The Road since “The Mechanics of Economic Development”

No single event in the last quarter century has been more transformative of technical economics than a lecture series about the nature of economic growth delivered by Robert Lucas, of the University of Chicago, to a skeptical audience in Cambridge, England, in December 1985.  After a delay suitable to a highly disruptive work, these Marshall Lectures eventually were published in 1988 in the Journal of Monetary Economics as “The Mechanics of Economic Development.” Not until 2002 did they appear in a book, as the cornerstone of Lucas’ Lectures on Economic Growth.

To that point in 1985, economists possessed two quite different approaches to the vast income disparities that existed among nations. Some specialized in wealth; others in poverty. Macroeconomists, especially those who did “growth economics,” studied the interplay of the accumulation of physical and human capital in industrial economies. “Development economists,” those concerned with the “Third World,” concentrated on the microeconomic conditions that kept whole nations in poverty. (The “Second World,” the Communist nations, had their own special students in the West.)

But the two sub disciplines, growth and development, were “essentially asking the same questions,” as Daron Acemoglu, of the Massachusetts Institute of Technology has pointed out. And reluctant as is most of Cambridge, Mass., to admit as much, it was the Chicagoan Lucas who demonstrated this basic unity, and, with a series of models, set a substantial fraction of economics on its ear. (A journalistic account of these developments can be found in Knowledge and the Wealth of Nations:  A Story of Economic Discovery.)

Lucas achieved his dramatic effect partly by pointing out some shortcomings of the dominant conceptualization of the levers by which economic growth might be manipulated — the famous “Solow model,” devised thirty years before in the context of the Cold War by Robert Solow, his arch-rival. That the earlier formulation emphasized the importance of technological change as the main driver of economic growth without attempting to explain where it came from didn’t matter. Lucas bent the Solow model to uses to which it hadn’t been put before: to explain patterns of migration, income disparities among countries engaged in international trade, even the existence of cities — topics considered esoteric by students of Keynesian economics.

Adapting a surprising model devised by his student, Paul Romer, Lucas argued that human capital spillovers — the uncompensated exchanges among people living and working cheek-by-jowl in cities — were the major engine of growth (a model that most of his listeners and readers swiftly discarded, once it had gotten their attention.) The rest of the lectures’ enormous impact owed to good timing (the JME version was the fifteenth-most frequently cited article in all of economics in the period 1970-2005, according to the best available survey).  The island nation of Japan recently had become the second biggest economy in the world. Communism collapsed practically as Lucas spoke, and nations all around the world swung onto “the capitalist road” and entered world markets. Development and globalization had become the foremost issues of the day.

Lucas extolled the magic of compound growth: At India’s average 1.4 percent annual rate, it would take fifty years for income to double; at Korea’s average 7 percent rate, income would double in a decade. Indonesia had somehow boosted its growth rate from 3.9 percent in the ’60s, about the same as that of Egypt, to 7.5 percent in the ’70s.

I do not see how one can look at figures like these without seeing them as representing possibilities.  Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what exactly? If not, what is it about “the nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering.  Once one starts to think about them, it is hard to think about anything else.

Last week a group of Chicagoans met in Clemson, S.C., to mark the 20th anniversary of the appearance of the “Mechanics” paper. Lucas was there, as were his fellow University of Chicago professors Nancy Stokey, Kevin M. Murphy and Boyan Jovanovic; Isaac Erlich of the State University of New York at Buffalo; and Princeton’s Esteban Rossi-Hansberg. Chicago’s Gary Becker was called away. There was no preening at the conference, no speeches, no sociological claptrap, no press: just seven papers about aspects of the topic that Lucas had raised twenty years before.

(So much on the down-low was this Fourth Annual Development Conference at Clemson University kept that I learned of it only by accident: David Weil, of Brown University, was the star presence at the first, Acemoglu and Stanley Engerman, of the University of Rochester at the second; Oded Galor and John McDermott, both of Brown, and Joel Mokyr, of Northwestern University, at the third. Clemson chair Raymond (Skip) Sauer created the series.)

