capital at all, which corresponds to the second intersection of the two lines at the point of origin in Fig. 2.1. As this mathematically possible equilibrium represents a non-existing economy, it is of no further interest.
- 7.
A formal proof for the stability of the equilibrium can be found in Krelle (1988).
- 8.
The term steady state reminds one of the stationary state as discussed in Sect. 2.1. The difference is that at steady state, an economy continues to grow at constant rate along the steady state growth path. Note that growth at constant rates also includes the possibilities of zero or even negative growth.
- 9.
This residual has become known as the Solow residual.
- 10.
Definitions and discussions of the various ways of implementing technological progress in a neoclassical production function can be found in Beckmann and Künzi (1984).
- 11.
The terms “abstract knowledge”, “state of technology” and, if appropriate, “effectiveness of labour” are usually used as synonyms here as well as in the bulk of growth literature.
- 12.
The term human capital (“Humankapital”) has been voted Ghastly Neologism of the Year 2004 (“Unwort des Jahres”) in Germany, which provoked some controversy. It should be stressed that the jury was appalled by non-technical applications of the expression (Spiegel Online, 18th January 2005 (http://www.spiegel.de/kultur/gesellschaft/0,1518,337259,00.html, queried on 30-July-2007)).
- 13.
In analogy to Sect. 2.2, the possibility of initial values of either type of capital equalling zero is ignored.
- 14.
A formal proof of the stability of the Mankiw-Romer-Weil model can be found in Gandolfo (1997).
- 15.
Economic history is somewhat reflected in these two most important neoclassical growth models: the Solow model adjusts the focus on physical capital accumulation, and provides an explanation of worldwide economic growth after the Second World War; the Mankiw-Romer-Weil model adds a focus on human capital accumulation to the former, and provides an explanation of worldwide economic growth since the decline of industrial employment in Western Europe and North America. Seen from a meta-level, these two models perfectly mirror their respective ages of economic development.
References
Aghion P, Howitt P (1992) A model of growth through creative destruction. Econometrica 60:323–351
Barro RJ, Sala-i-Martin XX (1995) Economic growth. McGraw-Hill, New York, NY
Beckmann MJ, Künzi HP (1984) Mathematik für Ökonomen III – Analysis in mehreren Variablen. Springer, Berlin, Heidelberg, New York, NY and Tokyo
Chiang A, Wainwright K (2005) Fundamental Methods of mathematical economics, 4th edn. McGraw-Hill/Irwin, New York, NY
Domar ED (1946) Capital expansion, rate of growth, and employment. Econometrica 14(2):137–147
Gandolfo G (1997) Economic dynamics, 3rd edn. Springer, Berlin, Heidelberg and New York, NY
Grossman GM, Helpman E (1991) Innovation and growth in the global economy. MIT Press, Cambridge, MA
Harrod RF (1939) An essay in dynamic theory. Econ J 49(193):14–33
Inada K-I (1963) On a two-sector model of economic growth: comments and a generalization. Rev Econ Stud 30(2):119–127
König H (1997) Innovation und Beschäftigung. In: Vosgerau, H-J (ed) Zentrum und Peripherie – Zur Entwicklung der Arbeitsteilung in Europa. Duncker & Humblot, Berlin
Krelle W (1988) Theorie des wirtschaftlichen Wachstums, 2nd edn. Springer, Berlin, Heidelberg, New York, NY and Tokyo
Krelle W, Gabisch G (1972) Wachstumstheorie. Springer, Berlin, Heidelberg and New York, NY
Lucas RE Jr (July 1988) On the mechanics of economic development. J Monet Econ 22:3–42
Lucas RE Jr (1990) Why doesn’t capital flow from rich to poor countries? Am Econ Rev 80(2):92–96
Mankiw NG, Romer D, Weil DN (May 1992) A contribution to the empirics of economic growth. Q J Econ 107:407–437
Marx K (1872) Das Kapital – Kritik der politischen Ökonomie; Erster Band: Der Produktionsprozeß des Kapitals, 2nd edn, Reprint 2003. Parkland, Cologne
Marx K (1885) Das Kapital – Kritik der politischen Ökonomie; Zweiter Band: Der Zirkulationsprozeß des Kapitals, 2nd edn, Reprint 2003. Dietz, Berlin
Marx K (1894) Das Kapital – Kritik der politischen Ökonomie; Dritter Band: Der Gesamtprozeß des Kapitals Reprint 2003. Dietz, Berlin
Pasinetti LL (1960) A mathematical formulation of the Ricardian system. Rev Econ Stud 27(2):78–98
Ricardo D (1821) On the principles of political economy and taxation, 3rd edn, Reprint 1996. Prometheus, New York, NY
Romer D (1996) Advanced macroeconomics. McGraw-Hill, New York, NY
Romer PM (1986) Increasing returns and long run growth. J Polit Econ 94(5):1002–1037
Romer PM (1990) Endogenous technological change. J Polit Econ 98(2):71–102
Schumpeter JA (1926) Theorie der wirtschaftlichen Entwicklung, 2nd edn, Reprint 1987. Duncker & Humblot, Berlin
Schumpeter JA (1942) Capitalism, socialism and democracy German edition 1993: A. Francke Verlag, Tübingen and Basel
Smith A (1776) An inquiry into the nature and causes of the wealth of nations German edition 2003: Deutscher Taschenbuch Verlag, Munich
Solow RM (1956) A contribution to the theory of economic growth. Q J Econ 70(1):65–94
Solow RM (1957) Technical change and the aggregate production function. Rev Econ Stat 39(3):312–320
Swan TW (1956) Economic growth and capital accumulation. Econ Rec 32(2):334–361
The World Bank (2004a) World Development Report 2005. The World Bank and Oxford University Press, New York, NY
The World Bank (2004b) World Development Indicators 2004. The World Bank, New York, NY
The World Bank (2008) Global development finance – the role of international banking. The World Bank, New York, NY
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2011 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Sardadvar, S. (2011). Neoclassical Growth Theory and Standard Models. In: Economic Growth in the Regions of Europe. Contributions to Economics, vol 1. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2637-1_2
Download citation
DOI: https://doi.org/10.1007/978-3-7908-2637-1_2
Published:
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-7908-2636-4
Online ISBN: 978-3-7908-2637-1
eBook Packages: Business and EconomicsEconomics and Finance (R0)