The Facts of Growth (Not a Mystery)

Stanford economists Charles Jones and Paul Romer have an ungated working paper with a title that will probably be confusing to lay readers, but may be one of the most important summary paper I've ever see (it probably is; I have yet to digest it). It is titled, The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital

Here is a summary of our new list of stylized facts, to be discussed in more detail below:

1. Increases in the extent of the market. Increased flows of goods, ideas, finance, and people — via globalization as well as urbanization — have increased the extent of the market for all workers and consumers.

2. Accelerating growth. For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.

3. Variation in modern growth rates. The variation in the rate of growth of per capita GDP increases with the distance from the technology frontier.

4. Large income and TFP differences. Differences in measured inputs explain less than half of the enormous cross country differences in per capita GDP.

5. Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.

6. Long-run stability of relative wages. The rising quantity of human capital relative to unskilled labor has not been matched by a sustained decline in its relative price.

Nicolas Kaldor's original article in 1961 also laid out six facts. They predominantly described the behavior and ratio of inputs and outputs: measured capital, labor, GDP, interest rate, and so forth. These new facts, as the authors discuss, define the agenda of study among growth scholars and show how much progress has been made in the field. I for one am impressed at how decisively we have moved beyond explaining growth in terms of ingredients, and have moved on to recipes.

So why is that so many popular discussion of growth emphasize how totally mysterious it is? William Easterly's book, "The Elusive Quest for Growth" is a case in point, but I think that kind of soundbite epitomizes the policy conversation. Growth is described ad nauseum as a "mystery" in reverent tones. And, not to make a pun, it really makes me sick. (This is no knock on Easterly -- his point is that experts tried to force correlations into causations, and failed. They were stuck on Kaldor 1.0)

How about this: growth isn't a mystery. By and large, we know what works and what doesn't. Corruption doesn't work well, property rights do. Globalization is working everywhere it is allowed. Protectionism is a disaster, in the long term and usually before. Democracy, unfortunately, seems insignificant in promoting growth, but free markets are essential. And, as every young American RTS playing teen knows, technology wins. And as almost every great innovator attests, entrepreneurship equals technology.

There remain unanswered questions, sure. But because scientists have yet to control fusion hardly means they can't design an engine that harnesses energy for locomotion. Because philosophers have yet to agree on the meaning of life surely does not imply they have no sense of morality. Bottom line: we know everything we need to know about growth to end poverty on Earth in this century. Will humanity be successful in growing universal prosperity? My suggestion: stop with the mystery mumbo-jumbo, and start reading this paper.

Comments

[Dennis]

Hi Tim,

I think one of the big unanswered questions is the following:

"Differences in measured inputs explain less than half of the enormous cross country differences in per capita GDP."

The rest presumably comes from technological and social/economic innovations combined with denser networks of economic agents - but we don't really know how to bring those factors into being - especially the networks. We have hints (technology, globalization), but they are only hints. Hence Easterly's point about confusing correlation with causation.

In any case, I look forward to the whole paper!

[Michael Strong]

Fabulous post. My favorite comparison is between William Graham Sumner in 1883,

“Some men have been found to denounce and deride the modern system—what they call the capitalist system. The modern system is based on liberty, on contract, and on private property.”

and Elhanan Helpman's 2004 summary of what we do know in development economics at the end of "The Mystery of Economic Growth,"

"Although it has been established that property rights institutions, the rule of law, and constraints on the executive are important for growth, the exact ways in which they affect income per capita are not well understood."

From Adam Smith (remember the title, "An Inquiry into the Nature and Causes of the Wealth of Nations,") to Sumner we had a pretty good idea of the basics of growth, and then we forgot about them for a century while the anti-capitalists took over academia.

Will we ever have a formal model that will perfectly "explain" growth; no, of course not. Do we know pretty much what it takes for economies to grow? Yes, and we've known more or less what it is for a very long time. Cowperthwaite of Hong Kong applied Adam Smith 101 deliberately in order to grow Hong Kong, and was spectacularly successful. Yes, there are lots and lots and lots of things that we don't know exactly how to do, but we know far more at a much higher level of certainty than one might guess from most of the talk about alleviating poverty.

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Tim: As I wrote on my blog, Truth on the Market, I think Tyler is pretty far off base with this one. See http://www.truthonthemarket.com/2009/04/28/what-does-tyler-know-about-law-and-economics-anyway/

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