Unified growth theory

Unified growth theory was developed to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole. Endogenous growth theory was satisfied with accounting for empirical regularities in the growth process of developed economies over the last hundred years. As a consequence it was not able to explain the qualitatively different empirical regularities that characterized the growth process over longer time horizons in both developed and less developed economies. Unified growth theories are endogenous growth theories that are consistent with the entire process of development, and in particular the transition from the epoch of Malthusian stagnation that had characterized most of the process of development to the contemporary era of sustained economic growth.

Unified growth theory was first advanced by Oded Galor and his co-authors who were able to characterize in a single dynamical system an initial stable Malthusian equilibrium which due to the evolution of latent state variables, ultimately vanishes endogenously, causing a transitional growth take off before the system gradually converges to a modern growth steady-state equilibrium. The Malthusian state is characterized by slow technological progress and population growth, where the benefits of technological progress are offset by population growth. In the modern growth state technological progress does not encourage population growth but human capital accumulation instead which then further spurs technological progress.

The theory captures in a single analytical framework the main characteristics of the process of development: (i) the epoch of Malthusian stagnation that characterized most of human history, (ii) the escape from the Malthusian trap, (iii) the emergence of human capital formation in the process of development, (iv) the onset of the demographic transition, (v) the origins of the contemporary era of sustained economic growth, and (vi) the divergence in income per capita across countries.

Unified growth theory suggests that the transition from stagnation to growth has been an inevitable by-product of the process of development. It argues that the inherent Malthusian interaction between the rate of technological progress and the size and composition of the population accelerated the pace of technological progress and ultimately raised the importance of education in coping with the rapidly changing technological environment. The rise in industrial demand for education brought about significant reductions in fertility rates. It enabled economies to divert a larger share of the gains from factor accumulation and technological progress to the enhancement of human capital formation and income per capita, paving the way for the emergence of sustained economic growth.

The theory further explores the dynamic interaction between human evolution and the process of economic development and advances the hypothesis that the forces of natural selection played a significant role in the evolution of the world economy from stagnation to growth. The Malthusian pressures have acted as the key determinant of population size and conceivably, via natural selection, have shaped the composition of the population as well. Lineages of individuals whose traits were complementary to the economic environment generated higher levels of income, and thus a larger number of surviving offspring, and the gradual increase in the representation of their traits in the population contributed to the process of development and the take-off from stagnation to growth.

Unified Growth Theory sheds light on the divergence in income per capita across the globe during the past two centuries. It identifies the factors that have governed the transition from stagnation to growth and have thus contributed to the observed worldwide differences in economic development. It highlights the persistent effects that variations in historical and prehistorical conditions have had on the composition of human capital and economic development across countries. Finally, it uncovers the forces that have led to the emergence of convergence clubs.

References

• Galor, Oded (2011). Unified Growth Theory. Princeton: Princeton University Press. ISBN 978-0-691-13002-6.