Content area
Full Text
The "dismal science" earned its name from classical growth theory. David Ricardo and Thomas Robert Malthus, in particular, each hypothesized miserable subsistence equilibrium as the long run fate of the masses of earth's people. Later, in 1987, Robert M. Solow won the Nobel Prize in Economics for pioneering a modern, neoclassical version of economic growth theory. In Solow's less dismal version, per capita income is increased by capital accumulation until diminishing returns halts such per capita progress. A steady state results in which capital, labor, and real output grow equally fast. No further improvement in real per capita income is thenceforth obtained from capital accumulation. Productivity growth becomes the only continuing source of rising per capita income-"multifactor productivity" growth, as it is called. Mancur Olson, in turn, developed a theory about the natural course of multifactor productivity growth. Olson argued convincingly that, with the passage of time, people form groups which collectively restrain productivity growth (Olson, 1982).
The post-war economic miracle of the Japanese economy can be roughly explained by neoclassical growth theory. Japan achieved a very high saving rate. This produced a high rate of capital accumulation and rapid convergence toward steady state equilibrium. The technological progress component of Japan's post-war growth performance was propelled by the acquisition of advanced technology embodied in imported capital (Ohkawa and Rosovsky, 1973, Chapter 2). Being, initially, a bit behind technologically also enabled Japan to derive much benefit from copying technology already pioneered elsewhere.
Completed convergence to steady state equilibrium is today suggested by a recent decline in Japan's rate of real GDP growth. In the period from 1956 to 1973, Japan averaged 9.1% per year; 1975 to 1991 saw 4.1% real GDP growth per year; 1992 to 1999 brought an average rate of 0.7% per year (Katz, 1999, p. 79). Inspection of money market interest rates likewise suggests convergence to steady state equilibrium. In the period from 1981 to 1992, money market rates averaged 5.7% in Japan; from 1993 to 1997 money market rates averaged 1.5% (Krugman, 1998, p. 167).
Robert Barro interpreted an interest rate decline of similar magnitude in America's history as a sign of our convergence to the steady state (Barro, 1993, p. 285). America is thought to have converged to its steady state...