chapter 3 accelerating economic growth in industrial...

Chapter ThreeAccelerating Economic Growth in Industrial Societies: The Process of

Expansive Reproduction

Economic Growth: The New Perspectives for Theory and Policy

Tai-Yoo Kim (Seoul National University) and

Almas Heshmati (Sogang University)

Springer 2014 Copyright © 2013 Tai-Yoo Kim and Almas Heshmati

CONTENTS

3.1 Compare growth curves of agricultural society and industrial society.

3.2 Look at previous studies relevant to accelerating economic growth (AEG) in the industrial society.

3.3 Find the expansive reproduction structure enabling the AEG, and explain why virtuous cycle is possible.

3.4 Summarize the findings.

3.5 References

3-1 Introduction

The agricultural revolution enabled humans to escape the subsistence level. However, there was no surplus production and thus low or no population growth.

In contrast, an industrial society is a “marvel” age:

Exponential growth in overall wealth

Explosive population growth

Agricultural society vs. Industrial society

3-1 Introduction


(a) World Population Growth and

(b)Global Average per Capita GDP(pGDP)

Figure 3 - 1

Stagnant in population and per capita income growths before Industrial Revolution.

Both grew exponentially after the transition to industrial societies.

3-1 Introduction

Accelerating economic growth (AEG) is derived by dividing pGDP changes by time. AEG is the concept of ‘Economic growth speed’.Compare it with “the economic growth rate”, the rate of change in pGDP as a percentage.Try to calculate AEG and economic growth rate, and compare their different meaning: A country with a pGDP of $40,000 increased

its pGDP $40,800 next year. While another with a pGDP of $400 obtains $440 of pGDP next year.


3-1 Introduction

Time-output Relations

(a) Decelerating Economic Growth in Agricultural Society and (b)Accelerating Economic Growth in Industrial Society

Figure 3 - 2

Uniform Economic Growth (UEG)

3-2 Accelerating Economic Growth in Industrial Society

In The Wealth of Nations (1776), Adam Smith illustrates the theory of the division of labor by describing the case of the pin manufacturing process.

Division of labor connected to production efficiency.

Technology development and process innovation lead to production efficiency and cause AEG.

Ideas about AEG from existing economic theories


Marshall (1920)’s study of increasing returns to scale also discusses the concept of AEG.

When a company reduces costs and increases production through scale economies, internal economies of scale are achieved.

By contrast, external economies of scale can be achieved by industrial development.

Therefore, if these two conditions are achieved, increasing returns to scale can be possible.



Chandler (1990) studies economies of scale and scope by analyzing liquidity in industrial capitalism.

Mass production in an industrial society reduces the cost of manufacturing products.

The same manufacturing facility can be used for many purposes and the same machine parts can be used to manufacture a variety of products.



Myrdal (1957) has found that the system moves continuously in order to break the balance of power rather than strike a balance.

AEG is unbalanced economic growth.

In follow-up studies, Kaldor (1978) states that growth in production induces growth in productivity via increasing returns.



Romer’s endogenous economic growth theory (1990) introduces the role of technology as an endogenous variable.

Growth can be achieved through:

Enhanced technological innovations.

The increase of a number of intermediate inputs invested, and the qualitative improvement of each intermediate material.

Improvement in intermediate material increases input–output efficiency.



The theory of the business cycle investigates the repetition of fixed cyclic patterns of economic activity. In the stage of prosperity or expansion,

AEG is shown.

In studies on demographic transition and economic growth, Galor and Weil (2000) have analyzed various types of economic growth in the Malthusian age, post-Malthusian age, and present economic growth age. Post-Malthusian age, and present economic

growth age is similar to AEG concept.

More close theories to the concept of AEG

3-3 Model of AEG in an Industrial Society

AEG patterns can be drawn through Solow’s neoclassical model.

AEG patterns and historical evidence

Shift in the APF According to Exogenous Technological Development)

Figure 3 - 3

Solow (1957) named this the aggregate production function (APF).The curve was shifted by the technical change between t1 and t2.


AEG induced through an extension of APF.AEG patterns and historical evidence

Time–output Relations as per Solow’s APF ShiftsFigure 3 - 4


Another source for drawing AEG patterns is Ruttan(2001)’s induced innovation model.

AEG patterns and historical evidence

Time–output Relations in an Industrial Society from the Point of View of the Induced Innovation Model

Figure 3 - 5

As the meta-production function envelops different production functions, the accelerating production curve is derived when the evolving production technologies of an industrial society are taken into account.


Growth curves of nine countries before and after the Industrial Revolution.

