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CHAPTER 4 A Way to Think about Growth
- University of Michigan Press
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CHAPTER 4 A Way to Think about Growth In this chapter I describe a growth process that can account for the characteristics listed in the previous chapter and that provides a framework for identifying specific points which are strategic for affecting that process. The Growth Process The Beginning State An economy, at a particular time, can be defined by several variables that also enter the growth story. There exists a great number of firms with an array of physical capital of various kinds, vintages, states of repair, and so on. There is also an array of rates of return on the various capital items, some of which of course may be zero or even negative. There is a labor force, the members of which have a variety of skills, commitment, education, experience, and ambition . The size of the labor force is ambiguous, since who is in the labor market depends very much on the state of the economy. Jobs are of varying quality, interest, and compensation, and they contribute in varying ways to the growth of well-being of the employed. There are also prevailing notions of the role of leisure. There is a body of technical, administrative, and organizational knowledge, some of which is being applied, some known about and not being applied, some not actually known but findable with some search by potential users. There is therefore underutilized knowledge. The economy is set in a larger, social environment that includes institutions of many kinds, ideas of morality and the good life, memories, and a great many other characteristics that can affect how much weight the community gives to having more goods and services, and that define the boundaries within which production takes place. The economy, defined in this way, yields a level of output of goods and services at a particular time and a particular distribution of that output. It (the economy) makes some contribution to well-being. There is considerable variance among the capital/labor ratios of the several sectors and firms as well as variation among productivity levels, ranging from very high to very low. Productivity levels vary widely because productivity growth 49 50 On the Search for Well-Being among firms and sectors has proceeded over the past decades at greatly different rates. Some firms and sectors are thus on the brink of extinction and others on the way up. This is what an economy looks like at a particular moment. Suppose further, for the moment, that this country is closed to the outside world and has long been so. The Growth Framework I begin with a simple relationship between capital and output, so that the amount of capital in a given firm is some kind of a function of output, K = v Q. The interpretation of v is crucial to the story. It helps to begin with what it is not. 1. It is not a technologically determined parameter. 2. It is not an "accelerator" coefficient. 3. It is not the "desired" amount of capital, given the rate of output and factor prices. 4. It is not an "equilibrium" or least cost coefficient, given factor prices and output levels. 5. It is not determined by Whimsy. It cannot be any of these mainly because of the assumptions about technical, administrative and organizational knowledge stated above: not all knowledge that is known is being applied and not all knowledge that is available (in some sense) is known by each firm. At the same time it obviously must reflect the knowledge that is and was, in the recent past, available and known. What v does represent can best be studied by considering the story of the birth and early life of a firm. Most firms start small, and the argument is clearer for a small firm than for a large one. Suppose two people conclude that a market for bicycles exists in their area and decide to start an enterprise to manufacture bicycles at some estimated rate per year. Their objective is to make money. How do they begin? They surely do a number of things: they visit another bicycle manufacturer some distance away, they look at some publications about bicycle manufacture , they talk to neighboring producers of other products who may know something about supply sources, metal working, tire fitting, and about available labor and wage rates in the area. For financing they may have accumulated some funds from their own saving and obtained some from other members of their family or they may have...