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Introduction to Modern Economic Growth
The discussion in this chapter therefore justifies why a study of political economy
has to be part of any investigation of economic growth. Much of the study of
economic growth has to be about the structure of models, so that we understand
the mechanics of economic growth and the proximate causes of income differences.
But part of this broad study must also confront the fundamental causes of economic
growth, which relate to policies, institutions and other factors that lead to different
investment, accumulation and innovation decisions.
4.8. Taking Stock
This chapter has emphasized the differences between the proximate causes of
economic growth, related to physical capital accumulation, human capital and technology, and the fundamental causes, which influence the incentives to invest in these
factors of production. We have argued that many of the questions motivating our
study of economic growth must lead us to an investigation of the fundamental causes.
But an understanding of fundamental causes is most useful when we can link them
to the parameters of fully-worked-out model of economic growth to see how they
affect the mechanics of growth and what types of predictions they generate.
When we turn to the institutions hypothesis, which we have argued in this
chapter that the available evidence favors, the role of theory becomes even more
important. As already pointed out above, the institutions view makes sense only
when there are groups in society that favor institutions that do not necessarily
enhance the growth potential of the economy. They will do so because they will
not directly or indirectly benefit from the process of economic growth. Thus it
is important to develop a good understanding of the distributional implications of
economic growth (for example, how it affects relative prices and relative incomes, and
how it may destroy their ends of incumbents). This theoretical understanding of the
indications of the growth process than needs to be combined with political economy
models of collective decision-making, to investigate under what circumstances groups
opposed to economic growth can be powerful enough to maintain known-growthenhancing institutions in place.
In this chapter, our objective has been more limited (since many of the more
interesting growth models will be developed later in the book) and we have focused
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