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Created 5/1/1996
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New Democrats and New Growth

Robert Shapiro's defense of endogenous growth theories against attacks by British conservatives, from the Financial Times.

I follow with interest you discussion of the endogenous sources of national growth. In truth, much of the disagreement seems to concern the political preferences of Kenneth Clarke, chancellor of the exchequer, and others, to which the economics of the matter are largely indifferent.

What can be said with certainty is that national growth rates are affected not only by the capacity of companies and workers to enhance their efficiency, but also by their capacities for innovation. In this regard, innovation refers not simply to the development of new physical technologies, but virtually every aspect of the economic process, from indentifying or locating new materials, sources of labour, or means of financing and marketing, to reorganising jobs and work places. Endogenous growth policy involves all factors which contribute to such variegated innovation, as well as to efficiency.

This view will not reassure political promoters on the hard left or the hard right. Higher efficiency requires greater investment, which in turn requires capital-encouraging policies. That includes what should seem obvious--sound monetary policy, enhanced access to capital, especially for smaller companies, and cyclical fiscal discipline--but not, as may might like it, lower marginal tax rates on the returns from certain capital (which evidence indicates has little effect on the aggregate net store of capital).

It also involves an enhanced commitment to enlarging the supply of public capital. Professor Robert Barro says as much (Personal View, November 1) when he notes the importance of improving the skills and health of the workforce and the quality of the infrastructure (which, properly chosen, produce returns higher than those from private investment). Also, add to that the store of basic research.

These functions cannot be "privatized" without sacrificing an increment of growth. Put another way, government's role in national growth is substantial--an investor, not director--for an advanced economy cannot for long raise its underlying growth rate without vigorous public (and private) investment.

Your correspondents are not wrong in suggesting that competition also matters to national growth rates, because (like political parties) companies and workers innovate only when competition forces them to. Regulation which impedes competition--for example, laws and rules insulating banks or telecommunications companies from certain sources of competition--makes no sense in a growth programme. This should not be confused with ideological demands to roll back other forms of regulation, such as health or safety protections, which serve social policy ends and pose no threat to the competition that drives innovation.


Op-Eds

Created 5/1/1996
This is
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/