You will have noticed that there are vast disparities in wealth between rich and poor nations. The standard economist response is to start talking about the "Solow Growth Model".
Problems with this approach
1. A philosophical one: is GDP the best (or even a particularly good) measure of a nation's well-being?
2. How do you measure capital?
3. The standard Left answer for this question is: rich countries became rich by stealing from poor countries This is an intriging possibility that is beyond the ken of macroeconomics... byu postulating that everything happens in markets, it doesn't know how to even THINK about power or theft.
4. Land and resources are typically left out of growth theory. Given the recent commodity and land price increases, is this justified?
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3 comments:
The Solow model is appropriate only for some economies: mature, capitalist, free-market economies. (Actually, it would be better to talk of the Ramsey-Cass-Koopmans, where we have a decentralized general equilibrium.)
As for your points...
1. No. But it is a very good proxy for it when the structure of production--what gets produced, what trade-offs are made--is determined by consumer demand/markets.
For example, it makes little sense to take GDP as proxy for welfare for pre-'70s China or North Korea or the USSR. (Where production was guided by the 5 Year Plan, which was independent and many times against the preferences of the little people). It makes a lot of sense to use this proxy when it comes to the US or UK, where there was considerable "consumer sovereignty", at least in the past.
Actually, contemporary models, with a representative agent, for example, have an utility function which depends, explicitly or implicitly, on GDP, hours worked and unemployment. Things we can measure and fit into theory.
2. You work backwards from the National Accounts. On the income side, you have payments for capital services. You use a depreciation rate, from micro studies, if possible and then you restrict the time series with the theoretical structure of the neoclassical model. And you get an estimate of the capital stock.
Investment and capital services payments are flows. You use the neoclassical theory to get at the stock.
3. I don't understand what you mean. Of course you can have models with that.
There are many types of growth. Take, for example, the growth of ex-communist countries from Eastern Europe. They grew, after their revolutions, at dizzying rates. Who did they stole from?
Who did South Korea stole from? Or any of the other "growth miracles"?
This hypothesis you attribute to the Left has little if any explanatory power.
That being said, you're welcomed to formalize it, spell out exactly what you mean, write and solve a model and see how you can test it. I'm highly skeptical, I must admit.
4. Models with land as a 3rd factor of production are usually called Malthusian models. They perform good for pre-industrial economies.
There are models with study the switch from a pre-industrial society to an industrial one where you have a Malthusian economy and a Solow one, side by side. Technical progress makes people switch their work and, more importantly, investment from one to another. A model on this by Prescott and Parente is very nice!
In models of industrial economies, land plays a smaller role because of industrial technology. Of course, land is valuable but it's no longer the amount of land available which limits the growth of the economy.
Before we would hit the limits imposed by land, we hit limits imposed by other things (labor supply, for example).
For contemporary economies, the main issues center on productivity: technological innovation, taxation, labor supply, etc. Capital and land are of secondary importance.
Regarding your initial issue... You might want to look at the Prescott-Parente model (disparities between countries can be accounted mainly by their membership or not in a "free trade club", tax treatment and other aspects of political institutions quality, and the degree of freedom of information) and conditional convergence models (countries would converge to the same growth rate, if some conditions would be met).
P.S. Don't take this personally, but you're misrepresenting macroeconomics.
You say that the Solow model is the state-of-the-art answer from the economic profession to your questions... it isn't. Not even by far.
Then, in your 3rd point, you say that macroeconomics is only about markets. Maybe in some models, but the generalization is not warranted.
You then say that economics can't even "THINK" about theft and so on. Again, false. Becker's work on crime, with rational agents and everything, should be telling.
I will agree that international macroeconomics has done little work on the economics of war and colonial rule. But that's mainly because peaceful trade has raised some puzzles and because it's far more policy relevant.
In any case, models with non-market transfers can and have been written. Think only of all of the papers on optimal taxation.
P.S. On second thought, since you reminded me of this comment...
I was wrong. The Solow model is generic enough to apply to pretty much any economy. Solow and his generation certainly did believe in its two main "lessons": 1) long-run convergence (with some footnotes); 2) that growth is caused by having the right saving rate/capital stock.
Hence, a lot of advise given to 3rd world countries to industrialize by central planning. It didn't work out. -- You can find the factories, from the '70s, in ruins, in many African countries.
So, yes, economists deserve some criticism (a lot actually) for some of their policy in the '60s and '70s... But I think they moved on.
I was googling away on something related to your point 3. Heres what I think.
Theres alot of debate on why Africa and most developing countries are not converging as regards to Solow Model, and of course someone thought it be better if they (developed and undeveloped countries) should be treated and looked at separately. As they at least look like converging when that is applied - bottom line, its cooking the data at hand.
Theres alot of stealing that occured as it is said, but seriously, theres alot of stealing even now! Most developing countries have silly leaders (Thats the most polite word I could find) who are so greedy and hunt for little resources that these countires have. They milk the country out of alot of money for their houses, farms, cars and fat accounts abroad. developed countries simply use them to get what they want by offering them more money and banks to put the stolen money into.
So being an economist, I would really think all economies work better without politicians! Solow model, it an extraction from reality so it has the basic elements but will not work in reality because of greedy that exists in man.
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