The Economics of Growth

 THE ECONOMICS OF GROWTH

Why This Book?

To learn about economic growth you need formal theory, for organizing the facts,

clarifying causal relationships, and drawing out hidden implications. In growth

economics, as in other areas of economics, an argument that is not disciplined

by a clear theoretical framework is rarely enlightening.

Our experience with graduates and undergraduates at Brown and Harvard has

taught us, however, that the theory needed to understand the substantive issues

of economic growth is much simpler than what is found in most modern text-

books. You do not need to master all the subtleties of dynamic programming and

stochastic processes in order to learn what is essential about such issues as cross-

country convergence, the effects of fi nancial development on growth, and the

consequences of globalization. The required tools can be acquired quickly by

anyone equipped with elementary calculus and probability theory.

These considerations are what motivated us to write The Economics of Growth.

We believe that what is going on at the frontiers of research on economic growth

can also be made accessible to undergraduates, as well as to policy makers who

have not been to graduate school for many years, even though gaining this access

requires learning some basic tools and models. Although there are many other

excellent books on growth economics,1

those that focus on theory are either too

removed from policy and empirical applications or too involved with formal

technicalities to be useful or interesting to the uninitiated reader wanting to learn

about the substantive issues, while other books that focus on substantive issues

are not as concerned with formal models as is necessary. None of them present

the main facts and puzzles, propose simple tools and models to explain these

facts, acquaint the reader with frontier material on growth—both theoretical and

empirical— or initiate the reader into thinking about growth policy. What follows

is our attempt to fi ll this gap.

To bring the reader up to date on the frontiers of the subject, we have had to

write a comprehensive book. In the fi rst part we introduce all the major growth

paradigms (neoclassical, AK, product-variety, and Schumpeterian), and then in

subsequent chapters we show how these paradigms can be used to analyze various

aspects of the growth process and to think about the design of growth policy. The

book is also comprehensive in its account of the most recent contributions and

debates on growth: in particular, we acquaint the reader with the literature on

directed technical change and its applications to wage inequality; we provide

simple presentations of recent models of industrialization and the transition to

modern economic growth; we show simple models of trade, competition, and

growth with fi rm heterogeneity; we analyze the relationships between growth and

fi nance, between growth, volatility and risk, between growth and the environ-

ment, and between growth and education; we refl ect on the recent debates on

institutions versus human capital as determinants of growth; and we introduce

the reader to the nascent literature on growth and culture.

Although comprehensive, the book does not provide an unbiased survey of all

points of view. On the contrary, it is opinionated in at least two respects. First,

in order to keep the book from getting too big, we had to be selective in the

material covered on each topic. At the end of each chapter, however, we include

literature notes that provide the reader with extensive references on the subject

and, in particular, direct her to the corresponding chapter(s) in the Handbook of

Economic Growth (Aghion and Durlauf 2005), the most recent compendium of

research on economic growth. Second, even though we repeatedly use the AK or

product-variety models in the text or in problem sets, we do not hide our prefer-

ence for the Schumpeterian model, which we use more systematically than the

others when analyzing the growth process and when discussing the design of

growth policy.