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Mainstream Growth Economists and Capital Theorists: A Survey

Author(s):Muzhani, Marin
Reviewer(s):Lazzarini, Andrés

Published by EH.Net (December 2015)

Marin Muzhani, Mainstream Growth Economists and Capital Theorists: A Survey. Montreal and Kingston: McGill-Queen’s University Press, 2014. x + 558 pp. $45 (paperback), ISBN: 978-0-773-54366-9.

Reviewed for EH.Net by Andrés Lazzarini, Institute of Economics, Federal University of Rio de Janeiro.

Mainstream Growth Economists and Capital Theorists: A Survey provides a comprehensive account of what the author identifies as modern economic growth theory, which spans from the late 1930s to the present. The thread, through which Marin Muzhani (Ph.D. in the History of Economic Doctrines from the University of Florence) joins the main modern growth models, is made up of the issues, controversies and key variables that growth economists have found in their theories to establish “what really determines the rate of growth” (p. 5). Is it physical capital per worker? What is the influence of income distribution on accumulation? Is saving the main driver of growth? Are technical progress and innovations the main factors for boosting an economy? These are really big issues in growth theory, some of which do indeed date back to the early classical economists. Readers of this long survey will gain a grasp of how attempts to address those questions have shaped the aims, validation methods, and empirical research of mainstream growth models over nearly a century. The emphasis on the mainstream, however, makes a misjudgment in the overall assessment of recent growth models, minimizing the serious difficulties into which they have recurrently fallen.

The main objective of this book is to show how modern growth models, in their quest to ensure the stability conditions for economic expansion, shifted in focus during their history. The first shift occurred from the models of the 1930s and 1940s, based on Keynesian features (Harrod and Domar), to neoclassical models of the 1950s and 1960s, focusing on optimization, factor substitution and long-run growth paths. This change originated with dissatisfaction with the Harrod-Domar model’s outcome of unstable, “two-edge knife” equilibrium, which is the result of using “short-run tools, such as the accelerator or the coefficient of the capital-output ratio to ensure equality between the warranted and the natural rate of growth” (p. 65) — a long-run problem. For the author, the line of thought following the Harrod-Domar view “would imply that the economy is in a state of depression rather than in a steady-state growth” (p. 68), but since this was not the case in the world economy in the late 1950s, the early “Neo-Keynesian” models were replaced by mainstream neoclassical theory.

Solow’s model depicts how a market economy can follow a balanced growth path if its capital intensity is appropriately adjusted to savings — a paramount neoclassical result that can only be achieved thanks to the principle of substitution between capital and labor. But, for the author, “the main problem with the neoclassical theory of growth was that it left the rate of growth almost unexplained” (p. 314), because of the exogenous nature of technical progress. “Through their actions, individuals determine the rate of technical progress, and if so, such actions should be part of an explanatory theory” (p. 314). As a result, modern growth theory underwent its second shift in focus from the Solow-Swan model to the endogenous growth theory (EGT) that emerged in the 1980s and continued to develop in the 1990s onwards.

Economic growth in these theories is driven by the accumulation of knowledge-based factors of production, such as human capital, learning by doing, innovation, and research and development. In the long run, “it is the accumulation of these factors that causes factor productivity to increase and prevents the marginal return to physical capital from falling” (p. 475). Muzhani correctly identifies the inability of Solow’s model to explain the high positive correlation between growth and the investment-output ratio: if labor is in full-employment, an addition of physical capital will decrease its marginal productivity, so any addition of this factor would require an appropriate addition of labor to boost growth. Endogenous growth theory emerged to explain that paradox within the neoclassical theory: “the decreasing marginal productivity of capital is in some ways eliminated without losing the competitive framework” (p. 326). On the whole, despite controversies and disagreements with the conventional standpoint regarding growth, the author concludes that neoclassical models of growth, both exogenous and endogenous, are still the most powerful and useful theories at our disposal.

