Our discussion of economic growth keeps emphasizing the role of technological advances as a key factor stimulating growth. Earlier growth theories treated such advances as "given" (i.e., exogenous to the economy). A more recent approach to growth is the new growth theory, in which technological advance is seen as endogenous: the outcome of what Joseph Schumpeter, the godfather of new growth theory, referred to as "the businessman's hunt for profits."
Schumpeter, writing over 50 years ago, argued that the essence of capitalism was the process of creative destruction. Schumpeter and creative destruction
"The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates...
"The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation...that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism."
(Joseph Schumpeter, Capitalism, Socialism, and Democracy, 1942, p. 83.)
Because innovations can bring profits, there will be continued technological change so long as there is a potential for making money. This continued technological change, then, will be the engine of sustained economic growth.
Growth-promoting policies
Thirty years ago, per capita incomes in many countries in Asia, Africa, and Latin America were very low compared to those in the industrial West, and often not very different from one another (cf., more homogeneous "Third World"). During the past three decades, however, incomes have stagnated or declined in most African countries, they have grown somewhat in most Latin American countries, and they have grown dramatically in many Asian countries. Parkin notes that the "miracle economies" in Asia share three traits: high saving rate, high rate of investment in human capital, and learning-by-doing in high-technology industries.
Policies that stimulate saving (and thereby generate funds available for investment in both physical and human capital) should encourage faster growth. Tax incentives are an obvious means of encouraging saving.
Most evident in this regard would be taxing consumption rather than income (note the double taxation on saving that exists at present). This is what many European countries do by using value-added taxes (VATs). However, although Dole and Clinton are promoting different packages designed to stimulate growth, neither of them argues for a consumption tax in lieu of the income tax.
Public subsidization of research and development is another policy that serves to promote economic growth. The basic rationale for such activity by the public sector is that there usually are important spillover benefits (positive externalities) of research. Hence, the inability of the private researcher to capture all the benefits from certain types of research reduces the incentive for private firms to engage in such research. There will consequently be an underallocation of resources to research, and public subsidization serves to remedy this underallocation.
Perhaps the most notable success story in this area is in agriculture. The U.S. system of publicly-funded research and extension has made remarkable contributions to increasing farm productivity: a hundred years ago, almost 40 percent of the population was engaged in agriculture, while at present only 2+ percent of the work force is required to feed the nation. The dramatic increases in agricultural productivity stemming from development of high-yielding varieties and other technological advances would not have been possible if agricultural research had been left to the private sector.
Parkin argues for a third policy to promote growth: target high-tech industries. This proposal is somewhat more controversial than the others he discusses (cf., industrial policy, Japanese growth and MITI), largely because there is no obvious mechanism for deciding which firms or specific industries should receive assistance.
The final strategy for promoting growth that he discusses is to encourage international trade. The notion of dynamic comparative advantage is a recent concept which emphasizes the inportance of first-mover advantages (e.g., in developing specialized human capital to exploit new technologies), but historically economists have argued for trade as a vehicle for promoting economic well-being for both trading partners.
In terms of recent experience, it is useful to contrast the trade policies of developing countries. Beginning in the 1960s, many Asian countries (the ones that became the "miracle economies") emphasized export promotion, typically beginning with light assembly manufacturing to take advantage of low labor cost and subsequently moving into increasingly high-tech operations. By contrast, countries in Africa and Latin America emphasized import substitution policies, aimed at protecting domestic "infant industries" to allow them to develop and produce output that would substitute for imports. In brief, the economies that promoted exports thrived while those that sought to bring about import substitution fared much more poorly.
Note: the export promotion countries did not always pursue trade-encouraging strategies in both directions -- cf., barriers to entry in the Japanese and Korean economies.
© 1996 David Shapiro
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