neo-classical growth model states that several countries tend to grow the same way if certain conditions are met, in other words, economies tend to converge on the long-term. On the short run however, economies can easily diverge due to numerous actions which have uncertain effects. These unpredictable actions have short-term effects which will affect economies in different ways, but all economies will tend to adapt to the effects on the long run – ergo the long-term convergence and the short-term divergence.
But even the long-term converge is not always a given fact and it can be met only in certain conditions. However the savings and the capital-labour ratio may diverge, if the population growth and technological possibilities are similar, the economies will converge in the long run. But the differences between the savings per economies will affect the short-term future of the countries. The neo-classical growth model is highly based on the notion of capital, but the capital is influenced by savings, and different amounts of savings can then influence the capital and as a consequence, the growth rate will differ on the short-term. However, on the long run, the situation will become more balanced.
In short, the conditional convergence hypothesis asserts that countries can differ in the their steady-state ratios and thus differ in consumption per capita, but as long as they have the same population growth rate, then all their level variables – capital, output, consumption, etc. – will eventually grow at that same rate” (CEPA)
2. It is true that starting with the 1860s, the British economy seemed to have slowed down its economic growth rate. It is also true that other economies were increasing their growth rates and developing on more levels. The lower growth rate of Great Britain then became somewhat similar to the growth rates of other economies, generating a stable growth and a long-term convergence.
Also, the societies of the 1860s, generally the United States of America and Germany, were being met with numerous developments in all sectors of life, including massive industrialization, technological advancements and developments in numerous sectors, such as finance and the banking systems. And these developments were characteristic to most of the global economies. Therefore, the similar advancements and conditions in Great Britain as well as other economies led to the economic convergence of the nineteenth century.
3. It is undoubted that the economic convergence of the nineteenth century and the trans-Atlantic labour migration are directly connected. The question remains which is the actual cause and which is the effect. In my opinion, I find the economic convergence to have been the cause for the trans-Atlantic labour migration rather than vice-versa.
To better explain, the economic convergence was already generated by numerous factors and it similarly produced certain effects. And one of the effects was this migration, which was actually only possible due to the economic convergence. In other words, if the economies had not registered similar growth rates, the population would not have been tempted to change their residence to less developed countries. But since most global economies were growing at the same rate, the labour force found it easier and less risky to change their locations and jobs.
On the other hand, if we consider that the migration generated the economic convergence, we would have to believe that increased migration is a highly important macroeconomic factor. And it actually is, but not so major as to create great international effects, such as economic convergence. And also, the convergence was generated by similar progresses in the industry and other sectors, not the migration of the workforce.
In all, the two are definitely interconnected, and it could also be true that some features of the trans-Atlantic workforce migration influenced the occurrence of the economic convergence (such as the specialized technicians who migrated and supported technological developments), but their influence is rather limited. As such, the migration was the effect of the economic convergence, rather than the other way round.
4. The neo-classical growth model introduces new variables to the equation and places increased emphasis on the human capital, unlike other preceding models. The newly introduced concept, that of productivity and growth of productivity, are directly correlated with the efforts of the labour force and the technological capabilities of the workers. “The neoclassical growth model is a macro model in which the long-run growth rate of output per worker is determined by an exogenous rate of technological progress” (Econterms, 2008).
The workforce and the technological advancements were key determinants for the neo-classical growth model and they played a vital role in both establishing the model as well as practically applying it. A condition which had to be met by the labour force revolved around the full occupation of the available positions. Then, the technological and demographic changes were seen as exogenous to the economy (Benito)
Basically, the workforce and the technological developments were regarded as vital conditions for economic growth and convergence with other developed or developing economies. The model emphasizes that an organization will grow only if they possess numerous employees which operate numerous machines, built with the latest and highly efficient technologies. “Neo-classical growth models identify the sources of growth as technical progress and population increases, with capital accumulation determining the capital-to-labour ratio in the steady state” (Meade, 1962).
