Evaluating growth theories and their empirical support: An assessment of the convergence hypothesis

Abstract

Understanding the factors determining economic growth has been a major concern for economists and governing bodies for many years. The Solow growth model and the endogenous growth models are the main theories tested and used in the growth literature. This paper discusses the main contributions to economic methodology and uses Lakatos's scientific research program framework to evaluate the main theoretical contributions to growth theory. Based on Lakatos's ideas, Solovian models are both empirically and theoretically progressive. Endogenous growth models, on the other hand, are not empirically corroborated, and thus not progressive in Lakatosian sense. However, there are many reasons for rational growth economists to continue working in this field, even facing empirical refutations of an important theoretical prediction. Endogenous growth models are promising in terms of generating enormous gains that will help us better understand the mechanisms of economic growth.

Keywords:

• growth
• methodology
• Lakatos
• scientific research program

ACKNOWLEDGEMENTS

The authors would like to thank James Wible from UNH, participants of the Eastern Economic Association Meetings in 2003, two anonymous referees and the participants of the Economic Seminar Series at UNH for their helpful comments.

Notes

1. Wible (1998) discusses the process of knowledge creation within a marketplace of ideas.

2. According to Blaug (1992: 247), ‘[w]hat methodology can do is to provide criteria for the acceptance and rejections of research programs, setting standards that will help us to discriminate between wheat and chaff. These standards, we have seen, are hierarchical, relative, dynamic, and by no means unambiguous in terms of the practical advice they offer to working economists.’

3. Note that Hands is not arguing that economists should use a rule‐based methodology to demarcate science from pseudoscience.

4. Broadly speaking, novel fact is an evidence/prediction not yet observed, which may be theoretical or empirical.

5. An anonymous referee suggested that the evolutionary approach represents a different paradigm in terms of evaluating economic growth. We recognize that this approach can potentially change the paradigm for evaluating economic growth. However, our paper proposes evaluating the growth viewpoint of mainstream economists by focusing on neoclassical growth models. The appraisal of the evolutionary versus the neoclassical approach as two different paradigms would be the topic of another research.

6. Common forces are understood as inherent elements that exist in competitive markets, which are due to the presence of diminishing marginal productivity, and cause growth paths to achieve the steady state level. The contagion components are associated with technology transfer.

7. See Hont (1983) for a through discussion of the rich country–poor country Scottish debate that includes the views of many well‐known economists, including Hume and Tucker.

8. Note that we are not specifying the ‘type of convergence’. Some authors use the neoclassical model to defend the hypothesis of absolute convergence. However, absolute convergence only takes place in the neoclassical model if the exogenous parameters, such as population growth rate, savings and technology, are identical among economies. In other words, absolute convergence requires convergence in structural parameters across countries. We discuss the concept of convergence in the text below.

9. Another important property of the Solow model is the Inada conditions, which state that as capital (or labor) goes to zero, the marginal productivity of capital (labor) approaches infinity and vice versa.

10. There is a third concept that essentially combines the two concepts of convergence by stating that there will be absolute convergence only within specific groups of countries that share similar characteristics. It is used to accommodate empirical regularities such as the existence of polarization, persistent poverty and clustering of countries, which suggest the existence of convergence clubs.

11. The ‘new growth theory’ is only a label to differentiate the ideas associated with Romer (1986) from the Solovian models. It is clear in the growth literature that both belong to the neoclassical view of economics.

12. See Foss (1997: 7) and Barro and Sala‐i‐Martin (1995: 10–11) for more details about Arrow–Sheshinski ideas.

13. Blaug (1992: 11) argues that ‘the tension between description and prescription in the philosophy of science, between the history of science and methodology of science, has been a leading factor in the virtual overthrow of the Received View in the 1960s’.

14. Hands (2001) evaluates Popper's contribution to philosophy of science as a part of the Received View. However, Popper advocates that the most important contributor to the ‘death’ of the Received View was himself. In his words, ‘everybody knows nowadays that logical positivism is dead. But nobody seems to suspect that there may be a question to be asked here – “who is the responsible?” … I fear that I must admit responsibility’ (Popper 1976 cited by Hands 2001: 70).

15. According to Blaug (1992: 30), ‘What Kuhn appears to have done is to fuse prescription and description, thus inducing his methodology of science from the history of science. In one sense, Kuhn's The Structure of Scientific Revolution is not a contribution to methodology but rather a contribution to the sociology of science’.

16. The hard core changes only if a scientific revolution takes place and replaces the hard core itself (Hands 2001).

17. To determine whether a new theory should be characterized as a part of an existing SRP, or as a new SRP, Lakatos suggest looking at whether it contains all the unrefuted content of the previous theories, in which case it is a part of the same SRP.

18. A novel fact is evidence not yet observed, which may be theoretical or empirical.

19. This concept of success of a theory does not differ significantly from Friedman's view. According to him, ‘predicting a novel fact is the key determinant of a successfully economic theory’ (Hands 2001: 55).

20. According to Lakatos, ‘the predictions concern basic value judgments made by scientists at the time concerning the rationality and irrationality of certain episodes. To see this, suppose that, according to Lakatos's theory, a certain research program of the past became unacceptably degenerate at a certain time. Subsequent historical investigation might uncover documents, which attest to the attitudes of the scientific community at the time. Suppose that these documents show that the community was preparing to reject the research programme in question. In this case, we would say that Lakatos's theory had made a successful novel prediction’ (Matheson 1996).

21. ‘The predictivist thesis gains little empirical support from the history of science. Any attempt to rescue it by redefining novelty in terms of what the theorist knew, when he knew it, and what he did or could have done with the information puts the philosopher in the position of a Watergate investigator without Deep Throat’ (Brush 1995 cited by Hands 2001: 295).

22. Hands (2001) discusses this issue in depth.

23. Kuhnian loss refers to the failure of a succeeding theory to address a particular phenomenon that was explained by the preceding theory.

24. See Sedgley and Elmslie (2002).

25. For an extensive literature review look at Cavusoglu (2001).

26. See Hall and Jones (1999) and Sachs and Warner (1995).

27. According to Pack (1994: 65), ‘even when conditional convergence does not occur as measured in these regressions, it does not prove that the endogenous growth theory is true, nor necessarily invalidate the Solow Mode’.

28. We thank an anonymous referee for raising this point.

29. Among the earliest studies are Rosenberg (1963) and Schmookler (1966).

30. According to Pack (1994), the empirical literature on endogenous growth models may not find evidence in favor of such a class of models because many ‘empirical tests of endogenous growth theory have, paradoxically, focused on test of convergence implied by neoclassical theory rather than efforts to directly test endogenous growth theory itself ’ (Pack, 1994: 63). Moreover, the presence of externalities is extremely important for endogenous growth, but ‘it is difficult to construct tests of their presence’. Finally, empirical studies of the determinants of growth do not simultaneously incorporate R&D and investment in physical and human capital, which are critical variables for such models.

31. For some interesting extensions of endogenous growth models refer to Jones (1995a, 1995b), Segerström (1998), Young (1998), Sedgley and Elmslie (2002) and Peretto and Smulders (2002).