Four historical evidence of AEG patterns

The Trend of Economic Growth in Nine Countries. Enlarged and Smoothed. Figure 3 - 6


England and 20 other industrial society’s growth pattern. Four historical evidence of AEG patterns

(a) pGDP in England (1970s US$), 1700–2000. (b)pGDP in OECD Top 20 Countries, 1950–2004.

Figure 3 - 7


AGE patterns by selected country groups. Four historical evidence of AEG patterns

Trends in pGDP of Selected Country Groups

Figure 3 - 8

Ten Western European countries: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Sweden, Switzerland, and the UK. Six Asian countries: India, Malaysia, Singapore, South Korea, Taiwan, and Thailand.


Indirect evidence: Labor productivity changes, 1870-1998 Four historical evidence of AEG patterns

The Labor Productivity of 12 Countries, 1870–1998. Figure 3 - 9


Compared to an industrial society, a pure agricultural society has a simple reproduction structure.

In a pure agricultural society, the principal factor that prevents expansive reproduction is the inelasticity of demand.

Supply side also has inherent limitations owing to the amount of available land and labor.

Simple reproduction structure in a pure agricultural economy


Simple reproduction structure in a pure agricultural economy

(a) Simple Reproduction Structure in an Agricultural DEG Society.(b) Stagnant Level in

Each Stage of the Circulation of Simple Reproduction.

Figure 3 - 10


Expansive Reproduction Structure as a Driving Force behind an Accelerating Economy

Expansive Reproduction Structure in an Industrial Society experiencing AEG.Figure 3 - 11


Six paths constituting expansive reproduction structure (1):

Path a: Given the market equilibrium, capitalists can secure profits, their accumulation becomes significant capital for reinvestment, and income increases.

Path b: Capital accumulation and income increase expand existing demand.

Path c: Accumulated capital is reinvested in order to improve technological innovation and increase production.



Six paths constituting expansive reproduction structure (2):Path d: As a result of technological innovation, quality-

enhanced new products is launched and new demand is created.

Path e: The expansion of existing demand and creation of new demand increase net demand in the market.

Path f: The increase in production through the increase in production capacity and improvements in productivity, and the launch of new products through technological innovation, increase net supply to the market.




Accelerating Trends at Each Stage Created by the Circulation of Expansive Reproduction.Notes: M: Market size, K: Capital accumulation, S: Net supply, D: Net demand

Figure 3 - 12



Table 3.1 Labor productivity in the cotton spinning IndustryTypes of Cotton Spinning Processor Required Labor Hours

Indian labor (18th century) 50,000

Crompton’s self-actor (1780) 2,000

100 weight self-actor (1790) 1,000

Power-aided self-actor (1795) 300

Robert’s self-actor (1825) 135

Modern cotton spinning machine 40

Source: Modified from Catling (1970).



Patent Registration in the Industrial Revolution Era, England, 1700-1809. Source: Mitchell and Dean (1962)

Figure 3 - 13


Market Equilibrium Stage:

Expanded production (due to supply capacity expansion) and expanded consumption (due to demand increase that creates equilibrium in the market) represent the scale of the economy or market.

Gras (1939) claims that, the industrial capitalist era witnessed the excessive demand and the expansion of supply.

Four stages of Expansive Reproduction Structure


Capital Accumulation Stage: It enables reinvestment into expansion by

accumulating capital for the company and by increasing income for consumers.

Increased profits enable higher wages to be paid, which increases the spending power of consumers.

Reinvested toward the expansion of production capacity (plants and equipment) and the development of new technology (R&D), which can be commercialized lin the form of new products or improved current products.



Expansion of Supply through Technological Innovation stage (1):

Technologies for the improvement of existing products (which is quantitative)

Technologies for the development of new products (which is qualitative)

The quantitative one maintains the existing levels of production. The qualitative one creates added value through technological innovation.



Qualitative Development in Accelerating Societies

Figure 3 - 14

Accelerating Economic Growth


Expansion of Demand stage:

a. An increase in existing demand as a result of an increase in the purchasing power of consumers.

b. The creation of new demand that results from the release of new products.

The creation of new demand is an important resource in an industrial society.



Virtuous circle of expansive reproduction:

There are clear causal relationships between these four stages of expansive reproduction.

The release of new products (following investment in R&D and the creation of new demand because of increased consumer spending power and strong marketing campaigns) are the factors driving the qualitative aspect of economic growth.

The qualitative aspect is an important causal factor that allows positive feedback in expansive reproduction to be sustained in industrial societies.


3-4 Conclusion

Identification of the growth pattern that differentiates an industrial society from an agricultural society.

AEG is a inherent curve in an industrial society.

AEG is enabled by the virtuous cycle of expansive reproduction.