The book is divided into three parts. The first part surveys the classical economists on accumulation and technical progress (chapter 1); the pioneering works of the “Neo-Keynesians” Harrod and Domar (chapter 2); and the works of the so-called “Old Keynesians” Kaldor and Pasinetti (chapter 3). The second part of the book is the central core of Muzhani’s reconstruction. Chapters 4 and 5 provide a wide-ranging account of the most influential neoclassical growth models of the 1950s and 1960s: Solow (1956; 1957), Cass (1965), Koopmans (1965), Uzawa (1961), Phelps (1962), and Arrow (1962), among several others. Chapter 6 reviews the post-war Cambridge capital theory controversies. Chapter 7 surveys the works of a number of influential economists after World War II who started a common effort to create a theory of economic development (Kuznets, 1949; Lewis, 1954; Myrdal 1954; Rostow, 1960; Chenery, 1960; Hirschman, 1958; and the Latin American Structuralist school). The third part (chapters 8, 9, 10) covers endogenous growth models (Romer, 1986; Lucas, 1988; Rebelo, 1991; Alwyn Young, 1998; Grossman and Helpman, 1991); the New Schumpeterian approach of creative destruction (Aghion and Howitt, 1992); and the contribution of the search theory, among several other models.

While this survey contributes to a more comprehensible account of mainstream growth theory, the author does not adequately consider the impact of insurmountable difficulties that impinge upon the neoclassical approach. For example, EGT models, by taking into account positive externalities of the different types, violate neoclassical theory due to the absence of decreasing marginal returns in the inputs, thereby jeopardizing both the determination of distribution according to the principle of factor substitution and the notion of convergence of per capita growth rates. Muzhani, on the other hand, minimizes this formidable problem for EGT: “Romer proposes that knowledge itself has increasing returns in the production function, but the search technology that produces it is based on the scale of decreasing returns, and this assures the existence of an optimal rate of growth. As a result, growth is endogenous because the externalities compensate for the decreasing marginal productivity in research” (p. 342): however, such a compensation would chiefly depend on an exceptionally unlikely value of the parameters involved, which, only by chance, could ever be observed, if only roughly, in the real world (Solow, 1992).

The problem does not stop here, though, because even if one accepts the unreasonable parameter values for EGT models, there would still remain the disquieting results of the Cambridge controversies which demonstrate that it is not possible to deduce the principle of factor substitution logically in any neoclassical model for economies with more than one capital good. Muzhani nods in agreement (pp. 266, 317), but the implication that it is impossible to extend the results of mainstream growth models, both Solovian and EGT, beyond an economy producing one single commodity, is stripped away by the author from his overall assessment of mainstream theory. Quite the opposite, Muzhani states that “the British Cambridge School failed to develop new sets of theoretical instruments in order to avoid the problems associated with general equilibrium and the one-commodity model” (p. 268), whereas it is, in fact, mainstream theory that has to grapple with the extremely incongruous results of intertemporal and temporary general equilibrium models, i.e. the current mainstream economic theory (Petri, 2004), where the one-commodity model is abandoned.

Mainstream Growth Economists and Capital Theorists is an ambitious book and will certainly appeal to graduate students sorting out the intricacies of models that thrive in standard economic growth textbooks, as well as to scholars devoted to macroeconomic and growth studies. It accurately balances a mathematically precise treatment of the models and the broad historical background. It offers a glimpse of the personal and intellectual lives of most of the theorists examined. It carefully simplifies, in other words, the structure of growth theory for the next cohorts of academics and policy makers alike. But, perhaps, in view of a still pessimistic outlook for economic growth for the global economy, the mainly positive assessment of mainstream theory in the book will make those non-conventional economic approach seekers differ from the author’s final judgment. There is little doubt, at any rate, that the big questions posed for economic growth will continue to demand new answers.

References not cited in the book under review:

Petri, F. (2004). General Equilibrium, Capital and Macroeconomics: A Key to Recent Controversies in Equilibrium Theory. Cheltenham, UK: Edward Elgar.

Solow, R. (1992) Siena Lectures on Endogenous Growth Theory. Collana Dipartimento di Economia Politica, Università di Siena, vol.6.

Andrés Lazzarini is assistant professor of History of Economic Thought and of Theories of Value and Distribution at the Federal University of Rio de Janeiro. He is the author of Revisiting the Cambridge Capital Theory Controversy: A Historical and Analytical Study (Pavia University Press, 2011) and has published articles on the Cambridge controversies and on Neoclassical capital theory and equilibrium in Review of Political Economy, History of Economics Review, and Review of Radical Political Economics, among others.
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Subject(s):Economic Development, Growth, and Aggregate Productivity
History of Economic Thought; Methodology
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII