The Origins of Economic Growth: The Fundamental Interaction between Material and Nonmaterial Values

243 Pages·1997·10.801 MB·English

by  Professor Arvid Aulin (auth.)

The Origins of Economic Growth
The Fundamental Interaction between Material
and Nonmaterial Values
Springer
Berlin
Heidelberg
New York
Barcelona
Budapest
Hong Kong
London
Milan
Paris
Santa Clara
Singapore
Tokyo
Arvid AuIin
The Origins of
Economic Growth
The FundamentalInteraction
between Material
and Nonmaterial Values
With 30 Figures
and 18 Tables
, Springer
Professor Arvid Aulin
The Finnish Academy ofScience and Letters
Oulunkyläntori 2 C 16
00640 Helsinki
Finland
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Die Deutsche Bibliothek- CIP-Einheitsaufnahme
Aulln, Arvld:
The originsofeconomicgrowth :the fundamental interaction
betweenmaterial and nonmaterialvalues ;with 18 tables/
ArvidAulin. - Berlin ;Heidelberg ;NewYork ;Barcelona;
Budapest ;Hong Kong ; London ;Milan;SantaClara ;
Singapore ;Tokyo :Springer. 1997
ISBN-13:978-3-642-64520-4 e-ISBN-13: 978-3-642-60712-7
001: 10.1007/978-3-642-60712-7
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The Economic Relevance of Nonmaterial Values:
The purpose of this book is to prove that nonmaterial values contribute
essentially to the ultimate source ofeconomic growth.. This entails a careful
mathematical study ofknowledge-based societies with economies defined by
(1) the increasing returns to scale due to the effects of progress in exact
science and technology on the output ofeconomy in the long run, and by
(2) the pursuit of such knowledge and of other nonmaterial values as
economic utilities in addition to the pursuit of material values.
The point (1) excludes, since research is a nonrival good, the growth mod
els with riyal goods only, such as the linear models of endogeneous growth
(as discussed for instance by Barro and Sala-i-Martin1 and Rebel02). Here
the 'mechanism of economic development' suggested by Robert E. Lucas3
will be chosen and generalized.
The point (2) indicates the direction ofthe generalization. The relevance
ofnonmaterial values in the long-term economic development will be realized
by introducing a leisure term, with an unbounded value /unction, to utility
function in the Lucasian mechanics, in addition to the usual consumption
term indicating the pursuit of material values. This choice accordingly de
fines nonmaterial values as values pursued outside the time that is reserved
tor the pursuit 0/ material values and represented by the working time.
The choice thus made for the representation of nonmaterial values in
economics expands greatly the range of facts covered by the theory. The
interaction between material and nonmaterial values appears as the primary
source of economic growth and produces also the business cycles as a nat
ural part of growth. The theory predicts the data on the business cycles
better than do the conventional real-cycle models (Chapter VII). It also
gives, in addition to the usual balanced-growth path, another basic growth
path whose existence is verified by empirical data (p.67).
What is usually represented by RD-factors and implies innovations moti
vated by monopoly profits4 refers to the work done in the pursuit ofmaterial
reward but surely involves also the pursuit of 'pure ideas' in the leisure time
1Barro,R.J. and X. Sala-i-Martin, Economic Growth, McGraw-Hill, New York 1995.
2Sergio Rebelo, Long-run policy analysis and long-run growth, Journal of Political
Economy 99, June 1991, 500-521.
3Lucas, Robert E. Jr,Onthemechanismofeconomicdevelopment, JournalofMonetary
Economics 22, 1988, p. 3-42.
4These factors are emphasized for instance by P.M. Romer, Theorigins ofendogeneous
growth, Journal of Economic Perspectives 8, 1994, p.3-22.
VI THE RELEVANCE OF NONMATERIAL VALUES
and thus a nonmaterial value. Therefore it is part of what is in the present
theory represented by the interaction of material and nonmaterial values.
Part 1 is an introduction to the concept of nonmaterial value. It intro
duces the distinction between nonmaterial values of the supply side, such
as the pursuit of objective knowledge in exact science and technology, and
nonmaterial values of the demand side as pursued in the cultural life such
as the arts, politics, philosophy, and humanistic and social sciences.
Part 2 gives the mathematical extension of the Lucasian 'mechanics of
economic development' to nonmaterial values,and derives the consequences
indicating the effects ofnonmaterial values on economic growth and the busi
ness cycles in the long-term economic development. This Part reproduces
an earlier technical study of the present author5, with some additions.
Part 3 offers a historical discussion ofthe mutual relations between eco
nomic development and nonmaterial values through the ages. For this pur
pose an entropy formalism is introduced, not useful in economics proper, but
building a frame ofreference in terms of which both economic development
and the development of nonmaterial values can be symbolically represented
and related to each other. The analysis suggests that in a surviving soci
ety certain upper and lower limits of individual freedom, and thus of other
nonmaterial values, are functions ofthe degree of attained endogeneous eco
nomic growth. Considered in the very long run, as they are in Part 3, all
these societies showing endogeneous economic growth are 'knowledge-based'
in the sense that the periods oftheir endogeneous economic growth depend
on some cognitive innovations, however rare ones.
If there is no endogeneous economic growth, the society is shown either
to disintegrate or to develop a strict hierarchical internalorder. Even in this
case there may be some economic growth, but then it has been acquired,
for instance, by conquering lands and possibly suppressing their peoples to
servitude, as it often happened in the archaie world.
Part 3 accordingly applies a mathematical tool to economic history in
the grand scale, beginning from the archaie societies and ending with the
modern Western ones. It is hoped that the three Parts ofthis book, entirely
different in their methods, could help the understanding ofeach other.
Arvid Aulin
Professor ofMathematics and Methodology
The Finnish Academy of Science and Letters
!>Causal and StochasticElements in Business Cycles, Lecture Notes in Economics and
Mathematical Systems No,431, Springer-Verlag, Berlin-Heidelberg-New York 1996.
Contents
v
THE ECONOMIC RELEVANCE OF NONMATERIAL VALUES
Part 1
AN INTRODUCTION TO
NONMATERIAL VALUES
I. KNOWLEDGE AS THE BASIC NONMATERIAL VALUE
OF THE SUPPLY SIDE 3
1. Human Capital as Accumulated Exact Knowledge 3
2. The Formation of Exact Scientific Knowledge 4
1. The strategy ofmathematieal generalization .4
2. A short history offundamental exaet science 5
3. The unique properties oftheoretical knowledge in exact sciences 7
3. Practical Sciences Applying Exact Science 12
1. Practicality as the original criterion ofobjectivity 12
2. Practical sciences today 12
II. NONMATERIAL VALUES OF THE DEMAND SIDE 14
4. The Human Need for Self-Expression 14
1. Subjective and objective knowledge 14
2. Commenting sciences 16
3. The pursuit ofself-expression as the fundamental nonmaterial
value ofthe demand side 18
5. The Historical Process from Philosophical
Self-Expression to Exact Science 18
1. The linguistic method ofclassical Greek philosophy 19
2. The influence ofthe myth ofthe eternal return upon Greek
philosophy 20
3. The first challengers ofthe "philosophical method" 22
4. Newton's physics doomed "philosophically false" 24
5. Newton's physics as "philosophically true" to Immanuel Kant 25
6. The triumph ofexact science over the "philosophical method"
since 19th century 26
7. What mean the terms 'supply side' and 'demand side'
in connection ofnonmaterial values? 27
VIII CONTENTS
Part 2
THE INTERACTION OF MATERIAL AND
NONMATERIAL VALUES AS THE SOURCE
OF ECONOMIC GROWTH AND BUSINESS CYCLES
III. A NECESSARY EXTENSION OF ECONOMICS 31
6. Facts 31
7. Conclusions 32
8. Is This Econornics? 33
IV. THE MATHEMATICAL TOOLS 35
9. The Harnilton-Jacobi Theory 35
1. The Hamiltonian function 35
2. The Lagrangian function 36
