Introduction to Modern Economic Growth

The book therefore strives to provide students with a strong background in dynamic economic analysis, since only such a background will enable a serious study of economic growth and economic development. I also try to provide a clear discussion of the broad empirical patterns and historical processes underlying the current state of the world economy. This narrative is motivated by my belief that to understand why some countries grow and others fail to do so, economists have to move beyond the mechanics of models and pose questions about the fundamental causes of economic growth. Second, In a somewhat different capacity, this book is also a graduate-level introduction to modern macroeconomics and dynamic economic analysis. It is sometimes commented that, unlike basic microeconomic theory, there is no core of current macroeconomic theory that is shared by all economists. This is not entirely true. While there is disagreement among macroeconomists about how to approach short-run macroeconomic phenomena and what the boundaries of macroeconomics should be, there is broad agreement about the workhorse models of dynamic macroeconomic analysis. These include the Solow growth model, the neoclassical growth model, the overlapping generations model, and models of technological change and technology adoption. Since these are all models of economic growth, a thorough treatment of modern economic growth can also provide (and perhaps should provide) an introduction to this core material of modern macroeconomics. Although there are several good graduate-level macroeconomic textbooks, they typically spend relatively little time on the basic core material and do not develop the links between modern macroeconomic analysis and economic dynamics on the one hand and general equilibrium theory on the other. In contrast, the current book does not cover any of the short-run topics in macroeconomics, but provides a thorough and rigorous introduction to what I view to be the core of macroeconomics. The selection of topics is designed to strike a balance between the two purposes of the book. Chapters 1, 3, and 4 introduce many of the salient features of the process of economic growth and the sources of cross-country differences in economic performance. Even though these xv Acemoglu first pages 2008/8/24 11:21 p. xv (front) Princeton Editorial Assoc., JRS ZzTEX 13.6 xvi . Preface chapters cannot do justice to the large literature on economic growth empirics, they provide a sufficient background for students to appreciate the issues that are central to the study of economic growth and a platform for further study of this large literature. Chapters 5-7 cover the conceptual and mathematical foundations of modern macroeconomic analysis. Chapter 5 provides the microfoundations for much of the rest of the book (and for much of modern macroeconomics), while Chapters 6 and 7 supply a quick but relatively rigorous introduction to dynamic optimization. Most books on macroeconomics or economic growth use either continuous time or discrete time exclusively. I believe that a serious study of both economic growth and modern macroeconomics requires the student (and the researcher) to be able to move between formulations using discrete and continuous time, choosing the more convenient or appropriate approach for the set of questions at hand. Therefore I have deviated from standard practice and included both continuous-time and discrete-time material throughout the book. Chapters 2, 8, 9, and 10 introduce the basic workhorse models of modern macroeconomics and traditional economic growth, while Chapter 11 presents the first-generation models of sustained (endogenous) economic growth. Chapters 12-15 cover models of technological progress, which are an essential part of any modern economic growth course. Chapter 16 generalizes the tools introduced in Chapter 6 to stochastic environments. Using these tools, Chapter 17 presents a number of models of stochastic growth-most notably the neoclassical growth model under uncertainty, which is the foundation of much of modern macroeconomics (though it is often left out of courses on economic growth). The canonical Real Business Cycle model is presented as an application. This chapter also covers another majorworkhorse model of modern macroeconomics, the incomplete markets model of Bewley. Finally, Chapter 17 also presents a number of other approaches to modeling the interaction between incomplete markets and economic growth and shows howmodels of stochastic growth can be useful in understanding how economies transition from stagnation or slow growth to an equilibrium with sustained growth. Chapters 18-21 cover topics that are sometimes left out of economic growth textbooks. These include models of technology adoption, technology diffusion, the interaction between international trade and technology, the process of structural change, the demographic transition, the possibility of poverty traps, the effects of inequality on economic growth and the interaction between financial and economic development. These topics are important for creating a bridge between the empirical patterns we observe in practice and the theory. Most traditional growth models consider a single economy in isolation, often after it has already embarked on a process of steady economic growth. A study of models that incorporate crosscountry interdependences, structural change and the possibility of takeoffs make it possible to link core topics of development economics, such as structural change, poverty traps or the demographic transition, to the theory of economic growth. Finally, Chapters 22 and 23 consider another topic often omitted from macroeconomics and economic growth textbooks: political economy. Inclusion of this material is motivated by my belief that the study of economic growth would be seriously hampered if we failed to ask questions about the fundamental causes of differences among countries in their economic performances. These questions inexorably bring us to differences in economic policies and institutions across nations. Political economy enables us to develop models to understand why economic policies and institutions differ across countries and must therefore be an integral part of the study of economic growth. Afewwords on the philosophy and organization of the book might also be useful for students and teachers. The underlying philosophy of the book is that all the results that are stated should be proved or at least explained in detail. This implies a somewhat different organization than found in other books. Most textbooks in economics do not provide proofs for many of the Acemoglu first pages 2008/8/24 11:21 p. xvi (front) Princeton Editorial Assoc., JRS ZzTEX 13.6 Preface . xvii results that are stated or invoked, and mathematical tools that are essential for the analysis are often taken for granted or developed in appendixes. In contrast, I have strived to provide simple proofs of almost all results stated in this book. It turns out that once unnecessary generality is removed, most results can be stated and proved in a way that is easily accessible to graduate students. In fact, I believe that even somewhat long proofs are much easier to understand than general statements made without proof, which leave the readerwondering why these statements are true. I hope that the style I have chosen not only makes the book self-contained, but also gives the students an opportunity to develop a thorough understanding of the material. In line with this philosophy, I present the basic mathematical tools necessary for the development of the main material in the body of the text.