In response to Professor Michael Spence's article "Does Growth Have a Future?" on Project Syndicate
"The new normal of lower growth" is the current baseline scenario, for the world economy, that is being projected by the bond-traders on Wall Street. It appears that the bond-traders are looking to rationalize the reasons as to why debt is trading on such low yields these days. Hence, they have been instrumental in conducting debates in the media, on the consequences of the current economic crisis for the medium-term growth of the world economy. Incidentally, this is the same topic that is addressed by Professor Michael Spence in his latest article, "Does Growth Have a Future?" on Project Syndicate. I suppose that the bond-traders' answer to Professor Spence's question is a firm "no", and moreover, these traders would like the general public to adjust its expectations for growth to this so-called "new normal".
However, coming from a renowned economist like Professor Spence, the question needs more careful analysis. As a result, I take it to mean, "Does Growth Theory Have a Future?" As such, Professor Spence takes a broader view on economic growth than bond-traders would, for he says in his article, "At the moment, the majority view in most countries is that the financial system failed badly, but that the incentives and dynamics of the broader market-based system in a relatively open global architecture remain the best avenues for wealth creation, poverty reduction, and the expansion of opportunity".
Does the theoretical study of economic growth promise to shed light on the path the world economy is going to take in the coming years? Would the tools and techniques that this topic of study employs, help economists to anticipate growth opportunities and prepare for them? Or would the world economy muddle along without any clear policy guidelines, unable "to avoid non-cooperative behavior and suboptimal equilibria"? Or perhaps should policy-makers abandon their focus on economic growth, and instead, promote social policies -- like income equality, health, sanitation, education and environmental preservation?
Such questions on economic growth can be profitably addressed, based on the concepts that I had elaborated in my recent article "A New Perspective on the Global Economic Crisis". The main argument to use for this purpose is that in different parts of the world, the underlying foundations for the prospects of growth are of varying durability. That is, the propects for economic growth that the emerging market economies are enjoying come with secure foundations provided by a theoretical framework that has been in development for over a millenium. Whereas, the growth that advanced economies can expect would depend on relatively new and recent developments in economic theory, whose durability remains suspect. On the other hand, the predicament of the poor countries shows that securely founded economic theory alone could not guarantee sustained economic growth.
The focus on durability that I propose is in contrast to the concerns of investment managers who treat all assets uniformly under the risk-reward framework of modern portfolio theory. Their view treats asset classes as differing only in their risk-reward profiles, without any implications for systemic risk. No particular significance is attached to the transience or permanence of economic wealth, as the case may be. Whereas, with the durability approach, it is possible to study the requirements for generating growth in the advanced economies, which are markedly different from the requirements in the developing economies. Taken together with this durability approach, the new perspective on global economic crisis that I had proposed in my recent article, opens up much better prospects for world-wide economic growth, in the medium-term, than those indicated by the "new normal" predictions of the bond-traders.
At present, it is not possible for me to develop such a wide-ranging theoretical frame-work as is plainly required before one can discuss, in a clear and transparent manner, the issues concerning world-wide economic growth. However, if I receive a job offer for exploring the prospects for economic growth full-time, then I would be sure to take it up.
Post Script: Professor Kenneth Rogoff had also written an article earlier on the same topic of growth in the world economy. This article "The "New Normal" for Growth" appeared on Project Syndicate in early May. I posted the above response in the comments section of Professor Rogoff's article as well. But he removed my comments the next day :)
"The new normal of lower growth" is the current baseline scenario, for the world economy, that is being projected by the bond-traders on Wall Street. It appears that the bond-traders are looking to rationalize the reasons as to why debt is trading on such low yields these days. Hence, they have been instrumental in conducting debates in the media, on the consequences of the current economic crisis for the medium-term growth of the world economy. Incidentally, this is the same topic that is addressed by Professor Michael Spence in his latest article, "Does Growth Have a Future?" on Project Syndicate. I suppose that the bond-traders' answer to Professor Spence's question is a firm "no", and moreover, these traders would like the general public to adjust its expectations for growth to this so-called "new normal".
However, coming from a renowned economist like Professor Spence, the question needs more careful analysis. As a result, I take it to mean, "Does Growth Theory Have a Future?" As such, Professor Spence takes a broader view on economic growth than bond-traders would, for he says in his article, "At the moment, the majority view in most countries is that the financial system failed badly, but that the incentives and dynamics of the broader market-based system in a relatively open global architecture remain the best avenues for wealth creation, poverty reduction, and the expansion of opportunity".
Does the theoretical study of economic growth promise to shed light on the path the world economy is going to take in the coming years? Would the tools and techniques that this topic of study employs, help economists to anticipate growth opportunities and prepare for them? Or would the world economy muddle along without any clear policy guidelines, unable "to avoid non-cooperative behavior and suboptimal equilibria"? Or perhaps should policy-makers abandon their focus on economic growth, and instead, promote social policies -- like income equality, health, sanitation, education and environmental preservation?
Such questions on economic growth can be profitably addressed, based on the concepts that I had elaborated in my recent article "A New Perspective on the Global Economic Crisis". The main argument to use for this purpose is that in different parts of the world, the underlying foundations for the prospects of growth are of varying durability. That is, the propects for economic growth that the emerging market economies are enjoying come with secure foundations provided by a theoretical framework that has been in development for over a millenium. Whereas, the growth that advanced economies can expect would depend on relatively new and recent developments in economic theory, whose durability remains suspect. On the other hand, the predicament of the poor countries shows that securely founded economic theory alone could not guarantee sustained economic growth.
The focus on durability that I propose is in contrast to the concerns of investment managers who treat all assets uniformly under the risk-reward framework of modern portfolio theory. Their view treats asset classes as differing only in their risk-reward profiles, without any implications for systemic risk. No particular significance is attached to the transience or permanence of economic wealth, as the case may be. Whereas, with the durability approach, it is possible to study the requirements for generating growth in the advanced economies, which are markedly different from the requirements in the developing economies. Taken together with this durability approach, the new perspective on global economic crisis that I had proposed in my recent article, opens up much better prospects for world-wide economic growth, in the medium-term, than those indicated by the "new normal" predictions of the bond-traders.
At present, it is not possible for me to develop such a wide-ranging theoretical frame-work as is plainly required before one can discuss, in a clear and transparent manner, the issues concerning world-wide economic growth. However, if I receive a job offer for exploring the prospects for economic growth full-time, then I would be sure to take it up.
Post Script: Professor Kenneth Rogoff had also written an article earlier on the same topic of growth in the world economy. This article "The "New Normal" for Growth" appeared on Project Syndicate in early May. I posted the above response in the comments section of Professor Rogoff's article as well. But he removed my comments the next day :)
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