EC104 Revision - topic 4

amarjotsidhu's version from 2015-06-09 15:37

Transition to Modern Economic Growth

Question Answer
What is modern economic growth?A sustained and consistent annual increase in GDP or GDP/capita. Represents a move from extensive to intensive growth via capital accumulation. Also represents a move from agriculture to industry/services. Technological development occurs and living standards improve
6 characteristics of MEG (Kuznets)high rates of growth of per capita output and population; productivity or intensive growth (TFP growth); structural transformation (agriculture -> industry); changes in the structure of society and its ideology (urbanisation, secularisation); opening up of international communications; wide gap between developed and under developed nations
Additional features of MEG in Britaindemand for new standardised goods; people prepared to work more days per year to buy new goods created by industrial production and internal trade; large consumer population but rise in dependency rates (more children and old people)
Endogenous growth theory'endogenises' (internal causes) typically exogenous (external cause) variables; emphasis that economic growth is an endogenous outcome of an economic system, not result of external forces; focus on technology and capital; tries to explain the rate of capital accumulation over time
Solow modelshows how output can grow because of growing inputs or more efficient use of given inputs; shows that capital accumulation runs into diminishing returns (gains from maintaining stock vs. gains from investing in additional capital stock); technological progress needed for sustained long run growth [y =f (K, L) ; y = Y/L ; k = kK/L
Lewis modelexplain growth of developing economies = transition of labour from agriculture to industry based on high wages; agriculture = low w (abundance of low, poor marginal returns to productivity); industry = high wages because of high productivity; industrial sector is becoming increasingly capital intensive -> profits reinvested -> process will continue until all the spare labour in agriculture has been used and economy is industrialised
Institutional change in Britain in 17th century(North & Weingast) - Glorious revolution - 1688 - key to MEG. parliament is given fiscal control and has power of monarchy now = more long-term economic rights for citizens; new constitution increased credibility that kings would not usurp parliament; government could credibility commit to upholding property rights stimulating growth; modernisation of administration and public finance; property rights + fiscal credibility = why Britain was first to experience MEG; risk premium that markets put on govt. debt (measure of fiscal credibility) - it became a discount between 1698 and 1705 (4% premium previously)
Traditional view of the industrial revolution(Dean and Cole)- sudden break with the past and increase in economic growth starting early C19; 'take off' stage (Rostow); starts 1800; 1.3% TFP growth: 1800-1831
Revisionist view of the industrial revolution(Crafts) - industrial revolution = episode of gradual acceleration with rapid technology change and productivity growth confined to a few sectors in manufacturing and transport; lower, gradual TFP growth (0.4% between 1800-1830); by second/third quarter of C19, growth was consistent and led to sustained and significant change (which made britain different); steam, which powered IR, made little contribution to labour productivity before 1830 -> took almost 100 years from the initial invention before the TFP benefits accrued; significant mechanisation between 1750 and 1850 but bigger change to come after
Agriculture in Britain(Crafts) - share of employment in agriculture in Britain by 1840 was as low as 22% while USA and Germany were still at 70% in 1870; organised on basis of capitalist farming = more productive = labour released into industry (Lewis model)
Institutions in Britain(Crafts) Britain had high quality institutions and policies by the standards of the time vs Europe; sustained growth sets Britain apart; significant TFP growth in the second half of C19; IR = long term sustained boom
Inventiveness in Britainendogenous growth theorists stress important of inventions and innovations; Britain had a high number of engineers; human capital needed to utilise developments
Demand in Britainunprecedented increase in population between 1750 and 1850 (7.5 million -> 20+ million) = boost in demand + market for growth of industrial output
Drivers of the industrial revolutionTrade; urbanisation;
Trade as a driver of the IRC16-17 -> England dominated European markets e.g. wool industry; added to this by creating an intercontinental trading network including the Americas and India via acquisition of colonial, naval power (Royal Navy defeated competing naval powers) and mercantilist trade; Navigation Acts - excluded foreigners from colonial trades
Urbanisation as a driver of the IRbig increase in population in London due to big increases in trade with colonies; growth of London created a shortage of woof fuel that was only relieved by the exploitation of coal which was cheaper than wood = cheapest energy in the world; growth of cities and manufacturing increased the demand for labour which meant that British wages and living standards were the highest in the world ; growth of cities and the high wage economy stimulated agriculture as the strong demand for food (meat, butter, etc.) forced it to become more productivity e.g. amalgamation of small holdings into large farms
Directed technology change (advantage of Britain)(Acemoglu) - 2 major forces affect equilibrium bias: price effect (encourages innovation directed at scarce factors ) + market size effect (leads to technical change favouring abundant factors) -> Britain successful in directing technical changes to price effect (many of inventions came out out resource saving aspect) + market effect (many inventions relied on cheap British resources e.g. British kilns used much more energy than those in China. Success = technology designed in Britain and suited to Britain's prices and markets--
