Young Economics.

Jones and Romer’s Facts

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Every student of macroeconomics learns about Kaldor’s facts, the set of ‘stylized facts’ that Kaldor (1961) used to frame the neoclassical research program in economic growth:

  1. Labor productivity (output per worker) has grown at a constant rate
  2. Capital per worker has grown at a constant rate
  3. The real interest rate (the real return on physical capital) has been stable over time
  4. The capital-output ratio has been stable over time
  5. The capital and labour shares of output have been stable over time
  6. Among fast-growing countries, there is considerable variation in output growth rates.

Neoclassical growth theory was considered a successful research program because it was able to explain the first five of these facts — and perhaps the sixth as well, taking into account the idea of conditional convergence.  But as that research program played out, it became clear that factor accumulation alone was not enough to explain all of the cross-country variation in per-capita output.

In a new paper, Charles Jones and Paul Romer lay out a set of ‘new Kaldor facts’ that should frame the next generation of growth theory in light of recent findings.  While Kaldor focussed on physical capital, Jones and Romer shift the focus to other variables: ideas, institutions, population, and human capital.  Their stylized facts are:

  1. Increases in the extent of the market. Increased flows of goods, ideas, finance, and people — via globalization as well as urbanization — have increased the extent of the market for all workers and consumers.
  2. Accelerating growth. For thousands of years, growth in both population and per-capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.
  3. Variation in modern growth rates. The variation in the rate of growth of per-capita GDP increases with the distance from the technology frontier.
  4. Large income and TFP differences. Differences in measured inputs explain less than half of the enormous cross-country differences in per-capita GDP.
  5. Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.
  6. Long-run stability of relative wages. The rising quantity of human capital relative to unskilled labour has not been matched by a sustained decline in its relative price.

Jones and Romer demonstrate how far our knowledge of economic growth has come since the 1956 papers of Solow and Swan, but also how many unanswered questions remain.  While there are many growth models that deal with one or two of these facts, Jones and Romer challenge the profession to build a theory to incorporate them all, just as neoclassical theory incorporated the original Kaldor facts.  Given the complexity of the variables (particularly institutions) and the relationships between them, this is indeed a daunting challenge.

It’s also worth asking what the shift in focus away from physical capital and toward these more complicated variables implies for growth policy.  If growth is driven by savings and capital accumulation, you can just accumulate capital and achieve economic growth.  This is how the USSR achieved industrialization (not that I am advocating their particular approach), and I think some have argued that the growth miracles in Japan, South Korea et al. were also mainly driven by accumulation.  But I don’t think there’s much good literature on how (or if) countries can generate pro-growth institutions through policy, especially informal institutions like trust, respect for the rule of law, and so on.

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Written by Alex

June 26, 2009 at 4:52 pm

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