Economic Growth II

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.

2 thoughts on “Economic Growth II

  1. I have to disagree with you that neoclassical models are completely crap. Their major strength is that they predict, quite accurately, where an economy is heading. This is because they do manage to include most of the important factors. And with these factors, then assume, as you rightly said a steady state, or as i would like to put it: everything will be similar to what already happened. (one of the best weather predictions: the weather of tomorrow will be the same as today)I do agree with your criticism of the theory, especially the inability to predict crises. However since most of the time(and also aggregated over longer timescales) things do generally go the same, there is definitely some use in these models. And (well maybe you will surprise me with your next post :-)) there is still really no credible alternative for the neoclassical models on macroscale

  2. I guess I didn't explain well enough why I think they are crap. Basically, they are descriptive in nature and do not exactly tell us how to change the direction. Sure there are some cases where they can elaborate on what they should do, but I think that these predictions are part of what have gotten us into the mess we're in.We're measuring without really understanding while using a predictive model that has a huge amount of "residual" that is unexplained. Sure it is ok at saying this is likely to come next. But for long term planning and for making policy choices I don't think it's a good option. I'll try to explain tomorrow (or whenever i get to it) why I think evolutionary is a better macro model for trying to grow the economy.

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