Lectures on economic growth
Robert E Lucas Jr
Oxford University Press
Pages: 205
Price: Rs 395
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As the Second World War was ending, the Allies were faced with a serious geo-political problem: how to prevent the poorer parts of Europe from going Communist. Force as embodied in the Truman Doctrine, which told the USSR to lay off, was one method. Quick economic growth was another.
The Marshall Plan was the answer to the latter problem and its success prompted a whole generation of economists to ask what caused growth. But possibly because it was economists who were asking the question, the answer is yet to be found. This collection of essays by one of the leading proponents of the art shows why.
He frames the unanswered questions in the introduction and then proceeds to try and answer them in the five essays that follow. The essays are technical but not all that hard to follow. Also, the reader may not emerge necessarily wiser at the end of it but the exercise is at least as absorbing as solving a crossword puzzle.
Amongst the questions Lucas asks are the following:
First, can modern growth theory be used as a theory of economic development as well? If so, how?
Second, how does economic growth create such differentials in the returns to factors of production in different parts the world? Why is labour usually left worse off than capital?
Third, how do you square the indubitable presence of increasing returns with the equally indubitable presence of diminishing returns? What relationship is there between economy wide and firm level effects? Do they move in the same direction?
Fourth, what role does very free international trade play in inducing rapid growth? Is the correlation really as strong as is made out? After all, is there not evidence to the contrary as well?
Fifth, what role do human capital and knowledge play? Has their importance been under-emphasised? Under what conditions do they contribute to growth?
But posing questions is one thing, coming up with answers is another. In the end Lucas plumps for the last. Following Paul Romer who developed his knowledge theory of growth, he says that in the end it is the stock and flow of useful knowledge in a society that determines growth.
However, he adds a useful point, namely, that