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This may also provide some insight on why the European powers sought to gain ever-larger colonial empires in the later 19 th Century.

A principal problem with this classical production function was that it could not explain the sources of productivity growth, or its dynamics, over time. More specifically, this function had no place for innovation . Finally, and most importantly, there was no role for human capital.

(2)A more useful Production Function: In his pioneering work in the theory of “endogenous growth,” Paul Romer of Stanford University extended the Model of Robert Solow of MIT to incorporate innovation into the formal theory of economic growth. There is considerable debate as to how far his model makes growth endogenous. Romer’s Model brought innovation and R&D to the forefront. Previously, these factors were treated in a most unsatisfactory manner as in the “residual” term of the Solow model. We can write:

(2) Y = F t (L, P, K, H, I) + Z

Here the new terms are (I), devoting innovation and H, standing for human capital . K now stands for physical capital only. The subscript t in F t indicates the technology function F that maps inputs into output changes over time t due to the dynamics of innovation and technological change. The rate of growth dY/dt in such a model will be the total derivative dF t (o)/dt . The letter (Z) is the residual. This, in turn, will be a complex function showing how changes in the five variables ( L , P , K , H and I ) and I translate into a change in output Y over time.

While this was an advance in thinking, it is not sufficient. This model still falls short of what is needed, namely a model that explains how two different economies possessing the same values of

the independent variables L , P , K , H and I can have completely different growth rates dY/dt .

That is, there must be additional variables missing from (2) (Romer’s approach) that cause

the four independent variables to be transformed differently into different growth rates of output.

A Much Better Production Function: Traditional growth theory along the lines sketched above has been a branch of “economics proper.” Political, legal, and sociological factors were usually not included in the models of economists who work in this field. This situation is changing rapidly. Recent research has shown that the true determinants of economic output and growth include not only the five independent variables appearing in (2) , but a host of other quite different variables, including the incentive structure in the economy. These include such institutional features as the quality of the legal system (e.g., the efficiencies of government regulation, the quality of the educational system), the average and marginal rates of taxation, the extent of leverage (debt) that accumulates in the economy, the extent of private and public sector corruption, the degree of compliance with the tax code, the incentives to retire early versus late, the penalties for excess pollution, the incentives to have few or many children, the regulation of immigration, the level of public safely, and the protection of property rights. These factors play no role in models like (1) or (2) above.

(3)Incentive Structure Effects on Growth: Taken together, these variables define the incentive structure within which economic activity is carried out in an economy. Think of the incentive structure of a society as the collection of all “sticks and carrots” (penalties and rewards) influencing the decisions of all agents as they decide what to produce or not to produce. If top tax rates are 90% (as they were from 1945-69), agents will probably stay in bed or go on long vacations or hire legions of expensive lawyers to help avoid taxes. If tax rates are 20%, they will probably work harder and hire fewer lawyers. As a result of the role of incentive structures, citizens in two essentially identical economies (i.e., economies possessing identical values of the land, workforce, capital, and innovation variables in (2) above) will experience very divergent rates in growth in output and living standards. This will be due to differences in the incentive effects of tax rates, regulatory burdens legal provisions such as sanctity of contract, property rights, etc. To incorporate these factors, we need more general growth mode, as in (3).

(3) Y = F t (L, P, H, K, I, IS) + e

Y = f t (L, P, H, K, I, IS) + e

where IS denotes the incentive structure of the economy may have evolved by design or by accident. Equation (3) , furnishes a more general framework that can, in principle, explain what fuels growth rates in several type of economies. It helps to explain growth in economies that conform perfectly to classical textbook assumptions and that grow in accord with equation (2) . It also helps to explain stages of growth in Nations such as China between 1950 and 2010. During the period 1950-1963, we noted that there was only modest growth. From 1963-1980, during the Cultural Revolution due to nationwide economic and social disruption China had negative growth. But after 1982, China experienced an astonishing 10% growth rate thereafter. Classical growth theory cannot explain such phenomena at all, whereas variations in the incentive structure can. This is the advantage of model (3) over (2) .

