An economy ages in many ways. The most common are tied to the exhaustion of factors such as production-labor, capital and resources. When an economy begins to develop, labor is the abundant resource. Hence, it makes sense to develop labor-intensive industries. When labor surplus is exhausted, it makes sense to develop capital intensive industries. When capital stock is high enough, investment cannot drive growth anymore.

As long as there is ongoing technological development leading to repeated waves of innovation, investment can drive growth. The model above rests heavily on a fixed technological regime to explain growth by moving in the direction of exploiting relatively abundant factors ... without having any explanation for why there would be relatively abundant factors in the first place without technological change.

And of course any functional formalization of the neoclassical catechism cannot encompass a theory of technological innovation in which new technology is being developed, since the neoclassical catechism is based upon reactions to knowledge, and technological innovation requires prior discovery of new knowledge in the face of prior ignorance. After all, without knowing at the outset what there is to be found, it is never neoclassically rational to try to push back the boundaries of ignorance.

This is one of several fundamental flaw in Rostow's Stages of Development model, briefly recapitulated in the quoted section.

Historically, the surplus labor in the economies most successful at industrialization came from a technologically progressive agriculture that freed up labor from agricultural work while increasing incomes in the agrarian sector, making it a more effective market for the output of industry.

The contrasting model of exploitation of cheap labor currently employed in a non-progressive agricultural system more often leads to the "development of underdevelopment" than in the direction of active industrialization ... the difference between Brazil's South and Brazil's Northeast, or between India's Northwest and India's South, or between the US Great Lakes and Midwest and the US Southeast.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

Given that the world is awash in capital and the strain that is being put on the economy in order to extract from it a "suitable" rate of return on capital, this might well be true.

The brainless should not be in banking -- Willem Buiter

Globally, we have an oversupply of labour... but we also have lots of capital unused... What Xie's piece puts in my mind is that we may have, in the West hit the limits of "capital availability" in spurring growth.

But in the USA and, now it seems, in Japan after 1990 capital was deployed to extract the maximum rent possible and if this resulted in cannibalization of the domestic economy that was just another "innovation" so long as the returns to the FIRE sector looked good, as with "off-shoring" of manufacturing operations. For the holders of capital the loss of domestic employment is a necessary consequence. If they can't externalize that consequence they will minimize it.

Mainstream Economics doesn't seem to really concern itself much with debt levels but the ratio of total debt to GDP. Had we shown concern with the debt to GDP ratio instead of wage inflation we would have been alerted to the problems of the asset bubbles and could have prevented them, we would have a more equal wealth distribution and larger consumer demand.

Goodhart's Law states that whenever an economic indicator is made the target for setting policy it loses the information content that would qualify it to play such a role. (Note 16, p.4 of Edward Chancellor's excellent White Paper, China's Red Flags, via Zero Hedge.) We have certainly succeeded in controlling wage inflation--to our detriment and the dropping of M3, the revisions to the CPI and all of the various measures of unemployment in the USA would seem to support Goodhart. We need better metrics AND better application of those metrics.

"It is not necessary to have hope in order to persevere."

There is, however, an important aspect of the story of the savings glut that often gets overlooked: if there is an excess supply of savings, what is the excess relative to?

The answer is: a demand for capital from companies. The flip side of the excess supply of savings is a deficiency of capital investment. As Federal Reserve governor Ben Bernanke said in a famous speech which popularised the notion of a savings glut, there has been a "dearth of domestic investment opportunities" in developed economies.

One sign of this dearth is that the share of capital spending in UK GDP has been trending downwards for years. Even before the recession began, business investment accounted for just 10 per cent of GDP, its lowest proportion since records began in the 1960s; it's now 8.5 per cent.

Granted, this has been in part a reflection of the fact that prices of capital goods - such as software - have fallen relative to prices generally. But it's unclear how relevant this is. It merely raises the question: why didn't companies respond to falling capital goods prices by spending even more?

Now, you might object that it makes no sense to speak of a lack of investment opportunities because profit rates have been high for years; in the second quarter of last year, non-oil, non-financial companies' net return on capital was 10.8 per cent - so, even in the worst recession since the 1930s, profit rates were higher than at any time in the 1970s or early 80s.

This objection, however, overlooks an important distinction - between existing investments and potential new ones. It's quite possible for capital in place to earn big returns while prospective new projects are expected to have low returns. There's no reason to suppose that what Keynes called the marginal efficiency of capital is close to the average profitability of existing capital; the idea that macroeconomic entities are stable, identifiable and smoothly differentiable is a pedagogic device, not (necessarily) an empirical reality.