The meeting was organized by Robert Tamura, of Clemson, and fittingly so, for it was Tamura, more than any other, who fifteen years ago persuaded Lucas that the so-called demographic transition lay at the heart of the mystery of economic growth — Tamura had been coauthor, with Murphy and Becker, of a model presented in 1988 at an influential meeting in Buffalo, at the height of the excitement, in which household decisions about the number of children to bear and the kinds of job skills to accumulate besides child-rearing were seen as inseparable from one another, and central to the advent of sustained income growth. (The so-called “quantity/quality” decision was originally described by Becker in 1960: you can have a lot of kids and let the ones who survive raise each other, or have a few and raise them yourself; as the number of children declines, the care devoted to them increases.) Today Tamura is a member of an up-and-coming Clemson department that has a strong Chicago flavor.

For a time the Becker-Murphy-Tamura fertility paper was overshadowed by Romer’s “Endogenous Technological Change,” which appeared in the same 1990 special issue of the Journal of Political Economy (edited by the same Isaac Erlich who edits the new start-up Journal of Human Capital). But gradually the fertility paper (“Human Capital, Fertility and Economic Growth”) gained ground, especially after Lucas took up the issue in 1997, in his Simon Kuznets Lecture at Yale University. “The Industrial Revolution: Past and Future” serves as the capstone essay in Lucas’ Lectures on Economic Growth. “I always thought that the Becker-Murphy-Tamura paper is a classic. I tried for weeks to understand it back when it came out and have read it again and again over the years,” says Louis Johnson, College of St. Benedict/St. Johns University, who wrote to study guide for Robert Frank and Ben Bernanke’s Principles of Economics.  “I think there’s one big problem with it: there’s no simple version of the model that us mortals can work with. But the point about multiple equilibria determined by fertility and human capital levels surely has to be part of the growth and development story.”

The Clemson conference included papers by: Tamura and three co-authors (Chad Turner, of Nichols State Univrersity, Sean Mulholland of Mercer University, and Scott Baier, of Clemson) on the significance of black-white schooling differentials for productivity differentials; Chi-Wa Yuen, of the University of Hong Kong on alternative channels of human capital formation; Ehrlich on human capital and the demand for risky assets; Stokey on “catching up” and “falling behind;” Becker, Murphy and Tamura on certain features of the baby boom; Jovanovic and Peter Rousseau of Vanderbilt University, on the “Q-elasticity” of investment, with respect to old and new firms; and Rossi-Hansberg, on the importance of organization (in its most general sense) for growth.

Even confined to seven papers, the breadth of conference program was an effective demonstration of the wisdom of Charles (Chad) Jones, of the University of California at Berkeley, who observed as long ago as 1997 in his Introduction to Economic Growth that the “new growth” literature (of which Lucas’s paper was among the most important specimens) had generated not one but three quite separate controversies, with a fundamentally different question at the center of each: “What is the engine of economic growth?” “Why are we so rich and they so poor?” And “How do we understand growth miracles?”

That the growth of knowledge, and not savings and investment in and of themselves, is the “engine” of growth and development is today a virtually settled matter. This was demonstrated provisionally by the Solow model sixty years ago — its famous “residual” originally ascribed nearly 90 percent of US growth in the first half of the twentieth century to loosely-defined technical change. The avalanche of work since the “new growth” literature ignited by Romer’s 1983 thesis has described the mechanics of invention, illuminating the interactions of corporations and governments, of entrepreneurs and bureaucrats, of trade and investment, of scientists and engineers, of patents and secrets, of education and training. As Stokey told the Clemson meeting, economic growth is “everywhere and always” a matter of new knowledge. The really interesting questions now have to do with its diffusion. “Growth is like a social disease; it spreads through intimate contact,” said Stokey.