Once we know how a particular IS variable impacts growth, and why , we may begin to understand which particular values of the IS variables are most supportive with strong growth. As we discuss later in this book, once policy- makers understand that taxes on consumption are much more efficient than taxes on labor because of their relative incentive effects, countries might consider adopting a tax code tilted towards consumption on the basis that it is “incentive structure compatible with optimal growth,” whereas taxes on payrolls are not. We may note at this point that over 150 nations now have ventral government taxes bases primarily on consumption: the value-added tax.

Selecting a Growth Rate: There is a second property that incentive structure variables have in common: IS variables are almost always policy variables chosen by governments, in contrast to classical land and labor variables that are usually exogenous and “taken as given.” Importantly, since IS variables are chosen, IS variables can be changed as a matter of policy, just as they were so spectacularly in China when Deng Xiaoping said in 1978, “It’s okay to go get rich!” After further reforms, the growth process there took off in 1982 and remained strong though 2014.

By contrast countries can be said to be “stuck” with a pathological incentive structure, and, by extension, with low growth. Greece over the period 2008-2014 has been the poster child for this incentive structure. We might conclude that the highly diverse growth rates that have been observed in history have themselves been chosen to a certain extent via their governments’ choice of incentive structures.

Analogously, countries can choose growth rates in the future. We now understand what polices are compatible with growth, and which are not.

Questions & Answers

anyone know any internet site where one can find nanotechnology papers?
Damian Reply
research.net
kanaga
Introduction about quantum dots in nanotechnology
Praveena Reply
what does nano mean?
Anassong Reply
nano basically means 10^(-9). nanometer is a unit to measure length.
Bharti
do you think it's worthwhile in the long term to study the effects and possibilities of nanotechnology on viral treatment?
Damian Reply
absolutely yes
Daniel
how to know photocatalytic properties of tio2 nanoparticles...what to do now
Akash Reply
it is a goid question and i want to know the answer as well
Maciej
characteristics of micro business
Abigail
for teaching engĺish at school how nano technology help us
Anassong
Do somebody tell me a best nano engineering book for beginners?
s. Reply
there is no specific books for beginners but there is book called principle of nanotechnology
NANO
what is fullerene does it is used to make bukky balls
Devang Reply
are you nano engineer ?
s.
fullerene is a bucky ball aka Carbon 60 molecule. It was name by the architect Fuller. He design the geodesic dome. it resembles a soccer ball.
Tarell
what is the actual application of fullerenes nowadays?
Damian
That is a great question Damian. best way to answer that question is to Google it. there are hundreds of applications for buck minister fullerenes, from medical to aerospace. you can also find plenty of research papers that will give you great detail on the potential applications of fullerenes.
Tarell
what is the Synthesis, properties,and applications of carbon nano chemistry
Abhijith Reply
Mostly, they use nano carbon for electronics and for materials to be strengthened.
Virgil
is Bucky paper clear?
CYNTHIA
carbon nanotubes has various application in fuel cells membrane, current research on cancer drug,and in electronics MEMS and NEMS etc
NANO
so some one know about replacing silicon atom with phosphorous in semiconductors device?
s. Reply
Yeah, it is a pain to say the least. You basically have to heat the substarte up to around 1000 degrees celcius then pass phosphene gas over top of it, which is explosive and toxic by the way, under very low pressure.
Harper
Do you know which machine is used to that process?
s.
how to fabricate graphene ink ?
SUYASH Reply
for screen printed electrodes ?
SUYASH
What is lattice structure?
s. Reply
of graphene you mean?
Ebrahim
or in general
Ebrahim
in general
s.
Graphene has a hexagonal structure
tahir
On having this app for quite a bit time, Haven't realised there's a chat room in it.
Cied
what is biological synthesis of nanoparticles
Sanket Reply
what's the easiest and fastest way to the synthesize AgNP?
Damian Reply
China
Cied
types of nano material
abeetha Reply
I start with an easy one. carbon nanotubes woven into a long filament like a string
Porter
many many of nanotubes
Porter
what is the k.e before it land
Yasmin
what is the function of carbon nanotubes?
Cesar
I'm interested in nanotube
Uday
what is nanomaterials​ and their applications of sensors.
Ramkumar Reply
how did you get the value of 2000N.What calculations are needed to arrive at it
Smarajit Reply
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Source:  OpenStax, Economic development for the 21st century. OpenStax CNX. Jun 05, 2015 Download for free at http://legacy.cnx.org/content/col11747/1.12
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