Exploring Key Growth Theories: Neo-Classical vs. New Models and Cultural Perspectives

Overview of Growth Theories “Frame of Reference”

Economic Growth Theories • General Neo-Classicial Models (1) Harrod-Domar Model (2) Solow Model (Representative Neo-Classical Model) focusing mainly on Capital and Technology • New Growth Models (3) Endogenous Growth Model Taking Human Capital seriously (4) World Bank Model Taking Social Capital seriously • Other Growth Models (5) Lewis Model – focusing on Duality (6) Rostow Model – focusing on Take-Off and Structural Changes

(1) Basic Features of Neo-Classical Economics 1) Supply Matters Economic growth = an Increase in aggregate output comes from an increase in L; an increase in K; and/or improvement of T

2) Aggregate Demand does not matter for long-run growth of income up to a certain stage of development -> In a developed country, a lack of demand can cause long-tern stagnation -> Until then, Macroeconomic Policies of Government should not matter for Y in the long-run 3) Specific Institutions do not matter No room in production function for institutions 4) Universality of the Model’s Application All countries will go through the same process

Basic Math • ‘production function’ Y = f (K, L; T) • Growth function dY = f (dK, dL; dT)

*Specific Formula of Production Function Most Widely Used Production Fn is • “Cobb-Douglas Production Function”: Y = A K a L 1-a , and a<1

*Why are the features of evolution of a growing economy? Anything that grows goes through a biological growth pattern- “S curve” Stages of Acceleration (Youth) and Deceleration (Maturity) In the end ther e will be Convergence

Harrod-Domar model focuses simply on K - How K is accumulated “The more K, the better” - how efficiently K is used. “ICOR” • Solow Model is focusing on Savings versus Gross Investment in a dynamic setting. -There is an optimal saving rate leading to the Golden Rule - Excessive savings, or external injection of capital is no good in the long-run. - Eventually all countries converge with falling growth rates as K rises. - Only T innovation leads to Sustained growth rates.

* Problems of Neo-classical Models of Economic Growth It focuses too much on Capital or Technology (“Material Things”) It focuses too little on Human/Institutional factors. It does not explain all of sustained economic growth: It explains the U.S.’s sustained growth by T, but does not explain the sustainted East Asian economic growth.

Analysis of Asian Economic Growth requires • Model or ‘Frame of Reference’ which -explains the sustained economic growth (no-deceleration of economic growth rates) -does justice to the role of human and institutional elements.

What are missing explanatory variables? • Most Endogenous Growth Models in general emphasize Human Capital • Some Endogenous Growth Models look at the institution as an explanatory variable. • The World Bank Model of ‘East Asian Miracles’ focuses on ‘East Asian Institutions’ as well.

Why is human capital not enough? • Philippines versus East Asian countries • Indonesia versus China • North Korea versus South Korea -The left have the same or similarly qualified humans as the right. But the left and right have very different institutions. - What causes the difference in instituions?

Institutions and Economic Development • More interests in the impact of Institutions on Economic Development • Examples: 1) Daron Acemoglu 2) OECD/World Bank Review Paper

In search of East Asian Economic Growth Model • Not only Institution itself (upper structure) but also Culture and Religion (lower structure) should be part of explanatory variables

What is the most unique culture of East Asia in the world? • What is the common cultural foundation among the East Asian countries?

*Value System as a ‘Foundation’ Institution for Economic Growth: • Max Weber arguned that “Protestant Work Ethic” sanctioned hard work, frugality and wise investment. • Rodney Stark is one of the most highly regarded sociology of religion scholars alive today. He recently published The Victory of Reason: How Christianity Led to Freedom, Capitalism, and Western Success. • Professor Tu Wei-Ming at Harvard University said that Neo-Confucianism of the Far East is similar to protestant ethic. - refer to the essence of his idea

Neo-Confucianism

Neo-Confucian Hypothesis Neo-Confucianism helped economic growth

Linking Economic Growth andMental Value System: Max Weber’s “The Protestant Ethics and Spirits of Capitalism (in western Europe)”

Great Review by Peter L. Berger • IN SEARCH OF AN EAST ASIAN DEVELOPMENT MODEL

“ …..Now, no one is likely to question that these social and cultural features are also, somehow, part of the" East Asian model" (economists, somewhat awkwardly, often refer to these features, often in a footnote, under the vague category of' 'human capital"). The question is to what extent the economic and the sociocultural features are causally linked. I think it is fair to say that at this point we don't know the answer to this, and that it would be very important indeed to 'get closer to an answer…..”

Sustainability is an issue becauseCultures and Institutions change over time • “…..And the distinctive cultural patterns of Confucian civilization may be highly functional in post-World War II period, producing the East Asian "economic miracle." There is no guarantee that this comparative advantage will continue in the future. On the other hand, cultural traits also change (although some anthropologists don't like to think so); they usually change spontaneously in response to new circumstances, but they occasionally change as a result of deliberate interventions by government (especially, of course, in educational policies). Therefore, I'm very much persuaded that it is an error to think of culture as a static, invariant reality……”

Exploring Key Growth Theories: Neo-Classical vs. New Models and Cultural Perspectives