COPYRIGHT NOTICE: Edited by Daron Acemoglu: Introduction to Modern Economic Growth is published by Princeton University Press and copyrighted, © 2009, by Princeton University Press. All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher, except for reading and browsing via the World Wide Web. Users are not permitted to mount this file on any network servers. Follow links for Class Use and other Permissions. For more information send email to: [email protected] Epilogue: Mechanics and Causes of Economic Growth nstead of summarizing the models and ideas presented so far, I end with a brief discussion of what we have learned from the models in this book and how they offer a useful perspective Ion world growth and cross-country income differences. I then provide a quick overview of some of the many remaining questions, which are important to emphasize both as a measure of our ignorance and as potential topics for future research. What Have We Learned? Let us first summarize the most important aspects and takeaway lessons of our analysis. Growth as the source of current income differences. At an empirical level, the investigation of economic growth is important not only for understanding the growth process, but also because the analysis of the sources of cross-country income differences today requires us to understand why some countries have grown rapidly over the past 200 years while others have not (Chapter 1). The role of physical capital, human capital, and technology. Cross-country differences in economic performance and growth over time are related to physical capital, human capital, and technology. Part of our analysis has focused on the contributions of these factors to production and growth (Chapters 2 and 3). One conclusion that has emerged concerns the importance of technology in understanding both cross-country and over-time differences in economic performance. Here, technology refers to advances in techniques of production, advances in knowledge, and the general efficiency of the organization of production. Endogenous investment decisions. While we can make empirical progress by taking cross- country differences in physical and human capital as given, we also need to endogenize these investment decisions to develop a more satisfactory understanding of the mechanics and the causes of income and growth differences across countries. A large part of the book has focused on understanding physical and human capital accumulation (Chapters 8–11). Investments in physical and human capital are forward-looking and depend on the rewards that individuals expect from their investments. Understanding differences in these investments is therefore intimately linked to understanding how reward structures—that is, the pecuniary 861 862 . Epilogue: Mechanics and Causes of Economic Growth and nonpecuniary rewards and incentives for different activities—differ across societies and how individuals respond to differences in reward structures. Endogenous technology. I have also emphasized throughout that technology should be thought of as endogenous, not as manna from heaven. There are good empirical and theoretical reasons for thinking that new technologies are created by profit-seeking individuals and firms through research, development, and tinkering. In addition, decisions to adopt new technologies are likely to be highly responsive to profit incentives. Since technology appears to be a prime driver of economic growth over time and a major factor in cross-country differences in economic performance, we must understand how technology responds to factor endowments, market structures, and rewards. Developing a conceptual framework that emphasizes the endogeneity of technology has been one of the major objectives of this book. The modeling of endogenous technology necessitates ideas and tools that are somewhat different from those involved in the modeling of physical and human capital investments. Three factors are particularly important. First, the fixed costs of creating new technologies combined with the nonrival nature of technology necessitates the use of models in which innovators have ex post (after innovation) monopoly power. The same might apply, though perhaps to a lesser degree, to firms that adopt new technologies. The presence of monopoly power changes the welfare properties of decentralized equilibria and creates a range of new interactions and externalities (Chapters 12 and 13 and Section 21.5 in Chapter 21). Second, the process of innovation is implicitly one of competition and creative destruction. The modeling of endogenous technology necessitates more detailed models of the industrial organization of innovation. These models shed light on the impact of market structure, competition, regulation, and IPR protection on innovation and technology adoption (Chapters 12 and 14). Third, endogenous technology implies that not only the aggregate rate of technological change but also the types of technologies that are developed will be responsive to rewards. Key factors influencing the types of technologies that societies develop are again reward structures and factor endowments. For example, changes in relative supplies of different factors are likely to affect which types of technologies will be developed and adopted (Chapter 15). Linkages across societies and balanced growth at the world level. While endogenous technology and endogenous growth are major ingredients in our thinking about the process of economic growth in general and the history of world economic growth in particular, it is also important to recognize that most economies do not invent their own technologies but adopt them from the world technology frontier or adapt them from existing technologies (Chapter 18). In fact, the process of technology transfer across nations might be one of the reasons why, after the initial phase of industrialization, countries that have been part of the global economy have grown at broadly similar rates (Chapter 1). Therefore the modeling of cross-country income differences and the process of economic growth for a large part of the world requires a detailed analysis of technology diffusion and international economic linkages. Two topics deserve special attention in this context. The first is the contracting institutions supporting contracts between upstream and downstream firms, between firms and workers, and between firms and financial institutions. These institutional arrangements affect the amount of investment, the selection of entrepreneurs and firms, and the efficiency with which different tasks are allocated across firms and workers. There are marked differences in contracting institutions across societies, and these differences appear to be a major factor influencing technology adoption and diffusion in the world economy. Contracting institutions not only have a direct effect on technology and prosperity, but they also shape the internal organization of firms, which contributes to the efficiency of production and influences how innovative firms will be (Section 18.5 in Chapter 18). The second is international trading relationships. International trade not only generates static gains familiar to economists but also influences the innovation and growth process. The international division of labor and the product cycle are examples of What Have We Learned? . 863 how international trading relationships help the process of technology diffusion and enhance the specialization of production (Chapter 19). Takeoffs and failures. The past 200 years of world economic growth stand in stark contrast to the thousands of years before. Despite intermittent growth in some parts of the world during certain epochs, the world economy was largely stagnant until the end of the eighteenth century. This stagnation had multiple aspects. These included low productivity, high volatility in aggregate and individual outcomes, a largely rural and agricultural economy, and a Malthusian configuration in which increases in output were often accompanied by increases in population, thus having only a limited effect on per capita income. Another major aspect of stagnation has been the failed growth attempts: many societies grew for certain periods of time and then lapsed back into depressions and stagnation. This cycle changed at the end of the eighteenth century. We owe our prosperity today to the takeoff in economic activity, and especially in industrial activity, that started in Britain and Western Europe and spread to certain other parts of the world, most notably to Western European offshoots, such as the United States and Canada. The nations that are rich today are precisely those where this process of takeoff originated or those that were able to rapidly adopt and build on the technologies underlying this takeoff (Chapter 1). A study of current income differences across countries requires understanding why some countries failed to take advantage of the new technologies and production opportunities. Structural changes and transformations. Modern economic growth and development are accompanied by a set of sweeping structural changes and transformations. These include changes in the composition of production and consumption (the shift from agriculture to industry and from industry to services), urbanization, financial development, changes in inequality of income and inequality of opportunity,