Classical Growth Theory - Explained
What is Classical Growth Theory?
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Table of ContentsWhat is Classical Growth Theory?Why is Classical Growth Theory Important?Academic Research on Classical Growth Theory
What is Classical Growth Theory?
The Classical Growth Theory is an economic theory that maintains that an increase in population growth leads to a decrease in economic growth. According to this theory, economic growth ceases when there is a rise in population, this is because when population increases, resources become limited causing a decline in economic growth. Proponents of this theory belief that population explosion or increase is caused by a temporary increase in the real gross domestic product of a country. However, when there is population explosion, there is a higher demand and limited resources which will in turn cause the end of an economic growth.
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Why is Classical Growth Theory Important?
Generally, classical growth theories focus on the concept of economic growth and population growth. The predominant classical growth theories were developed by Adam Smith and Thomas Malthus. These theories explored the impacts of population increase on economic growth. For instance, in the early days, there are sufficient amount of lands for families, this is where they work and get their livelihood. At some point, all good and productive lands were occupied and as the number of people increased, the available lands required more efforts and produced little harvests. Land became a limitation for the population and productivity diminished. This outplay of situations gave the belief that when humans continue to reproduce and increase in population, hunger and war is at hand. Thomas Malthus stated the major controls of population which are;
- Abstinence from sex which he described as a form of 'moral self-restraint.'
- Sexual practices with no intention of procreation or reproduction, and
- Hunger, diseases and wars.
Being a Reverend, Malthus placed more emphasis on the first solution. However, there are many classical theory ideas that do not resonate with the belief of Thomas Malthus, different classical theories emerged in the eighteenth century when a massive growth occurred. According to Ricardo and Marx, a major factor for economic growth is capital. An increase in the number of workers influence capital, workers also increase when there is an accumulation of capital.
Academic Research on Classical Growth Theory
- The classical theory of economic growth, Eltis, W. (2000). In the Classical Theory of Economic Growth (pp. 310-338). Palgrave Macmillan, London. This paper makes a thorough discussion on the classical theory of economic growth. There are several economists who worked on this theory and its modifications with respect to modern economics. The models elaborated by Smith, Marx, Quesnay, Malthus and Ricardo are still considered worldwide, even after 100 or 200 years. But at the same time, there are some controversies in the very first version of their models. Though, the subsequent researched improved the concepts. The need for further evolution is yet to be.
- Growth theory through the lens of development economics, Banerjee, A. V., & Duflo, E. (2005). Handbook of economic growth, 1, 473-552. Traditionally, the Growth Theory assumes the presence of an aggregate production function which is closely connected to the optimal resource allocation assumption within each economy. The authors provide proper evidence that the optimal resource allocation assumption radically fails. They argue that the evidence poses issues for new and old growth theories alike. The main fact is the large heterogeneity of return rates to similar factor in an economy. Then, they review many reasons of this misallocation. In production, there should be fixed costs. To conclude, the authors outline the theory of non-aggregate growth and evaluate the existing attempts for taking this model to the data.
- The emergence of chaos from classical economic growth, Day, R. H. (1983). The Quarterly Journal of Economics, 98(2), 201-213. This study demonstrates how the fluctuation of an unstable and erotic nature can merge from the process of deterministic economic growth. The analysis implications are at least 2. 1st, the noticeable changes in the way, an economy reacts do not need us to reject the understanding of its working process. 2nd, we do not need to seek in the exogenous forces a detail as to what is the reason of the change in the behavioural patterns and why it might be so hard to anticipate the upcoming events from the profiles of previous experience.
- Human capital and growth: theory and evidence, Romer, P. M. (1989). (No. w3173). National Bureau of Economic Research. This article explains the role of human capital in the endogenous growth model. This framework focuses on 2 queries: the first is about the theoretical distinction between intangibles of experience or education and science or knowledge. The second is about the effect of science and knowledge on production. One implication is that a variables initial level (e.g. literacy) may have importance for the subsequent growth. This emphasis on an inputs level is different from growth on change rates of inputs. The findings are that literacy has no extra explanatory power in growth rates national regression on investment, etc. But having consistency with the model, the literacy initial level helps in predicting the subsequent investment rate and the growth rate, indirectly.
- A general equilibrium approach to monetary theory, Tobin, J. (1969). Journal of money, credit and banking, 1(1), 15-29. In this research, the author modifies the auction rules of uniform price and allows the seller for rationing bidders. The author presents a strategic basis for underpricing when the seller is interested in the dispersion of the ownership. In addition, several equilibria of so-called Collusive Seeming disappear. That is why the author describes a general equilibrium theory to monetary approach.
