The 64 essays in this volume are primarily about political economy — as opposed to either business or academic economics — and democratic government in the English-speaking nations of the Northern Hemisphere, primarily the U.S. The first, political economy, is viewed in terms of the differences between the theory of economic thought and the reality of actually existing capitalism as considered in topics such as economic growth, business cycles, globalization and monopoly power. The second, political science, is concerned with the contrast between the theory of democratic government and the reality of actually existing democracy, specifically regarding constitutional government, emergency powers, and civil liberties.
While the neoliberal consensus, the unipolar world after the Cold War, and the world post-9/11 provide the context for these essays, their relevance persisted in the midst of the COVID-19 global pandemic, widespread human rights protests against systemic anti-Black racism, and the profound constitutional crisis in America, which were in full force when this collection was first published. Three years later, the essays remain instructive even though geopolitical unipolarity is rapidly disappearing, the hot wars among the great powers have returned to Europe, and there is increasing demand for an illiberal Leviathan that mirrors the governance model of the powerful CEO.
Excerpt:
On Economic Growth Theory
Economic growth theory attempts to identify and explain the causes of national wealth in terms of an aggregate production function. The aggregate production function is a macroeconomic model that relates inputs (factors of production such as labour and capital) to outputs (products and services). In the short run, one or more of the factors of production are assumed to be fixed for the period under investigation due to the lag time required to produce additional quantities of some of the factors of production, such as plants, equipment and machinery. However, in the long term, all factors of production are considered variable, since the supply of any factor may be increased/decreased as required within the expanded timeframe. Although economic growth forecasts are often developed for the short run (forward-looking GDP estimates are commonly developed with one- and two-year time horizons), in this article, which is devoted to the theory of economic growth as opposed to the empirical application of that theory, the long run will be assumed, because this assumption facilitates consideration of the impacts of changes in factor quantities (labour and capital) as well as changes in factor proportions (due to changes in production technique) and technology changes (e.g., innovations and improvements in capital inputs).
In a short run analysis of the economy, some of the factors of production and techniques/processes of production are also assumed to remain constant, while in a long run analysis, focusing on economic growth, both the inputs into the production processes as well as the production processes themselves are allowed to vary. In other words, over the long run, not only are the quantities of labour and capital expected to change, but production processes are also expected to change to accommodate changes in the quantity and quality of productive resources. Economies grow as a result of increases in the quantity of productive resources (labour and capital) and as a result of the increased efficiency of productive resources (better educated and more highly skilled labour, faster and less expensive microprocessors, etc.) A critical assumption of economic growth theory is that labour and capital, the principal factors of production in the post-industrial age, are fully employed. This full employment result is itself an outcome of a more fundamental assumption, viz. that the aggregate economy is perfectly competitive with markets clearing such that there are no disequilibria in factor or product markets. In addition, the full employment assumption indicates an important difference between economic growth and business cycle studies. In theory, economic growth represents changes in economic output potential, while business cycles represent deviations from potential In addition, insofar as the long run is concerned, the peaks and troughs of the business cycle tend to be smoothed out by the trend rate of actual economic growth.
In the following, the current, mainstream model of economic growth will be described in the broad context of its development, specifically in terms of the influence of the Harrod-Domar Model and Solow’s extensions of that model. The Harrod-Domar model, based on the independent yet similar research of Roy Harrod and Evsey Domar, and Solow’s contributions are fundamentally in agreement with respect to the principal elements of long run economic growth, viz. labour force, capital and technology. Each of these components can be decomposed further, e.g., labour force growth is a function of population growth as well as changes in labour force participation; capital growth is a function of investment, savings, interest rates and profit; and technology is a function of the proportion of net investment to the total capital stock as well as the age and durability of the existing capital stock. For the purpose of this article, the labour, capital and technology components will not be disaggregated, since it will be sufficient to show how they fit into the neoclassical model.
According to the Harrod-Domar Model, national income is proportional to the quantity of capital required to produce national output. This is a statement of the familiar ‘growth by capital accumulation’ thesis. By assumption, capital and labour are not substitutes for one another and, there is a fixed proportion of capital to labour in each production process. Thus, given a rate of population growth, the opportunity for economic growth depends upon the accumulation of capital sufficient to employ the additional labour. Technology improvements and labour productivity are outside the scope of this model, since they imply variable factor proportions. If the capital stock is fully employed, then annual national income growth is constrained by annual growth in the capital stock – annual replacement of degraded capital being given.
