A Missing Factor

In reality, there was no growth in the global economy before the end of the 19th century. Researchers began to take a serious interest in economic growth only after the Great Depression of the 1930s. At this time people began to understand that social well-being could not be sustained if the gross national product failed to grow or if it were to shrink.

The deregulation and globalisation of the world economy was influenced by such theories as the neoclassical theory of growth developed by Robert Solow in the 1950s. This theory concentrates on explaining the importance for economic growth of an increasing labour force, capital inputs and savings. While Solow observed that, in addition to these factors, economic growth is affected by technological progress, he treated the later as an exogenous factor in the growth model. In other words, he felt that while major inventions such as the steam engine, the railway and the telegraph stimulated national economies to higher levels of growth, they were in principle available to all. It was, moreover, not possible to influence the creation of such inventions which arose by chance. Mainly for these two reasons technological progress could not be adapted to the growth model.

According to neoclassical growth theory, investments of labour and capital are subject to the law of diminishing returns, meaning that economic growth in the wealthier countries would eventually slow down. Growth in the poorer countries, on the other hand, would accelerate if they had large labour reserves and could obtain capital. This would lead to a gradual convergence, i.e. to a situation in which the per capita gross national products of all countries would tend to the same level. It is quite obvious that no such convergence or catch-up has occurred, or that it is extremely slow.

Long-term growth in the developed industrialised countries has long been more rapid than that of the developing world. There certainly seems to be a missing variable in neoclassical growth theory. This missing factor is known as the Solow residual. Since this residual has subsequently been observed to account for one third, or even half of all economic growth, it is hardly surprising that efforts have been made to supplement neoclassical growth theory.