Jamyca Rose V.

De la Cruz SocST 143: Comparative Economic Planning

BSE II-Social Studies Contemporary Models

Contemporary Models Proponents Theory/Assumptions Strength and Limitation

Endogenous growth theory is an economic theory which
Endogenous Growth Paul Romer argues that economic growth is generated from within a
system as a direct result of internal processes. More
specifically, the theory notes that the enhancement of a
nation's human capital will lead to economic growth by
means of the development of new forms of technology and
efficient and effective means of production.
A theory that holds economic growth is primarily the result
of endogenous and not external forces. Endogenous
growth theory holds that investment in human capital,
innovation, and knowledge are significant contributors to
economic growth
 The endogenous growth theory is that it is impossible to validate
with empirical evidence.
  The theory has been accused of being based on assumptions that
cannot be accurately measured.
 Endogenous growth may prove useful for understanding growth in
world knowledge over time, but it is not useful for understanding
why some countries are so poor relative to the United States today.
 The theory focuses upon market imperfections and technological
progress in a variety of ways, and reconstructs their impact upon
the macroeconomic as a growth rather than as a level effect.
 Overlooks inefficiencies brought about by poor infrastructure,
inadequate institutional structures and imperfect capital and goods
markets.
 the theory places most of its emphasis on explaining long term
growth rates and not on short or medium-term growth

Coordination Cooper and John In an economic system with multiple equilibria,  Can make the equilibrium quite sensitive to technology and other
Failure coordination failure occurs when a group of firms could real stocks
achieve a more desirable equilibrium but fail to because  Credit market and other nominal shocks about future government
they do not coordinate their decision making. Coordination policies.
failure can result in a self-fulfilling prophecy. 
These failures occur when people are unable to reach a
 mutually beneficial arrangement or equilibrium because
they are unable to coordinate their actions.

 multiple equilibrium may only arise under restrictive parameter

Multiple Equilibria Leon Walras The model is explained by the privately rational decision
function, an S-shaped curve. The intersection of this curve
with the 45º line is the point of equilibrium (A stable
equilibrium).
values
 This theory is bloodedly rational decision-makers’ choices are
contextualized and constrained by complex environmental factors.
 Much depends on individual preferences and institutional design.
 No one choice is either inevitable or economically efficient.

The Big Push Rosentein Rodan a stringent variant of the theory of ‘balanced growth’. The  The big push theory brings out the need for a massive effort on the
Theory crux of this theory is that the obstacles of development are part of the underdeveloped countries to industrialize
formidable and pervasive. The development process by its  It is the high minimum quantum of investment that takes an
very nature is not a smooth and uninterrupted process. It underdeveloped economy towards an optimum position.
involves a series of discontinuous ‘jumps’. The factors  This theory fails to recognize that the amount of resources in an
affecting economic growth, though functionally related underdeveloped country is very limited.
with each other, are marked by a number of  The gap between demand and supply is likely to persist for some
“discontinuities” and “hump.” time resulting in increase in prices. This would create a pressure
for the demand of consumer goods, which would generate
inflation.
 It is very difficult to co-ordinate the various development plans in
Big Push theory.
 Big Push is a programme of comprehensive industrialization. It

This refers to the theory that even the smallest components
O -ring Theory Michael Kremmer of a complex production process must be performed
properly if the end product of the process is to have any
useful value. In other words, a mistake that creeps into even
the smallest of tasks can cause the final product to possess
absolutely no value to users.
lays more stress on the heavy dose of investment in different
industries such as capital goods industries, consumer goods
industries and social overhead capital etc., but it ignores the
development of agricultural sector.
 If the O-ring theory is true, the more complex the production
process, the costlier each mistake.
 The less skilled workers, with their greater propensity to make
mistakes, would lead to such capital getting wasted. Such firms
will then employ less physical capital.
 people will sort by skill as firms will find it worthwhile to employ
people of the same competency. Those firms with the best workers
will then attract the most capital.
 Large differences in wages might also be observed across borders
if there are differences in skill between countries.