3. The action principle 37
4. The Legendre function 38
5. Transversality conditions 39
6. The "principle ofthe largest action" 40
10. The Maxirnization of Accumulated Utility 41
1. Canonical equations for discounted utilities 41
2. The Solow growth model revisited 42
3. The parameter conditions oftransversality in the Solow model 44
4. The Arrow-Kurz generalization 47
V. THE LUCASIAN MECHANICS OF ECONOMIC DEVELOPMENT
AND ITS EXTENSION TO NONMATERIAL VALUES 49
11. Growth Theory as Based on Rational Expectations 49
1. The reaction ofthe market to common knowledge 49
2. The market clearing 51
12. The Extension of Lucasian Mechanics
to Nonmaterial Values 54
1. The first axiom ofgeneralization 54
2. The fundamental equations 55
3. The second axiom ofgeneralization 56
4. The derivation ofa general solution algorithm 57
5. The natural boundary conditions 59
6. The Legendre condition 60
7. Transversality conditions 60
CONTENTS IX
VI. THE FUNDAMENTAL DYNAMICS OF ECONOMIC
GROWTH AND THE BUSINESS CYCLES 62
13. The Basic Growth Paths 62
1. The balanced growth path: Growth Type 1 62
2. The path oflogistically rising productivity ofcapital:
Growth Type 2 64
3. Verification by the Solow (1957) material 67
14. The Basic Business Cycles 69
1. The state-plane and the cycle center 69
2. The decreasing relative size ofthe cycles 70
3. The existence ofwell-behaving general solutions 72
4. The invariance group and the time scale 75
5. The detrended cycle functions 77
6. The minimums and maximums ofthe cycle functions 79
VII. THE BASIC BUSINESS CYCLES AS THE CAUSAL PART
OF THE BUSINESS CYCLES 80
15. The Predictive Power of the Basic Cycles Compared
With That of the Stochastic Models:
Ordinary Business Cycles 80
1. The linear approximation ofthe Basic Business Cycles 80
2. Comparisons with empirical correlations and variances 82
3. Comparisons with empirical autocorrelations 87
16. Conclusions and Challenges 91
1. The two levels ofmacroeconomic theory 91
2. Economic stability 93
3. Are real business cycle theories outdated? 93
17. The Dynamics of Anomalous Business Cycles
and Their Quantitative Verification 94
1. Fundamental theory vs model construction in economics 94
2. The method ofcalculation 97
3. The fall in procyclicality ofconsumption and investment 101
4. The retained high procyclicality ofemployment 106
5. An appraisal ofthe results 110
VIII. THE GROWTH EFFECTS OF NONMATERIAL VALUES AND
THE TRADE-OFF BETWEEN GROWTH AND STABILITY 114
18. Primary Causal Factors of Economic Growth 114
x
CONTENTS
1. The reduction to human capital 114
2. The freedom factor 115
3. The three ultimate determinants ofthe level ofnational economy 116
e,
4. The form ofthe function b(e, Ü 116
19. The Growth and Stability Effects of Savings Rate 117
1. Which is the causal order of parameters? 117
2. The existence ofthe growth effects ofsavings rate 118
3. An empirical test 119
4. The slowdown ofthe growth oflabour productivity
in the long run 122
IX. AN ALTERNATIVE VISION OF THE STOCHASTIC ELEMENT
IN THE BUSINESS CVCLES 123
20. Stochastic Shocks as Perturbations Superposed upon
the Basic Business Cycles 123
1. Are the business cycles purely stochastic processes? 123
2. The production ofrandom series with adefinite mean
and standard deviation 124
3. How the technological shocks affect each economic variable? 125
21. Final Result: Both the Stochastic and Nonstochastic
BBC Versions Predict Better Than Any of the Models
Based on Stochastic Optimization 127
1. Correlations and variances ofstochastic cycle functions over
a cycle: the formulae 127
2. Preliminary steps ofcalculation 127
3. Calibration 129
4. The small but not negligible effect ofshocks 130
5. The final result in numbers: Table 12 131
6. The final result illustrated: Figures 9 and 10 131
7. Final comrnents 134
References (Part 2) 135
Appendix 1 (Part 2) 137
Appendix 2 (Part 2) 143