Unified
Growth Theory
Slides of a Lecture Series on the subject:
Foundations:
Underlying
Philosophy:
Overview:
The evolution of economies during the major portion of human
history was marked by Malthusian Stagnation. Technological progress and
population growth were miniscule by modern standards and the average growth
rate of income per capita in various regions of the world was even slower due
to the offsetting effect of population growth on the expansion of resources per
capita. In the past two centuries, in contrast, the pace of technological
progress increased significantly in association with the process of
industrialization. Various regions of the world departed from the Malthusian
trap and experienced initially a considerable rise in the growth rates of
income per capita and population. Unlike episodes of technological progress in
the pre-Industrial Revolution era that failed to generate sustained economic
growth, the increasing role of human capital in the production process in the
second phase of industrialization ultimately prompted a demographic transition,
liberating the gains in productivity from the counterbalancing effects of
population growth. The decline in the growth rate of population, and the
associated enhancement of technological progress and human capital formation,
paved the way for the emergence of the modern state of sustained economic
growth.
The transition from stagnation to growth and the associated
phenomenon of the great divergence have been the subject of intensive research
in the growth literature in recent years. The discrepancy between the
predictions of exogenous and endogenous growth models, and the process of
development over most of human history, induced growth theorists to advance an
alternative theory that would capture in a single unified framework the
contemporary era of sustained economic growth, the epoch of Malthusian
stagnation that had characterized most of the process of development, and the
fundamental driving forces of the recent transition between these distinct
regimes.
The preoccupation of growth theory with empirical
regularities that have characterized the growth process of developed economies
in the past century and of less developed economies in the last few decades,
has become harder to justify from a scientific viewpoint in light of the
existence of vast evidence about qualitatively different empirical regularities
that characterized the growth process over most of human existence. It has
become evident that in the absence of a unified growth theory that is
consistent with the entire process of development, the understanding of the
contemporary growth process would be incomplete and distorted. As stated
eloquently by Copernicus: “It is as though an artist were to gather the
hands, feet, head and other members for his images from diverse models, each
part perfectly drawn, but not related to a single body, and since they in no
way match each other, the result would be monster rather than man.”
The evolution of theories in older scientific disciplines
suggests that theories that are founded on the basis of a subset of the
existing observations and their driving forces may be attractive in the short
run, but non-robust and eventually non-durable in the long run. The attempts to
develop unified theories in physics have been based on the conviction that all
physical phenomena should be explainable by some underlying unity. Similarly,
the entire process of development and its fundamental forces ought to be
captured by a unified growth theory.
The advancement of unified growth theory was fueled by the
conviction that the understanding of the contemporary growth process would be
limited unless growth theory was based on micro-foundations that would reflect
the qualitative aspects of the growth process in its entirety. In particular,
the hurdles faced by less developed economies in reaching a state of sustained
economic growth would remain obscured unless the origin of the transition of
the currently developed economies into a state of sustained economic growth
would be identified, and its implications would be modified to account for the
additional economic forces faced by less developed economies in an
interdependent world.
Unified growth theory suggests that the transition from
stagnation to growth is an inevitable outcome of the process of development.
The inherent Malthusian interaction between the level of technology and the
size and the composition of the population accelerated the pace of technological
progress, and ultimately raised the importance of human capital in the
production process. The rise in the demand for human capital in the second
phase of industrialization, and its impact on the formation of human capital,
as well as on the onset of the demographic transition, brought about
significant technological advancements, along with a reduction in fertility
rates and population growth, enabling economies to convert a larger share of
the fruits of factor accumulation and technological progress into growth of
income per capita, and paving the way for the emergence of sustained economic
growth. Moreover, the theory suggests that differences in the timing of the
take-off from stagnation to growth across countries contributed significantly to
the Great Divergence and to the emergence of convergence clubs.
Variations in the timing of the transition from stagnation
to growth, and thus in economic performance across countries (e.g., England's
earlier industrialization in comparison to China), reflect initial differences
in geographical factors and historical accidents and their manifestation in
variations in institutional, demographic, and cultural factors, trade patterns,
colonial status, and public policy. In particular, once a
technologically-driven demand for human capital emerged in the second phase of
industrialization, the prevalence of human capital promoting institutions
determined the extensiveness of human capital formation, the timing of the
demographic transition, and the pace of the transition from stagnation to
growth. Thus, unified growth theory provides the natural framework of analysis
in which variations in the economic performance across countries and regions
could be examined based on the effect of variations in educational,
institutional, geographical, and cultural factors on the pace of the transition
from stagnation to growth.
The establishment of a unified growth theory has been a
great intellectual challenge, requiring major methodological innovations in the
construction of dynamical systems that could capture the complexity which
characterized the evolution of economies from a Malthusian epoch to a state of
sustained economic growth. Historical evidence suggests that the transition
from the Malthusian epoch to a state of sustained economic growth, rapid as it
may appear, was a gradual process and thus could not plausibly be viewed as the
outcome of a major exogenous shock that shifted economies from the basin of
attraction of the Malthusian epoch into the basin of attraction of the Modern
Growth Regime. The simplest methodology for the generation of this phase
transition – a major shock in an environment characterized by multiple
locally stable equilibria – was, therefore, not
applicable for the generation of the observed transition from stagnation to
growth.
An alternative methodology for the observed phase transition
was rather difficult to establish since a unified growth theory in which
economies take-off gradually but swiftly from an epoch of a stable Malthusian
stagnation would necessitate a gradual escape from an absorbing (stable)
equilibrium – a contradiction to the essence of a stable equilibrium.
Ultimately, however, it has become apparent that the observed rapid, continuous,
phase transition would be captured by a single dynamical system, if the set of
steady-state equilibria and their stability would be
altered qualitatively in the process of development. As proposed in unified
growth theory, first advanced by Galor and Weil (2000), during the Malthusian
epoch the dynamical system would have to be characterized by a stable
Malthusian equilibrium, but ultimately, due to the evolution of latent state
variables, the dynamical system would change qualitatively, the Malthusian equilibrium
would vanish endogenously, leaving the arena to the gravitational forces of the
emerging Modern Growth Regime, and permitting the economy to take-off and to
converge to a modern growth steady-state equilibrium.