Arnold Kling  

Lucas on Growth

Reagan's Economics in Context... Inappropriate Annuities...

Robert E. Lucas, Jr. (Nobel, 1995), sounding much like Brad DeLong, gives a historical overview of economic growth which is Malthusian up until around 1800 (meaning that population growth ate up, so to speak, increases in production), followed by a steadily increasing standard of living. The theory Lucas uses to tie together these two disparate growth patterns and to explain the transition between the two is Gary Becker's (Nobel, 1992) theory of quality vs. quantity of children.

Technological advances occurred that increased the wages of those with the skills needed to make economic use of these advances. These wage effects stimulated others to accumulate skills and stimulated many families to decide against having a large number of unskilled children and in favor of having fewer children, with more time and resources invested in each. The presence of a higher-skilled workforce increased still further the return to acquiring skills, keeping the process going.

Lucas goes on to argue that trade rather than aid is the solution to bringing growth to underdeveloped countries.

For backward economies, dealing on a day-to-day basis with more advanced economies is the central element in success. [Trade addresses] the need to get up to world standards, to learn to play in the big leagues. The only way learning and technology transfer can take place is for producers to compete seriously internationally. Learning-by-doing is perhaps the most important form of human capital accumulation.

...of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.

For Discussion. In addition to trade barriers, what internal "barriers to riches" (to use Parente and Prescott's term) account for the slow rate of knowledge transfer to underdeveloped countries?

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COMMENTS (6 to date)
Lawrance George Lux writes:

The greatest barrier is the high cost of educational and communication materials. It is a like problem in the United States between rich and poor. The United States should donate free set-piece libraries to poor countries capable of taking the user from primars to college texts free of charge, such libraries would have an extremely high particiapation rate, as the poor are not stupid, but lacking in access. Aid to the poor and wealthy in this Country could be a Federal law stipulating all phone charges per household should consist of a simple monthly charge of $30, where all access is granted--Cellphone, landline, DSL, Long-distance, and free phone supply. The Communication companies would make more money in the long run, and economic skills would be increased throughout the population. lgl

rvman writes:

All the knowledge transfer in the world won't help, if the poor can't use it to get rich. In most poor countries, getting rich is a matter of being connected to the government. High barriers to entrepreneuership in the form of expensive, or corruptly distributed, licensing for small business or construction, poor to non-existent title (which makes borrowing against the value of property difficult), and fear that property will be taken by the state or cronies of the powerful if a business is successful are the biggest barriers to riches I see in the underdeveloped world. ("hat tip" to Hernando de Soto)

Don Boudreaux writes:

Lucas makes many fine, correct, and important points in his article. But he seems to disregard the division of labor as a contributing factor to economic growth. This oversight (which is, unfortunately, quite common) is lamentable.

Patrick R. Sullivan writes:

I don't think Lucas is ignoring the division of labor so much as he simply assuming his readers will realize it is part of the industrial revolution.

Dave Sheridan writes:

Don, i agree with Patrick. Sounds like Lucas just treats it as a part of the whole IR thing. I like rvman's shorthand -- unless there are rewards to locals from acquiring skills -- and not becoming part of a brain drain --, there's little hope of diffusion. Take the Arab states, Saudi Arabia for one. There's lots of wealth, but it's manna from heaven. There's no diffusion. It hasn't created sustainable wealth apart from what comes out of the ground because there's no way for an ordinary Saudi to get rich by starting a business. Their unemployment rate for 16-34 year old males is something on the order of 30%.

Thomas writes:

I concur that without support for an effective capitalist system, no country can grow. This means a government acceptance of the free market, de-regulation, low coruption, and effective property rights.

China could have had massive growth during the 50's and 60's, but instead decided to make life hell for its people. Since 1980 free-market reforms, China is now growing like wildfire.

William Easterly's book The Elusive Quest for Growth details how decades of attempts by "The West" to aid underdeveloped countries has failed.

For instance, tremendous increases in educational opportunities have occured in Africa, but if you can't get a job with your skills because the government squashes the market, it is of no value.

Similar failed policies include direct aid, population control, education subsidies, investment incentives, loans conditioned on institutional reforms, and most recently, loan forgiveness.

If you give a drug addict $10,000, it is most likelt that money will go to drugs rather than be used to start a company or into a stock fund. The addiction is the problem that needs to be solved. In the underdeveloped world that isn't developing, the addiction is a mixture of fascism, corruption, and socialism.

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