Economic Growth over Time and

Space
Lecture 5
Lund University, Fall 2017
Julius Probst
 Innovation, structural, change and
long-term cycles
• Inventions vs. Innovations
• GPTs/Macroinventions
• Waves vs. Phases (cycle theory)
• Technological revolutions
• Stages of development
Invention vs. innovation
Technology life cycle
 Macro vs. microinventions
• Technological progress the result of many
microinventions: continuous stream of
incremental improvements
Innovation is a stochastic process (Solow
model)
• Macroinventions (GPTs) are the main driver of
long-run economic growth
 Cycle theory
• Externalities and spillovers between different
industries, linkages between firms
• Innovative activities usually occur in swarms
(Schumpeter)
• Innovation clusters
• Growth as a non-linear process
 Macroinvention/GPTs
• GPTs: Invention that has a macroeconomic
impact
• Technological breakthrough: secondary
innovations
• Infrastructure investment related to key
inventions  railroads, optical fiber (internet)
• Importance of networks
• Interactions with the credit cycle
Technological Revolution
(Perez, 2009)
Technological Revolutions
 Long-term cycles vs. “Phases”
• Schumpeterian long-term cycles/waves
• The cycle theory is very deterministic (Kondratieff
waves of 40 years)
• Theory that is hard to falsify
• World is more complex/random
• From a statistical point of view, insufficient data to
accept or reject the hypothesis
• How useful as a theory?
• Remarkable stability in long-run economic growth?!
(“The facts of economic growth, Jones (2015))
 05
06
06
07
07
08
09
09

08
1850
1854
1858
1862
1866
1870
1874
1878
1882
1886
1890
1894
1898
1902
1906
1910
1914
1918
1922
1926
1930
1934
1938
1942
1946
1950
(constant 1910 prices)

1954
1958
Swedish GDP

1962
1966
1970
Logarithm of Swedish real GDP per capita

1974
1978
1982
1986
1990
1994
1998
2002
y = 0.0209x + 5.2177

2006
2010
U.S. GDP per capita
Different phases
 Stages of growth
• Malthusian growth: Agricultural revolution
• Industrial Revolution: based on manufacturing
• The rise of the service sector
 Malthusian trap
• Little sustained economic growth before Industrial Revolution 
some estimates suggest that living standards in 1800 were not that
different from Ancient Rome
• Malthus identified land as the binding constraint (fixed factor of
production)
• Malthusian trap  improvements in living standards are self-
defeating as they push up population growth
• Correct model for the period before 1800, but ignores technological
progress
• By the time of Malthus, the Industrial Revolution was on its way
• “Revolution” misleading term, not a period of abrupt change, but
rather a period of gradual economic and social change lasting
several decades
 Simple Malthusian model
• Start with Cobb-Douglas, 2 factors of production:
labor L & land X
• Yt = At * Xtβ * Lt1-β
• Now assume that land X is fixed: X = 1
• What happens to GDP per capita y ?
• yt = Yt/Lt = At * Lt-β
• Per capita GDP increases with productivity A but
decreases with population L
• An increase in L has a less than proportionate
effect on output because land is fixed
 Living standards and fertility
• Now suppose that higher standards of living
translate into higher population growth
• gL = n (y) =n ( At * Lt-β)
• Make the assumption that population growth
has a fixed upper limit and becomes negative
when people are poor enough
• This will lead to a steady state-level of
population Lt* = (At * yt*)1/β
 Implications of the Malthusian model
• Productivity increases temporarily pushes up
population growth
• Higher population will push down income per
capita again
• Progress is self-defeating
 Transition from agriculture in
manufacturing
• Productivity increases in agriculture can
support a rising population
• Rising urbanization as a result of larger
agricultural output
• Food has a low income elasticity, an increase
in demand for other goods as incomes rise
• Surplus labor: Transition from agriculture into
manufacturing & escape diminishing returns
Transition from industries towards the
service sector
• At very high income levels, the demand for
service rises more than proportionally (high
income elasticity)
• Higher share of government involvement
(education, health care, etc.)
Decline of U.S manufacturing
employment
But large productivity gains in
manufacturing
 Race against the machines?
• True for manufacturing
• For the economy as a whole, the problem is
largely exaggerated
• U.S. has created millions of jobs in the service
industry over the last decade
• Unemployment very low
• Concern: Stable manufacturing jobs replaced
with lower-paying service sector occupations
 Job trends in the U.S.
• Employees in the U.S.: 145 million
• Decline of manufacturing: down to 12 million
now from 17 million 2 decades ago
• Rise of services in between 2004 and 2014:
professional business services, healthcare, leisure
and hospitality have created 3 million, 4 million
and 2 million jobs, respectively
• High-tech: less than 3% of the workforce (less
than 5 million in 2014)
• Facebook only 14.000 employees, but higher
market capitalization than GM with 250.000
BLS employment projections

Source: http://www.bls.gov/news.release/pdf/ecopro.pdf
 Agglomeration effects
• Agglomeration effects are becoming more
important
• Over the last 2 decades, most GDP growth in
the U.S. was generated by a few metropolitan
areas
• Tendency towards bigger cities, more
concentration
• Much higher productivity in concentrated
areas
 Agglomeration forces
• Gravitational pull towards more concentration
• Companies want thick labor markets
• Companies want to be located close to
upstream/downstream suppliers & services
• Externalities (spillover) between firms  ideas
& technological know-how
• Consumers demand amenities: education,
transportation, culture, gastronomie & other
services (love of variety)
• Services are produced locally!
 Forces of dispersion
• High concentration
• Overcrowding & congestion
• Pollution
• Rising housing prices and cost of living in
general
“The new geography of jobs” (Moretti)
• Moretti estimates that for every job in high-
tech, 5 local service sector jobs are created
• Uber drivers, Starbucks barristas, Yoga
instructors, etc.
 Is the decline of industries
problematic?
• Simply reflects structural change in the
economy
• With higher income, we demand more
services
• Problematic if stable manufacturing jobs are
replaced by low-paying service occupations 
hollowing-out of the middle class
• Rising inequality  growth inhibiting
 Baumol’s cost disease
• Where is a haircut cheaper? Sweden or India
• Why?
• Productivity gains harder to achieve in the
service sector
• Hair cuts, Teaching
• Might be a problem for future growth if the
service sector is a larger share of GDP
 A short note on institutions
• Large body of academic literature: Institutional
Economics
• Institutions are key for economic growth, the “rules of
the game”
• Acemoglu and Robinson: Why nations fail
• The colonial origins of comparative development –
Extractive vs. inclusive economic and political
institutions
• Douglas North: Nobel prize winner
• Difference in institutions as a result of colonial legacy:
British common law vs. French civil law
Inclusive vs. extractive institutions
 Institutions

• Acemoglu and Robinson suggest from an historic point of view the blue
path is more likely than the red path  criticism of “modernization
theory” which proposes that economic development will ultimately
lead to democracy