On the Mechanics of Economic Development: Marshall Lectures 1985

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On the Mechanics ofEconomic DevelopmentMarshall
Lectures 1985

• Robert E. Lucas, Jr.
• (presented by Chi-Wa Yuen)

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Objective

• To construct (dynamic) theories that can be
  calibrated/simulated to exhibit mechanics (macro
  behavior) resembling their real-world counterpart
• in order to tackle the problem of economic
  developmenti.e., the observed diversity in
  levels and growth rates of per-capita incomes
  across countries and across time,
• given no necessary correlation between income
  levels and income growth.

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Main result 1

• 3 models are considered in the paper.
• The 1st, neoclassical (Solow) growth model is
  useful in differentiating between level effects
  and growth effects and in quantifying them.
• But it fails to generate sustained growthdue to
  the law of diminishing returnsin the absence of
  exogenous technical progress ? growth is left
  unexplained.
• It also produces a counter-factual egalitarian
  or convergence implication, esp. in the face of
  international capital and/or labor mobility.

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Main result 2

• The 2nd, closed-economy human-capital-based
  (endogenous) growth modelwhere human capital is
  accumulated thru schoolingis capable of
• fitting postwar US data just as well as the Solow
  model
• generating persistent growth and
• explaining cross-country differences in levels
  of income and of real wages (in terms of HC
  externalities), even in the presence of
  international factor mobility.
• Given the fundamentals, however, it fails to
  explain cross-country differences in income
  growth rates.

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Main result 3

• The 3rd, open-economy human-capital-based
  (endogenous) growth modelwhere human capital is
  accumulated thru an external learning-by-doing
  effectis capable of generating (but not truly
  explaining) cross-country diversity in income
  growth.
• This result is obviously driven by the
  assumptions of homothetic preferences (hence,
  unititary income-elasticities) over a fixed set
  of goods, and fixed learning rates (hence, static
  comparative advantage).

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Cities and growth

• Results 2 and 3 draw heavily on the importance
  of an unobservable external effecti.e., HC
  externalities or knowledge spillovers (which
  imply inefficiency of market equilibrium
  outcomes).
• Use Jane Jacobs observations from cities to
  provide indirect evidence on such effects.

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Omissions andpossible extensions

• Far too many, as with any first contribution.
• Why capital does flow from rich to poor
  countries.
• Population issuesthe role of fertility,
  mortality, and demographic transition (tradeoff
  between quantity and quality of children), as
  well as international and rural-urban migration.
• Growth miracles catch-up growth.
• Industrial revolutionpreconditions for
  what-used-to-be stagnant economies to take off.

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Other extensions

• Technical progressRD, invention/ innovation,
  imitation, creative destruction,
• Product quality and variety product cycles.
• Income distribution (under heterogeneous
  population).
• The environment and sustainable development.
• Structures of private property rights, markets,
  organizations, and institutions.
• Regulatory, industrial, and macro policies.