5. The neo-classical model was mainly based on two concepts: technological advancements and the labour force. Today, the modern economy is also centred on the personnel and the technological capabilities of the organization, but has changed its perspective. For instance, the neo-classical model required numerous employees in order to increase productivity; today, companies require sufficient, skilled and capable employees, which will not only increase productivity and efficiency, but will also bring value to the organization. This can be translated into the increased interest towards looking at the issue from the stand point of real wages.
To better explain, the neoclassic company was based on production and all factors were measured in terms of productivity, or output. Today however, the companies have become more employee-oriented, seeing their staff as the path to organizational success. They wish to satisfy their needs and by this motivate them to increase their efforts and performances to sustain the company in reaching its organizational goals. In a reversed line of thoughts, if the employees are given large salaries, it means that they are remunerated for the great job they do and the company will therefore grow.
Also, the modern economy views the employee as the company’s most valuable asset; therefore they must remunerate the staff accordingly. And the convergence of the real wages is proof of this fact.
6. The entrepreneurial failure is a major cause of the economic decline in the nineteenth century Britain. The world’s economic leader up to that time, Britain was characterized by intense industrial and technological developments. The number of small entrepreneurs had grown exponentially and so had the competition. This then generated internal disputes and soon the British companies were unable to compete internationally, as they were competing against each other.
The dominant explanations include the loss of competitive advantage in world markets which accompanied the successful exploitation of superior assets by Germany and the United States, and Britain’s loss of technological momentum in the leading sectors of its industrial revolution-cotton, coal, iron and steel, mechanical engineering — and a slow take-up of the technologies of the Second Industrial Revolution-petroleum, new metals and materials, and electrical engineering” (Gourvish, 2000).
Aside from the entrepreneurial failure, the economic decline in Britain was also due to political instability. In addition, the tremendous developments in the industry and technology encouraged manufacturers to produce large quantities of goods. As a consequence, the offer was much higher than the demand and the economy generated an unsustainable surplus (Elbaum and Lazonick, 1984).
7. Stability and flexibility are highly important for the well-being of an economy. A context of economic stability strengthens the country’s status in the world, increases the value of the national currency and attracts foreign investors. But there should also exist a certain level of flexibility in order to encourage investors to open businesses within the country. Foreign investors need both security but also the promises of adaptability and flexibility, which will help them conduct organizational operations.
Stability should be offered by most industries and sectors, as well as national institutions. Among the sectors which reveal increased importance in offering stability are the financial sector and the banking sector. The financial sector, supervised by the country’s central bank, must be stable as to develop and implement fair financial regulations, maintain an appropriate value of the national currency and reduce inflation. The banking sector has to be stable as to offer numerous credit and savings opportunities for entrepreneurs.
Benito, C.A., Neo-Classical Growth Model, Development Economics Sonoma State University, retrieved from www.sonoma.edu/users/b/benito/econ403/units/NeoClassical.ppton February 7, 2008
Elbaum, B., Lazonick, W., 1984, the Decline of the British Economy: An Institutional Perspective, the Journal of Economic History, Volume 44, Number 2
Gourvish, T., 2000, Entrepreneurship in Britain 1870-1914 – Failure or Adaptation, London School of Economics, Retrieved at http://www.dieboldinstitute.org/paper3b.pdfon February 7, 2008
Meade, J.E., 1962, a Neoclassical Theory of Economic Growth, Retrieved at http://www.economyprofessor.com/economictheories/neo-classical-growth-theory.phpon February 7, 2008
2008, Definition of Neoclassical Growth Model, Econterms, retrieved at http://economics.about.com/cs/economicsglossary/g/neoclassical_g.htm. On February 7, 2008
Neoclassical Growth, CEPA Newschool, Retrieved at http://cepa.newschool.edu/het/essays/growth/neoclass/solowcont.htm. On February 7, 2008
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