So, two days ago I started discussing two different paradigms for economic growth. The first is neo-classical growth, the second is evolutionary economics. I basically asserted that neoclassical growth methods are crap. Well, I should have been a bit more careful. There are situations where they do work and can work well. However, they require a great deal of work to make sure that they actually predict anything. Additionally, they also measure if the economy is going towards or going away from a steady state position.
First, it’s not entirely clear if there is anything as a steady state economy. By steady state I don’t mean no growth at all, it’s more like consistent growth at a specific level. The US supposedly was in a steady state economic condition during the late 90s and early 2000s. However, two recessions, in my opinion, have revealed how flawed this theory of steady state economy is.
So what is neoclassical economics good for? Well, it can be used to predict growth assuming that the economy is capable of absorbing new technologies and innovations. If the economy is able to absorb these and then create manufacturing centers or research centers based on these advancements then the neo-classical growth model can work fairly well. It would work well for most European countries, however, I would still be skeptical of these predictions.
Why? Well, these growth models only capture a part of the economy as I said on Sunday. It also doesn’t predict or deal with changes within the structure of economies. For example, the age of steel was an extremely long lasting period, however, based on neoclassical growth the city of Pittsburgh should not have worried about shifting to a new area.
So what is evolutionary economics then? Well, I’ll get to that tomorrow.