Exogenous modelsHarrod Domar (growth depends on increasing savings and using that investment more efficiently through technological change but savings and channels = exogenous) ; Solow model (savings = key as they deliver investment in technology which can achieve long run growth BUT savings and technology still exogenous)
Endogenous models LR growth not 'given'; growth determined by econ agents e.g. workers in Britain working hard - many days
Explaining GB MEG using endogenous technological changegood institutions (GR); good property rights ; good human capital; good credit markets (BOE 1694)
Why did't the Dutch experience MEG first?1400-1700 - Dutch income = fastest in Europe and enjoyed the highest level of per capita income in Europe (1600-1820) BUT: per capita income growth wasn't sustained and ran into diminishing returns; growth not based on technical progress in industry but Smithies growth based on specialisation; no move to modern factory industry (large scale factories not established); urbanisation high but not as high as Britain; some modern aspects but not all
MEG in Britainsustained population growth and per capita income growth; growth based on technical progress in industry as well as Smithies growth; exhibited a high degree of structural change; high degree of urbanisation; higher living standards (taking over from Dutch)
Contribution of different sectors of British economy to IRAgriculture - early productivity gains release labour; industry - bigger factories given higher supply of labour and markets ; textiles - powerhouse of IR; business and finance - core for international trade; trade empire - sets Britain apart
Paradox in Britain's growthTFP growth slow by today's standards; some inventions don't make a contribution to productivity until mid 19th century
General purpose technologies(Lipsey) - generic technology which has large scope for improvements and becomes widely used, having a lot of spill over effects e.g. steam, electricity
GPT growth accounting issuesdifficult to quantify effects; effects slow to materialise; have a phase of increasing and diminishing productivity growth
Solow productivity paradoxGPTs are made cost effective for use in specific sectors initially - small fraction of the economy ; there is a long time lag before they are widely used and they have an impact on growth e.g. Steam engine invented by Watt in 1769 but innovated into a modern steam engine in 1850 - 100 years after; steam=inefficient technology at first
Failure of Victorian Britainreal output per capita grew more slowly than other industrialising nations at the end of C19; By late C19, US, Germany and other European countries were catching up; industries losing market share
Why did Britain fall behind?overseas investment preferences; failure to emulate US mass production techniques; lack of competition; trade policies ; invested too little in R&D; institutional failures; penalty of an early start
Overseas investment preferences (Failures of Britain)savings went abroad while they could have been used domestically; BUT, investors acting rationally, seeking higher returns + little demand for domestic capital investment
Failure to emulate US mass production targets (Failures of Britain)USA used more capital intensive process, benefited from factor endowments which were better suited to second IR (1870-1914) than Britain's factor endowments (Rothbarth-Habakkuk) ; USA had larger homogenous market
Lack of competition (Failures of Britain)lack of competition e.g. navigation acts BUT, there is no widespread observable failure at firm level, Britain still lead Europe in terms of labour productivity and industrial exports
Trade policies (Failure of Britain)US had stronger trade barriers = protected industry BUT not that important; more important = WWI weakening Britain's imperial system which threatens Britain's empire , its biggest market
invested too little in R&D (Failure of Britain)More focused on apprenticeships vs US inviting more into education and science and engineering (Oxbridge produces social scientists, not engineers)
Institutional failure (labour market) (Failure of Britain)Britain had high levels of union membership = low competition in labour markets; unions maintained skill labour over new capital and technology; restrictive shop floor practices
Institutional failure (business organisation) (Failure of Britain)Family control slow to adopt changes; no professional management culture; little vertical integration; mergers resulted in anti-competitive practices
Penalty of an early start (Failure of Britain)Conservative attitude to new changes; excessive confidence and complacency (Levine)
Over commitment hypothesisBritain stuck in old, low productivity sectors; legacy of inappropriate institituions; interest group constraints; uncompetitive firms remained too long into C20; British govt did not eliminate uncompetitive anti-trust practices
Support for over-committmentlots of structural unemployment after WWI; rigid L markets; Germans more efficient e.g. British car industry - poor quality, still L-intensive
Against over-comitmentno British failure pre 1914; new industries performed better than old
Failure of iron & steellarge decline in British share of world output by WWI; overtaken by US and Germany before then; slow adoption of large size blast furnaces; not all ore source exploited in Britain; British ore was lower grade; BUT, entrepreneurs not to adopt many US technologies as they were unsuitable
Ship building and engineering growth failureslow adoption of new technology + bigger US shipyards = more efficient BUT ship building advances not cost efficient for Britain ; American System of Manufacturing quickly installed in some engineering areas
Cotton textiles - growth failurefailure to adopt new ring spinning technology; stagnation of L productivity BUT, mule technology better suited to British factor prices than US = enterpreneurs rational + not cause of poor growth
Failure of industry summaryinron and steel - unfavourable factor endowments; shipbuilding - no failure as Britain's factor endowments not suitable for all technology;cotton textiles - failure as a result of international issues
Failure summarytoo little R&D investment and in technologies of 2nd IR but this is unlikely to have been enough to prevent Britain's relative decline

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