I invite you to read my newish post on the Solow-Swan model of growth. After reading it, it will still be unclear how much economic policy has contributed to growth, but the ways that economic policy can help will likely become clearer.
Very broadly speaking, the main ways to grow an economy focus on technological development and capital accumulation. I still need to finish writing the post on endogenous growth theory, but the rough story there is that economic policy can help firms develop technological innovations.
As an interesting epistemic spot check, I’ll ask you a question: how much faster do you think the capitalist economy of the United States grew compared to the Marxist-Leninist Soviet Union?
The answer: GDP per capita grew at roughly equal rates until the 1980s, after which the Soviet Union entered a deep depression. Is that surprising? It might be if you think that growth is a direct function of how capitalist a nation is, or how much a nation listens to the advice Western economists. But that’s not the best model.
Growth depends on a variety of factors, in addition to economic policy: how far a nation is from the economic frontier, the presence of war and organized crime, and exogenous factors like climate and natural resources. There’s some really interesting stuff to learn about in growth economics.
I also like the Solow-Swan model. But if I’m evaluating “how can economic policy help growth?”, I can hardly do that from within an idealized economic model. The question is empirical, or at least empirical work must first support the predictive validity of the theoretical model. So I could have said “Solow-Swan makes intuitive sense, and makes decent predictions”, except I didn’t add it because I hadn’t heard that the latter was true. And I haven’t looked yet, either.
The answer: GDP per capita grew at roughly equal rates until the 1980s, after which the Soviet Union entered a deep depression. Is that surprising? It might be if you think that growth is a direct function of how capitalist a nation is, or how much a nation listens to the advice Western economists.
I guessed about 5x GDP/capita growth in US, both because post-war US was growing extremely quickly, and I hear that Soviet Union policy sucked (but I haven’t looked closely). So I was surprised, but my (implicit) model wasn’t “capitalist->more growth”, it included considerations like “weaker property rights decreases individual incentive to invest, decreasing the Solow steady-state equilibrium output” or “centralized planning leads to huge deadweight loss, misallocated production, and underspecialization.” So I still am surprised and confused.
I also like the Solow-Swan model. But if I’m evaluating “how can economic policy help growth?”, I can hardly do that from within an idealized economic model.
I disagree. Idealized models can help by answering what happens when we intervene on one of the variables. For example, there are policies that can increase the national savings rate, and thus increasing capital accumulation and per capita output (like the 401k). The Solow-Swan model doesn’t directly state how to do this, but you can endogenize the savings rate; the most famous attempt is the Ramsey–Cass–Koopmans model, which shows how households make tradeoffs between savings and consumption, and helps us see we might intervene to affect the savings rate.
my (implicit) model wasn’t “capitalist->more growth”, it included considerations like “weaker property rights decreases individual incentive to invest
FWIW, I think “strong property rights” is the defining feature of what most people consider “capitalism” so I don’t see these as separate models.
I think there was an opportunity for the USSR to grow faster, on par with other countries that leapfrogged it since the 60s. Maybe it’s not about capitalism vs socialism, but still has to do with economic issues, like the oil curse.
I invite you to read my newish post on the Solow-Swan model of growth. After reading it, it will still be unclear how much economic policy has contributed to growth, but the ways that economic policy can help will likely become clearer.
Very broadly speaking, the main ways to grow an economy focus on technological development and capital accumulation. I still need to finish writing the post on endogenous growth theory, but the rough story there is that economic policy can help firms develop technological innovations.
As an interesting epistemic spot check, I’ll ask you a question: how much faster do you think the capitalist economy of the United States grew compared to the Marxist-Leninist Soviet Union?
The answer: GDP per capita grew at roughly equal rates until the 1980s, after which the Soviet Union entered a deep depression. Is that surprising? It might be if you think that growth is a direct function of how capitalist a nation is, or how much a nation listens to the advice Western economists. But that’s not the best model.
Growth depends on a variety of factors, in addition to economic policy: how far a nation is from the economic frontier, the presence of war and organized crime, and exogenous factors like climate and natural resources. There’s some really interesting stuff to learn about in growth economics.
I also like the Solow-Swan model. But if I’m evaluating “how can economic policy help growth?”, I can hardly do that from within an idealized economic model. The question is empirical, or at least empirical work must first support the predictive validity of the theoretical model. So I could have said “Solow-Swan makes intuitive sense, and makes decent predictions”, except I didn’t add it because I hadn’t heard that the latter was true. And I haven’t looked yet, either.
I guessed about 5x GDP/capita growth in US, both because post-war US was growing extremely quickly, and I hear that Soviet Union policy sucked (but I haven’t looked closely). So I was surprised, but my (implicit) model wasn’t “capitalist->more growth”, it included considerations like “weaker property rights decreases individual incentive to invest, decreasing the Solow steady-state equilibrium output” or “centralized planning leads to huge deadweight loss, misallocated production, and underspecialization.” So I still am surprised and confused.
I disagree. Idealized models can help by answering what happens when we intervene on one of the variables. For example, there are policies that can increase the national savings rate, and thus increasing capital accumulation and per capita output (like the 401k). The Solow-Swan model doesn’t directly state how to do this, but you can endogenize the savings rate; the most famous attempt is the Ramsey–Cass–Koopmans model, which shows how households make tradeoffs between savings and consumption, and helps us see we might intervene to affect the savings rate.
FWIW, I think “strong property rights” is the defining feature of what most people consider “capitalism” so I don’t see these as separate models.
I think there was an opportunity for the USSR to grow faster, on par with other countries that leapfrogged it since the 60s. Maybe it’s not about capitalism vs socialism, but still has to do with economic issues, like the oil curse.