As for the relative wealth and poverty of nations, economists’ attention has shifted in the last decade to an intense debate about the relative importance of history, geography and culture as factors conditioning economic performance. There are still growth economists and development economists, but now they use the same tools. Theorists have intensely debated strategies by which leaders have managed the transitions of various planned economies to more market-oriented systems, arguing at every step the relative merits of democratic institutions, financial reforms, public health initiatives and social organizations. But leadership in the field gradually has shifted to authors with extensive practical knowledge of development, of whom the best known are William Easterly, of New York University; Alice Amsden, of MIT; David Ellerman, of the University of California at Riverside (who was speechwriter for Joseph Stiglitz at the World Bank) and Dani Rodrik, of Harvard University’s Kennedy School of Government.

And population? What of the “economic miracle” of the Industrial Revolution that has preoccupied Lucas since the 1990s?  For thousands of years, it is thought that living standards barely progressed. After 1800, both income and population began to grow rapidly in northern Europe, with production outstripping population, at which point population growth slowed in many countries — but not in others. World population today is six billion persons. What will it be a hundred years from now?  What will be the fate of nations that are today caught in so-called “Malthusian traps,” in which gains in income are translated only into more people? The likelihood of pinning down these mechanisms any time soon is not great.  Most of the papers from last week’s conference at Clemson are expected to appear in an issue of the Journal of Human Capital next year. But don’t expect them to settle any arguments. The new emphasis on the relationship among technical change, production and population growth will be a central topic in economics for years to come.

It is precisely for that reason that perhaps the single most compelling section of Lucas’ Lectures on Economic Growth is the use he makes early on of V.S. Naipaul’s novel, A House for Mr. Biswas. The intellectual urgency of “The Mechanics of Economic Development,” with its gallant nod to the great urban theorist Jane Jacobs (The Economy of Cities), has faded since 1985.  Today, many people — not just economists — are talking about the role of cities in fostering growth. China and India’s integration into the world economy is an everyday fact of life. And economists such as Jeffrey Sachs, of Columbia University, have made the failure tio follow suit of most African and many South American nations a matter of grave concern. The lecture titled “Why Doesn’t Capital Flow from Rich to Poor Countries” is dated, too. It does flow there today, at least to some developing countries, and the interesting question has become why so much surplus continues to flow back from developing nations to rich ones.

But in a few brilliant paragraphs in the introduction, Lucas relates the easy-to-follow world of Naipaul’s fiction to more severe (but no less penetrating) abstractions of his own equations. He explains,

The novel begins with the story of Mohun Biswas’s birth and death, all within its first 40 pages. He was born in rural Trinidad, a grandson of immigrants who had come from India as indentured servants. As asmall boy, his ambition is to become a herder of cattle like his older brothers.  At his death, he is an unemployed journalist in Port-of-Spain, living in a ramshackle house, with no assets to support his wife and large family after he is gone. What life within such limits is to sustain the reader for the novel’s remaining 540 pages? Yet measured by the cultural distance between Mr. Biswas and his children, his life is a story of amazing progress.  By the end of Mr. Biswas life, his oldest son, Anand — Naipaul’s own fictional counterpart — is a scholarship student at Oxford. Between Anand and Mohun Biswas’ parents is the entire 25-1 difference between living standards in India and living standards in Western Europe and the United States.

Biswas himself is no Horatio Alger figure. His talents are modest, and his willingness to ingratiate himself with those who might advance his career is non-existent. He passes from one mediocre, limited job to another.  But his unwillingness to accept limits of each current situation as permanent, to make the best of it, turns out to be his strength. Through all his misfortunes and setbacks, Mr. Biswas is able to maintain the sense of himself as a man with possibilities, with options, a man who is in a position to set limits on what he will put up with. And equally important, he lives in a society that will permit him to survive with this attitude. An African slave with these attitudes, working in the same sugar cane fields as Mrs. Biswas’ father and brothers did, would have been beaten to death, or starved as an outcast.  So too might have been his own grandfather. But in the Trinidad of the interwar and World War II periods, options were available. A man with a little literacy could move from rural to small town to Port-of-Spain jobs, jobs where he could interact with people who could teach him a little more. Somehow Biswas survives, marries, supports a family after a fashion, and succeeds in passing on to some of his children this sense of living in a world with possibilities, a world that can reward those who accept the challenges it offers.