The equilibrium growth rate is the rate at which both capital and labour are fully employed allowing for a predetermined rate of technological progress. In Harrod’s terminology, the warranted rate of growth, which is the rate of growth required to fully employ all capital resources, would be equal to the natural rate of growth, which is the rate of growth required to fully employ all labour. These rates of growth must be equal owing to the fixed factor proportions assumption which dictates that any incremental change in the quantity of one productive resource must be matched by a corresponding and proportional change in the other productive resource. Since the equilibrium growth rate requires the equality of two independently determined growth rates, the probability of attaining and maintaining such equilibrium is very low. If capital expands at a rate greater than that of labour, then there will be excess capital capacity, and if labour grows faster than capital, then there wlll be unemployment.
The instability of Harrod-Domar’s razor-edge equilibrium and the model’s inability to retrodict and explain economic growth time series data contributed to the context for Solow’s work in the mid-1950s. Solow’s 1956 article, "A Contribution to the Theory of Economic Growth," extended the Harrod-Domar Model by relaxing the fixed factor proportions assumption, and in the following year, his article, "Technical Change and the Aggregate Production Function" advanced the thesis that technological change is the key missing variable in the Harrod-Domar production function. The resulting Solow growth model was therefore a theoretical enhancement and elaboration of Harrod-Domar, incorporating key observations of economic reality with respect to variable factor proportions and technological change.
Regarding Harrod-Domar’s razor-edge equilibrium, the introduction of technological progress and the removal of the fixed factor proportions assumption provided for a more stable equilibrium wherein qualitative adjustments (under the rubric of technical/technological change) could augment quantitative adjustments (supply side changes in labour and capital) in the aggregate production function. Theoretically, labour and capital could be simultaneously and fully employed, since productivity improvements and flexible factor proportions tended to eliminate resource imbalances, by permitting labour and/or capital to stretch further as necessary. For example, an overabundance of capital could be offset by moving to more capital intensive and higher output production techniques, and an overabundance of labour could be countered by moving to higher labour intensive and higher output production techniques.
With respect to measuring, predicting and explaining economic growth, the Solow extensions, especially technological progress, made it possible to account for growth that otherwise could not be reduced to population growth and/or capital accumulation. The technological component of economic growth, the so-called Solow residual, represented a new and powerful explanatory variable in the aggregate production function – a variable that continues to stimulate research and debate most notably in recent years in the endogenous growth theory research program pioneered by among others Paul Romer. The Harrod-Domar Model supplemented by the Solow extensions describes how capital, labour and technology interact to determine economic growth. This basic equation helps to explain Japanese and German growth since World War II (intensive replacement and modernization of capital), China’s recent growth (rapid capital accumulation from a largely agrarian base) and U.S. growth in the late 1990s (strong productivity growth).
The debate regarding the Solow residual continues along another path, which can be dated back to the early 1960s. In 1962, Phelps’ discussion of the sources of productivity gains (capital deepening and technological progress) led him to challenge the 'infinite growth possibility' scenario on the grounds that since new capital is the carrier of technological progress (cf. Solow’s vintage capital approach) and capital has a finite but nevertheless definite durability the rate of capital modernization cannot increase ad infinitum. Capital deepening (the increase in capital per worker – a measurement of the capital stock) and technological progress (technical change proper and the associated changes in the human capital of the labour force) continue to be the objects of investigation in terms of their relative contributions to labour productivity and the Solow residual. The U.S. productivity statistics (and their revisions) for the late 1990s continue to provide the empirical basis for the capital deepening versus technological progress debate.
Another significant aspect of the Harrod-Domar-Solow growth model is that it presents the upper limit of economic growth, i.e., the potential output extrapolated into the future. As early as 1956, Solow had indicated that the model’s assumption regarding perfect competition was unrealistic and that future research should consider relaxing this assumption given the economic reality of wage and price rigidities and the possibility of a liquidity trap, all of which indicate conditions of imperfect competition and market failure wherein long run output growth will deviate from the equilibrium growth path. In essence Solow was stating for the long run, what Arthur Okun was to state for the short run, viz. that market forces will not necessarily produce full employment conditions for labour and capital resulting in an output gap between potential output and actual output. Endogenous growth theory, especially under the influence of Romer, has identified the unreality of the perfect competition hypothesis as an obstacle to economic growth studies. Essentially, the value of endogenous growth theory incorporating imperfect competition, market power, etc. would be that two distinguishable output potentials would be available for research and analysis: one would represent the economy’s maximum output potential under perfectly competitive conditions where markets clear instantaneously and all factors are fully employed, and the second would represent the economy’s maximum output potential under constrained competition, where markets do not clear in the short term, where prices are sluggish and where productive resources are unevenly employed.
