Growth theory is a way to explain why an economy increases in its power. There are two main explanations for expansion: 1) the supply of great ideas and boosts in living standards comes from the growth of science; 2) when work and business enterprise is not interfered with. Additionally, these ideas branch out into six categories: linear growth theory, structural change theory, dependency theory, new-classical theory, new growth theory, and property rights. In the following paragraphs, we will be discussing these in detail.
Linear growth theory focuses on the steps and/or stages to increase economic power. According to Economics Online, “One of the first growth theories was that proposed by American economic historian Walt Rostow in the early 1960s. As a vigorous advocate of free market capitalism, Rostow argued that economies must go through a number of developmental stages towards greater economic growth. He argued that these stages followed a logical sequence; each stage could only be reached through the completion of the previous stage” (“Linear Growth Theories”). These steps start from an economy driven by agriculture and barterting and ends with a state of mass consumption and even rewards for people that partake as a consumer.
Not as methodical as linear growth theory, this method puts attention on the transition from agriculture to a high productivity of labor. The basic idea behind what is also called the “Lewis Model” is explained by the website Tutor2You, “Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in: there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment. Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts” (“Lewis Model of Structural Economic Growth and Development | Economics”). These higher salaries make more people come to cities in order to work. This influx of people forces companies to expand and to become more successful.
This model puts an emphasis on the constraints made by political and economic order. As Britannica states, “According to dependency theory, underdevelopment is mainly caused by the peripheral position of affected countries in the world economy. Typically, underdeveloped countries offer cheap labour and raw materials on the world market. These resources are sold to advanced economies, which have the means to transform them into finished goods” (Munro, André). In turn, these underdeveloped countries have to buy things at high prices, taking away the money they could use to make their production more effective. This results in a cycle that continues the separation between the rich and poor.
This perspective became popular in the 1980s as a rejection of Keysenian economics. According to Economics Online, there are three different approaches to this theory:
“1. The free-market approach, where markets alone are assumed to be sufficient to generate maximum welfare.
2. The public-choice approach, which is an extreme New-classical model which emphasises that all government is ‘bad’ and leads to corruption and the gradual confiscation of private property.
3. The market-friendly approach, which suggests that, while markets work, they sometimes fail to emerge, and a government has an important role in compensating for three main market failures: missing markets, imperfect knowledge and externalities.” (“New Classical Theory”)
In all these approaches, however, there is a focus on market freedom and limitations of the government when interacting with the economy.
New growth theory centers around the idea that human wants are insatiable, and that this is connected to productivity and economic power. According to Investopedia, “The new growth theory argues that real GDP per person will perpetually increase because of people’s pursuit of profits. As competition lowers the profit in one area, people have to constantly seek better ways to do things or invent new products in order to garner a higher profit. The theory also argues that innovation and new technologies do not occur simply by random chance” (Kenton, Will). A key component of this theory is that knowledge and innovation is an asset.
Lastly, in modern economics, the issue of property rights is significant in terms of earning capital and keeping a business functioning. Economics Online explains that, “In many less developed countries such documentation is limited, leading to the emergence of large hidden economies and the suppression of formal business activity. The absence of formal property rights is seen as a fundamental cause of poverty and a constraint on economic development” (“Property Rights”). With a lack of property documentation, “dead capital” can form.
As you can see, there are six main ways of looking at how an economy can grow: linear growth theory, structural change theory, dependency theory, new classical theory, new growth theory, and property rights. Each of these perspectives have more-or-less methodical ways of increasing the economic power of a country. There is no wrong or right choice in terms of the method. Rather, it depends on the nation, its government, and its economic predicament.
“Linear Growth Theories.” Linear Growth Theories – Economic Development | Economics Online, www.economicsonline.co.uk/Global_economics/Linear_growth_theories.html.
“Lewis Model of Structural Economic Growth and Development | Economics.” tutor2u, www.tutor2u.net/economics/reference/lewis-model-of-structural-economic-growth-and-development.
Munro, André. “Dependency Theory.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., 15 Oct. 2018, www.britannica.com/topic/dependency-theory.
“New Classical Theory.” New Classical Theory – Development Economics | Economics Online, www.economicsonline.co.uk/Global_economics/New_classical_theory.html.
Kenton, Will. “New Growth Theory.” Investopedia, Investopedia, 12 Mar. 2019, www.investopedia.com/terms/n/new-growth-theory.asp.
“Property Rights.” Property Rights – Development | Economics Online, www.economicsonline.co.uk/Global_economics/Property_rights.html.