How can you compare economic growth theories?

1 Classical theory

The classical theory of economic growth, developed by Adam Smith and David Ricardo, among others, assumes that economic growth depends on the accumulation of physical capital, such as machinery, tools, and infrastructure, and the efficient allocation of resources by the market. According to this theory, economic growth is limited by the diminishing returns to capital and the availability of land and natural resources. Therefore, in the long run, economic growth will converge to a steady state, where output per worker is constant.

2 Neoclassical theory

The neoclassical theory of economic growth, pioneered by Robert Solow and Trevor Swan, modifies the classical theory by introducing the role of technological progress and human capital, such as education, skills, and health, in enhancing productivity and output. According to this theory, economic growth is driven by the exogenous rate of technological change, which is determined by factors outside the economic system, such as scientific discoveries and inventions. Therefore, in the long run, economic growth will also converge to a steady state, but at a higher level of output per worker than the classical theory.

3 Endogenous growth theory

The endogenous growth theory of economic growth, developed by Paul Romer, Robert Lucas, and others, challenges the neoclassical theory by arguing that technological progress and human capital are not exogenous, but endogenous, meaning that they are influenced by the economic system itself. According to this theory, economic growth is driven by the accumulation of knowledge and innovation, which are fostered by factors such as research and development, education, learning by doing, and spillovers from other sectors and regions. Therefore, in the long run, economic growth does not necessarily converge to a steady state, but can be sustained indefinitely, depending on the policies and institutions that support innovation and learning.

4 Institutional theory

The institutional theory of economic growth, advanced by Douglass North, Daron Acemoglu, and others, emphasizes the role of institutions, such as laws, norms, rules, and organizations, in shaping the incentives and constraints for economic actors and activities. According to this theory, economic growth is determined by the quality and evolution of institutions, which affect the security of property rights, the enforcement of contracts, the reduction of transaction costs, the prevention of rent-seeking and corruption, and the promotion of social cohesion and trust. Therefore, in the long run, economic growth depends on the institutional environment that enables or hinders productive and cooperative behavior.

5 Developmental theory

The developmental theory of economic growth, inspired by Alexander Gerschenkron, Albert Hirschman, and others, focuses on the historical and structural factors that influence the patterns and prospects of economic growth in different countries and regions. According to this theory, economic growth is not a linear or uniform process, but a complex and diverse one, that requires different strategies and policies depending on the level of development, the comparative advantage, the industrial structure, the international context, and the social and political conditions. Therefore, in the long run, economic growth requires a dynamic and adaptive approach that balances the opportunities and challenges of development.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?