trade, increasing returns and divergent growth Flashcards
what does the law of diminishing returns state?
if one input in the production of a commodity is increased while all other inputs are held constant, a point will eventually be reached at which additions of this input will yield progressively smaller increases in output
what do the neoclassicals explain about growth poles?
they have less capital and more labour so they will have lower wages and high returns to capital. the operation of the free market price mechanism they will tend to specialise at first in labour intensive production methods. the marginal productivity of labour will be relatively low and the marginal productivity of capital is high. therefore through the operation of factor prices there will be an incentive for capitalists to invest in poorer capital scarce areas when returns are higher then rich capital surplus regions. this will continue until there is an equilibrium is reached where the returns equalise for both capital and labour. therefore the neoclassical supports the argument that overcrowding will limit trade in centres where it first occurs and the resources will eventually seek better returns elsewhere
what was rosenstein-rodan view on growth pole areas?
he says that there are internationally depressed areas and in some areas there are substantial external economies of scale. he states that existing institutions of international and national investment do not take advantage of external economies. this is because there is no incentive for them to invest in goods which are profitable in social marginal net product but not profitable in private marginal net product. the laissez fair solutions then cannot be implemented since the free market does not operate efficiently. he states that less developed regions and nations have less developed, missing and fragmented markets. prices are thus inefficient signals for the allocation of resources and this may be reflected in local monopolies or distorted incomes or perhaps under price valuable resources which may be lost to wealthier nations. this results in positive feedback where there is a virtous circle for some and a vicious circle for those left behind with depreciating resources and further decline. this means rapid growth can occur in some regions whilst there are depressed regions in others
what was gunnar mrydal theory of circular cumulative causation?
labour surplus regions wil exhibity high returns to capital. neoclassical theory asserts that the capital/labour ratios in the poorer regions will rise and the capital/labour ratios in richer countries will fall. this will occur until the labour productivity are aligned in both regions. this however ignores the effect of external economies. if both labour and capital migrate from poor to rich regions then the differential in productivity and wages will never close. the richer region will not experience a fall in the capital/labour ratio but the poorer region will be drained of both resources becoming poorer and poorer.
what does the theory of circular cumulative causation say will occur in the modern sector?
there will be new innovative capital investment together with an inflow of enterprising and inquisitive labour which will create a dynamic culture. the flow of ideas is correlated with the concentration of people
what does the theory of circular cumulative causation say will occur in the traditional sector?
the fixed private and public capital will depreciate and only the immobile resources will remain. they will be left with a stagnating culture
what are the implications of increasing social marginal returns according to nicholas Kaldor?
the most important casualty is the notion of general equilibrium. the notion of a general equilibrium is based on the assumption that the economic forces are constrained by a set of exogenous variables which are given from the outside and are stable over time. it assumes that the economic forces are independent of history. the neoclassical theory tries to prove that markets lead to a succession of steps to a state of equilibrium. however the increasing returns results in continuous changes which are endogenous which cannot be predicted except as a sequence of events in the previous periods. there is divergent growth
what is the endogenous growth theory of the romer model?
he argued using the neoclassical assumptions that it was possible for firms to invest in research which brings diminishing marginal returns yet increasing social return. new technology is expensive to produce but cheap to copy. positive externalities imply private diminishing returns but constant social marginal returns to capital accumulation and thus increasing social returns to scale. technology is endogenously produced in new research and may be embodied in new capital equipment or disembodied in new practices, organisations or institutions. this results in divergent growth where capital rich countries will grow faster then the capital poor.
what was Skott and Auerbach cumulative causation and the new theories of economic growth (post- keynsian economics) .
neoclassical growth theory is decuced from microeocnomic foundations ie based on rational choice. it assumes that the agents exogenous preference remain constant through time. the post keynians argue that there are dramatic and ongoing transformations of society that has taken place in course of capitalism development should cast doubt on the assumption of unchanging preferences. temporary disturbances may have large and cumulative effects, increasing returns means initial differences between sectors are exacerbated. unstable and divergent growth causes changes in behavioural parameters. values and preferences change (exogenously given factor endowments and production possibility sets do not act as binding constraints don’t act as binding constraints don’t he evolution of the economy)
growth paths are likely to provoke political and institutional change and long term effects cannot be predicted except as a result of a sequence of historical events
what are the preconditions for efficient markets to exist in the new institutional economics?
- perfect competition
- minimal information and transaction costs
- no barriers to entry and exit
- prices are determined by the real forces of supply and demand
- secure property rights, transparent and accountable government and enforceable contract law
what does Douglass north argue about the growth of a country?
countries grow slowest where property rights are weak or absent and the rule of law is unreliable and where governments are corrupt
what does joe stigletz argue about the privatisation of resources?
in russia they took the western advice to privatise first so those who were in the know bought up all the capital so it led to the rise of the oligarchs. in china they focused on institutions first before privatisation which has led to a more competitive capital as the ownership is more diverse
what are insitutions?
factors that define the relations and incentives of economic agents. they could be formally established and recognised in law or informal norms of conduct, they shape the environment in which economic decisions are made. they take time to develop
what are the effects of institutions which encourage diversity and security of private property?
reduces risk aversion , encourages capital accumulation . it allows financial markets to develop and helps facilitate entrepreneurship
what are the effects of institution which create freedom from conflict?
it is essential for all functions of the market economy
