Economics and Economic Growth

Because of the static heritage of mainstream economics, it is a commonplace that mainstream economics lacks a convincing explanation of growth and dynamic change within an economy. Mainstream economics typically treats the growth of knowledge as a matter that is independent of the economic system—an assumption that is transparently false. This is not because economists do not recognise the central role of the growth of knowledge in economic development, but rather because they have been unable to incorporate this insight successfully into their mainstream models. The growth of knowledge is simply not a mechanical process. Though many have tried, it is not possible to simply add a new parameter for knowledge to a production function to get a sensible growth model.[78] The very idea of an aggregate production function that combines such disparate activities as cleaning shoes and building hydrogen bombs seems incoherent. The ‘Cambridge Capital Theory Controversies’ have undermined the logical coherence of the concept by showing the insurmountable theoretical problems involved in measuring capital. It follows that the concept of an aggregate production function is unhelpful, as is the empirical work based on it.[79] In this regard, Lipsey tells us: ‘I have slowly come to accept that models of growth that use aggregate production functions and stationary equilibrium concepts, whether in the neoclassical tradition or the new growth tradition, offer only limited assistance in studying long term economic growth.’[80]

As much policy analysis is about economic growth, this lack of a convincing explanation of growth is something of an embarrassment to the profession. Similarly, the long-term strategic economic development decisions that confront governments—and which involve significant uncertainty—do not lend themselves to the mechanical method of mainstream economics. As George Shackle (1903–92) demonstrated convincingly, the future that flows from any particular decision is unknowable, involving as it does an infinite exponential cascade of different possible futures—undermining the possibility of any calculable probability analysis and consequently of any so-called rational analysis.[81] Therefore, the future is uncertain and any strategic positioning requires practical judgement.

In the absence of a successful growth theory, mainstream economists have been forced to rely on a wide range of statistical analyses to try to identify the significant influences underpinning economic growth, but such studies involve formidable conceptual and data issues. It is clear, however, that growth is not just about the accumulation of physical capital. These statistical studies are tending to provide empirical support for the importance of such things as innovation, knowledge, education and skills in the growth process. This reflects a strong consensus that innovation and technological development have underpinned economic development. Consequently, it is clear that comparative advantage is not simply a matter of natural endowments but can be created. Indeed, economic development is a contingent, path-dependent process and often occurs in clusters. As a result, developed countries throughout the world are placing increasing emphasis on these factors in their economic policies. It is also clear from Weber and North that economic development is heavily dependent on the complex of institutions and beliefs that underpin high trust and initiative in society. This is now seen as a major factor explaining the uneven nature of economic development throughout the world. The existence of mechanisms sharing risk and uncertainty in social and economic life could well be important to economic development.