About growth

Today I would like to change gears a little bit to talk about a fascinating topic: growth.

There is one thing that I do not understand, which basically no one understands, so at least I don’t feel bad about it. On the one hand, it seems like some institutions have been more democratic, and that might have fostered growth in Great Britain during the Industrial Revolution. See, for example, the work on Daron Acemoglu or Jim Robinson. On the other hand, it might very well be the case that it is not necessary that such organizations are democratic; they might only need to be strong. Yet, large and powerful states have failed. So the question remains: what can we actually do to foster growth.

Coming from Latin America, I am fascinated by that question. Is there something fundamentally wrong that our ancestors did? Was there some mechanism that was flawed? And if so, what exactly? Some authors state that democracy is a necessary but not sufficient condition. Is it really necessary? Countries like China seem to challenge that basic assumption.

What about technological innovation? The race to innovate is certainly big. Some countries seem to have a comparative advantage in the innovation of certain products. Joel Mokyr is an advocate for this thread of thought. For example, Japan produces high-quality robots and computer products. Innovation is a hard topic, first of all, because it is hard to assess what a good idea is, its source, and its connection with growth. One agent might think, for example, that it was the Catholic way of thinking that allowed for the Scientific grounds to be rooted. But such statements are not easily measured and so many times remain at the level of hypotheses, which can be proven or disproven simply by the large scale of consequences that follow. Such kind of logic is especially true for the bigger questions, like that of growth.

Another possibility is trade, the high wages it produced, and the urbanization, ultimately inducing the technological innovation necessary for growth. See Robert Allen. Clearly, Great Britain was trade-oriented, and that changed the way people lived on so many levels. Indeed, we observe that the major cultural shocks happen in civilizations that are trade-oriented, like the alphabet, which was developed by the Phoenicians, potentially in order to communicate with a vast amount of civilizations around the Mediterranean. The causality there is what is not clear: do countries grow and then trade or do they trade and then grow. An even more complicated question there is that the World economy didn’t really seem to grow until around the 1500s.

All things considered, the question of growth remains an open question. Maybe the mystery will someday be solved, but while it remains not to, there will be a debate on how to better organize the state: making it larger or smaller, increasing or decreasing the public spending, budgeting differently or investing in R&D. What do you think?

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