- A contribution to the theory of economic growth, Solow, R. M. (1956). The quarterly journal of economics, 70(1), 65-94. This paper describes the important aspects of the Theory of Economic Growth, also known as a Long Run Growth Model and its effects on the economic conditions of a country. The author examines the possible growth patterns presented in this model and elaborates it with the help of practical examples. He observes the behaviour of interest rates as well as the wage rate. Finally, he proposes an extension to this model according to his perception.
- Slow convergence? The new endogenous growth theory and regional development, Martin, R., & Sunley, P. (1998). Economic geography, 74(3), 201-227. The role of interest has been revived in economics in the perspective of economic growth, particularly, about longtime convergence in output and PCI (Per Capita Income) between countries. It promotes the evolution of Endogenous Growth Theory (RGT) that strives to go beyond the traditional neoclassical theory. To check and implement their ideas, economists have started using long-run regional growth patterns. They suggest that regional convergence is a discontinuous and slow process. The authors consider whether RGT can explain their findings. They argue that it has significant regional implications, but also some limitations while applying to regional cases.
- The classical approach to convergence analysis, Sala-i-Martin, X. X. (1996). The economic journal, 1019-1036. This paper discusses the classical theory of convergence analysis. It explains the concepts of absolute -convergence, conditional -convergence and -convergence. The author applies them to a number of data sets, containing a big cross-section of one hundred and ten countries, the US, EU regions, Japan prefectures and member countries of OECD (Organisation for Economic Co-operation & Development). All data sets show strong evidence of absolute -convergence and -convergence except the big cross-section countries which displays conditional -convergence and -convergence. It is the same in all data sets, nearly two percent every year.
- Fiscal policy in a neo-classical growth model: An analysis of time required for equilibrating adjustment, Sato, R. (1963). The Review of Economic Studies, 30(1), 16-23. This research throws light on the neoclassical growth model and its impact on the fiscal policy of a country. The author analyses the time which the equilibrium adjustment requires. He finds 3 major differences from the Model of Harrod Domar. The 1st is that the equilibrium growth rate does not depend on the capital accumulation rate. The 2nd is that any departure from the equilibrium causes an automatic equilibrating move back to the natural growth rate. The 3rd is that with the help of production function, we can bring the wage rate, profit rate and income/head of the labour force to the model. Finally, the author satisfies many relevant questions using examples in an easy way.
- Economic growth and social capital, Whiteley, P. F. (2000). Political studies, 48(3), 443-466. The latest interdisciplinary theoretical approaches suggest that the citizens interpersonal trust or social capital has a vital role in determining the political institutions efficiency and contemporary societys economic performance. This review paper evaluates the relationship in economic growth and social capital in a sample of 34 countries from 1970-1992 using the modified neoclassical model. The findings are that social capital affects the growth which is equally strong as the education or human capital is. There is much more focus on the latest work of endogenous growth theory. It has the same effect on growth as the ability of under-developed countries to adopt technological innovations.
- Linking entrepreneurship and economic growth, Wennekers, S., & Thurik, R. (1999). Small business economics, 13(1), 27-56. The economists have observed the role of economic growth and entrepreneurship during the stagflation of the 1980s and then a re-evaluation of 1980s and 1990s. The objective of this paper is to investigate the relation between the entrepreneurship and economic growth with the help of macroeconomic growth theory, evolutionary economics, historical views on entrepreneurship, industrial economics and history of economic growth. It requires to decompose the concept of entrepreneurship. The first objective is to understand the involved dimensions while making the analysis. The second is to gain insight into establishing a connection between economic growth and entrepreneurial dimensions. The third and last is to give suggestions for future empirical work about this relationship.
- Entrepreneurship, innovation and economic growth: Evidence from GEM data, Wong, P. K., Ho, Y. P., & Autio, E. (2005). Small business economics, 24(3), 335-350. This paper uses cross-sectional data of thirty-seven countries taking part in GEM 2002. It describes the augmented Cobb Douglas production to know about the formation of firms and technological innovations determining growth, separately. The authors contrast between various entrepreneurial activities applying GEM TEA (Total Entrepreneurial Activity) rates, i.e. 4 main activities (necessity TEA, high growth potential TEA, opportunity TEA and overall TEA). Just the high growth potential entrepreneurship has a great effect on economic growth. The findings are that the quick developing new firms account for new employment by SMEs (Small & Medium Enterprises) in advanced nations.