Critical factor for a virtuous circle of expansive reproduction is technological innovation under sufficient capital accumulation.

SUMMARY

• Industrial societies are characterized by accelerating growth. • Such growth is generated by expansive reproduction, a process by

which economic growth occurs through the accumulation of capital, reinvestment, and technological innovation.

• Four stages constitute for a virtuous circle of expansive reproduction • Especially technological innovation under capital accumulation is a

key factor for a virtuous circle.• This pattern of growth is fundamentally different from that of

agricultural societies, which is decelerating. • The findings presented herein provide both a more accurate

understanding of economic growth patterns over time and a basis for the formulation of policy for achieving accelerating economic growth.

• In addition, the implications of the findings offer insights into the elucidation of economic growth trends of late industrializing economies.

3-5 References

Arrow, K.J. (1962). The economics implication of learning by doing. The Review of Economic Studies, 29(3), 155–173.

Ben-David, D., Papell, D.H. (1998). Slowdowns and meltdowns: Postwar growth evidence from 74 countries. Review of Economics and Statistics, 80(4), 561–571.

Barro, R., Sala-i-Martin, X. (2004). Economic growth (2nd Ed.). Cambridge, MA: MIT Press.

Blaug, M. (1979). Economic theory in retrospect. Cambridge: Cambridge University Press.

Brown, E.H.P., Weber, B. (1953). Accumulation, productivity and distribution in the British economy, 1870–1938. The Economic Journal, 63(250), 263–288.

Calvo, G.A. (1998). Capital flows and capital-market crises: The simple economics of sudden stops. Journal of Applied Economics, 1(1), 35–54.

Catling, H. (1970). The spinning mule. Newton Abbot: David and Charles.

Chandler, A.D., Jr. (1990). Scale and scope: The dynamics of industrial capitalism. Cambridge: Belknap Press.

Chari, V.V., Kehoe, P.J., McGrattan, E.R. (2005). Sudden stops and output drops. American Economic Review, 95(2), 381–387.

Chenery, H.B., Robinson, S. and Syrquin, M. (1986). Industrialization and growth: A comparative study. New York: Oxford University Press.

3-5 References

Clark, G. (2007). A farewell to alms: A brief economic history of the world, Princeton, NJ: Princeton University Press.

Crafts, N.F.R., Mills, T.C. (1997). Endogenous innovation, trend growth, and the British Industrial Revolution: Reply to Greasley and Oxley. The Journal of Economic History, 57(4), 950–956.

Croix, D., Doepke, M. (2003). Inequality and growth: Why differential fertility matters. American Economic Review, 93(4), 1091–1113.

Deane, P. (1979). The first industrial revolution (2nd Ed.). Cambridge: Cambridge University Press.

Domar, E.D. (1946). Capital expansion, rate of growth, and employment. Econometrica, 14(2), 137–147.

Dornbusch, R., Goldfajn, I., Valdés, R.O. (1995). Currency crises and collapses. Brookings Papers on Economic Activity, 1995(2), 219–293.

Ernst, D. (2001). Global production networks and industrial upgrading: A knowledge-centered approach. East-West Center Working Papers 25.

Fernandez-Villaverde, J. (2003) Was Malthus Right? Economic Growth and Population Dynamics. PIER Working Paper 01-046, http://papers.ssrn.com/abstract=293800.

Galor, O., Weil, D.N. (2000). Population, technology, and growth: from Malthusian stagnation to the demographic transition and beyond. American Economic Review, 90(4), 806–828.

Gras, N.S.B. (1939). Business and capitalism: An introduction to business history. New York: F.S. Crofts.

3-5 References

Grossman, G.M., Helpman, E.E. (1991). Quality ladders in the theory of growth. The Review of Economic Studies, 58(1), 43–61.

Hammond, J.L. (1925). The rise of modern industry. London: Mathuen and Co. Ltd.

Hansen, G.D., Prescott, E.C. (2002). Malthus to Solow. American Economic Review, 92(4), 1205–1217.

Hausmann, R., Pretchett, L., Rodrik, D., (2005). Growth accelerations. Journal of Economic Growth, 10, 303–329.

Hayami, Y., Ruttan, V. (1970). Factor Prices and Technical Change in Agricultural Development: The United States and Japan, 1880–1960. Journal of Political Economy, 78(5), 1115–1141.

Heston, A., Summers R., Aten, B. (2002) Penn World Table Version 6.1. Center for International Comparisons at the University of Pennsylvania (CICUP). http://datacentre2.chass.utoronto.ca/pwt61. Accessed 10 March 2009.

Hobson, J.A. (1965). The evolution of modern capitalism: A study of machine production. London: Walter Scott.

