Laissez-faire growth economics

Summary

Laissez-faire economics failed to deliver economic growth to poor countries

Assumptions

  • Market is best allocation mechanism
  • Diminishing returns to capital
  • Technology was exogenous so in endogenous growth models, technology modelled as non-rivalrous (but partially excludability) therefore not a pure public good.

Theory/Model

Solow model & Endogenous growth models

Application

Predictions

Conditional convergence, assuming diminishing returns to capital, implied poor economies with lower k (=K/L) compared to its long-term steady state will grow faster.

Evidence

Evaluation

To include technology, endogenous growth theories assumed technology is non-rivalrous but partially excludability  however Yifu Lin despite partial excludability, not sufficient to mean the market will provide a socially optimum level. Therefore need government intervention.