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Date: | Fri Mar 31 17:18:37 2006 |
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Well, well, let's have a little fun with all this. For the time being
I won't say how, I believe, Keynes would respond to what has been said
but let's turn to Solow's Growth model. Solow's growth model, as we all
remember, explains economic growth through changes in capital, labor and
technology. The model has been used to explain differences in living
standards
in different countries. In the short run the rate of savings determines a
country's capital stock which leads to higher growth. But in the long run
it's only technological change that will lead to higher growth. In terms of
savings a country should follow the Golden rule level of capital:
If MPK>depreciation continue to accumulate capital stock which leads to
higher output; if MPK<depreciation then increases in capital stock actually
leads to a decrease in long term consumption. So the Golden rule is:
MPK - depreciaton = 0.
But when you talk about different countries, particularly third-world
countries, another major factor is the population growth. For Solow's
model besides having investment to replace depreciated capital you need
new investment to meet any rate increase in population. So to have
Solow's steady-state you need capital to replace depreciation and to supply
new workers with units of new capital. This has been a major problem for
third-world countries, where you have large population growth which
affects the capital-labor ratio because what explains long term economic
growth is technological development or the efficiency of labor and capital.
The problem with Solow's model is that he assumes that technological
development is given exogenously which means he doesn't explain it.
If it is the case that this is where all the action is then it needs to
be explained, so we can have a better understanding of how we might be
able to improve the living conditions of people in third-world countries
and to help explain the difference between poor and rich countries.
And there has been a lot of interesting work on this with endogenous growth
theory. The key issue here has been to focus not on capital efficiency but
labor efficiency i.e. education and job training as a by-product of capital
accumulation or improvements in capital. So the emphasis now in growth
theory is more on the accumulation of human capital and of knowledge.
So what is all this talk about savings? The real issue is the rate of
population growth and the accumulation of human capital and of knowledge
:-).
-Ric Holt
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