Hoffman, W.G. (1958). The growth of industrial economics, trans. Henderson, W.O. and Chaloner, W. H. Manchester, UK: Manchester University Press.

Jalee, P. (1977). How capitalism works. New York: New York University Press.

John, A.H. (1961). Aspects of English economic growth in the first half of the eighteenth century. Economica, New Series, 28(110), 176–190.

3-5 References

John, A.H. (1965). Agricultural productivity and economic growth in England, 1700–1760. Journal of Economic History, 26(1), 19–34.

Junker, L.J. (1967). Capital accumulation, savings-centered theory and economic development. Journal of Economic Issues, 1(1/2), 25–43.

Kaldor, N. (1961). The theory of capital. In Lutz, F. A., Hague, D. C. (Ed.), Capital accumulation and economic growth (pp. 177–222). New York: St Martin’s Press.

Kaldor, N. (1978). Cases of the slow rate of economic growth of the United Kingdom. Cambridge: Cambridge University Press. (Originally published in 1966)

Kim, T., Heshmati, A., Park, J. (2010). Decelerating agricultural society: Theoretical and historical perspectives. Technological Forecasting & Social Change, 77(3), 479–499.

Knowles, L.C.A. (1924). The industrial and commercial revolution in Great Britain during the 19th Century. London: Routledge.

Kremer, M. (1993). Population growth and technological change: One million B.C. to 1990. The Quarterly Journal of Economics, 180(3), 681–716.

Lewis, A.W. (1955). The theory of economic growth. London: Unwin Hyman.

Maddison, A. (1982). Phase of capitalist development. New York: Oxford University Press.

Maddison, A. (1995). Monitoring the world economy 1820–1992. Paris, France.

3-5 References

Maddison, A. (2001). The world economy: A millennial perspective. Paris: Development Center of the Organisation for Economic Co-operation and Development.

Marshall, A. (1920). Principles of economics (8th ed.). London: Macmillan and Co., Ltd.

Masi, D. (1987). L’avvento post-industriale. Milano: Franco Angeli.

Mitchell, B.R. Dean, P. (1962). Abstract of British historical statistics. Cambridge: Cambridge University Press.

Myrdal, G. (1957). Economic theory and underdeveloped regions. London: Gerald Duckworth.

Norton, J.A., Bass F.M. (1987). A diffusion theory model of adoption and substitution for successive generations of high-technology products. Management Science, 33(9), 1069–1086.

OECD Development Centre (2001). The world economy: A millennial perspective. Paris, France.

OECD Development Centre (2003). The world economy: Historical statistics. Paris, France.

Peneder, M. (2001). Entrepreneurial competition and industrial location: Investigating the structural patterns and intangible sources of competitive performance. Cheltenham, UK: Edward Elgar Publishing.

Perron, P. (1989). The great crash, the oil price shock and the unit root hypothesis, Econometrica 58, 1361–1401.

Pollard, S. (1965). The genesis of modern management: A Study of the Industrial Revolution in Great Britain. Cambridge: Harvard University Press.

3-5 References

Romer, D. (1990). Endogenous technological change. Journal of Political Economy, 98(5), 71–102.

Ruttan, V.W. (2001). Technology, growth, and development: an induced innovation perspective. New York, NY: Oxford University Press.

Salvadori, N., Panico, C. (2006). Classical, neoclassical and Keynesian views on growth and distribution. Cheltenham, UK: Edward Elgar Publishing.

Schumpeter, J.A. (1939). Business cycles: A theoretical, historical and statistical analysis of the capitalist process. New York: McGraw-Hill Book Company.

Smelser, N.J. (1959). Social change in the industrial revolution: An application of theory to the Lancashire cotton industry 1770–1840. London: Routledge and Kegan Paul.

Smith, A. (1776). The wealth of nations. Edited by Edwin Cannan, 1904. Reprint edition 1937. New York: Modern Library.

Solow, R.M. (1957). Technical change and the aggregate production function. The Review of Economics and Statistics, 39(3), 312–320.

Stanley D.C. (1970). Fixed capital formation in the British cotton industry, 1770–1815. Economic History Review, 23(2), 263–266.

Stavenhagen, R. (1982). Problemas etnicos y campesinos. Mexico: Instituto Nacional de Indigenistas.

Sutton, J. (1991). Sunk costs and market structure: Price competition, advertising.

3-5 References

Turnovsky, S. J. (2009). Capital Accumulation and Economic Growth in a Small Open Economy. Cambridge: Cambridge University Press.

Wilson, C. (1957). The entrepreneur in the Industrial Revolution in Britain. History, 42(145), 101–117.

chapter 3 accelerating economic growth in industrial...

Documents