Economic Growth and Development

Theories, Criticisms and an Alternative Growth Model

by Hasan Gürak (Author)
©2015 Monographs 258 Pages


Mainstream economic theories today are logical, consistent and even explanatory in many ways, when their relevance is tested in real economic situations, they often fail to correctly explain normal economic transactions. Thus they are only successful in explaining a fictional world and fictional economic relations that are largely based on unrealistic assumptions. Economic Growth is a study of new and alternative theories and models to replace the parables of these mainstream ideologies and hopes to appeal to open minded economists as a constructive contribution for the further development of new economic ideas.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • This eBook can be cited
  • Foreword
  • Contents
  • Introduction
  • The Purpose & Scope of this Study
  • Which Criteria Can We Use as a Comparison?
  • Chapter 1: Growth Process Worldwide
  • All About Growth
  • “Savings = Investment” Paradox
  • On Added-value Criterion
  • The Relationship Between the Laborer – Technological Progress & Growth
  • What Role Does Investment Play in Regard to Technology and Long-run Growth?
  • Access to and the Use of Technology
  • Laborer, Knowledge & Growth
  • Qualified Labor or “Human Capital”
  • Creative Labor and Growth
  • Unqualified Labor
  • Technological Progress & the Global Economy
  • Is it possible to Measure the “Qualification Level of the Laborer” Accurately?
  • Other Factors Having an Impact on Growth
  • The Institutional and Cultural Infrastructure
  • Competitive Conditions
  • Economic and Political Stability
  • Financing the Investments
  • Natural Resources
  • Chapter 2: Basic Concepts Related to Growth
  • Productivity- (Productivity) Growth - Qualified Laborer - Technological Progress
  • Productivity (V)
  • Measuring Productivity: a Static Analysis
  • The Quantitative Analysis
  • Measuring Qualitative Differences
  • Value Analysis of “Productivity”
  • An Alternative Value Measurement
  • Optimum Productivity
  • “(Productivity) Growth”
  • Quantitative Productivity Growth
  • Partial Factor Productivity Growth
  • Added-value Based Productivity Growth
  • Is a “Value” Criterion a Perfect Choice?
  • “New Products” and Growth
  • An Inter-Country Productivity Comparison
  • Concluding Remarks
  • Chapter 3: Growth Theories: Historical Perspective
  • A. Smith
  • Ricardo
  • Marx
  • Marshall
  • Keynes
  • Keynes’s Model
  • The Characteristics of Keynes’ “Static” Model
  • Harrod-Domar
  • A summary of the Harrod-Domar model
  • Schumpeter
  • Overview
  • Chapter 4: New Approaches to Growth Theory
  • Neoclassical Growth Theory-1: Pre-Solow
  • A Criticism of the Theory in Regard to Growth
  • Neoclassical Growth Theory-2: Solow & After
  • Estimation of TFP
  • Criticism of Solow’s Model & the TFP Approach
  • TFP & Long-run Growth
  • Some TFP-related Data
  • TFP and Growth in Turkey
  • “Endogenous” Growth Models
  • Lucas: the Mechanical Model of Growth
  • The Institutional School
  • P. Romer: An Endogenous Growth Theory
  • R.J. Barro on Growth
  • Aghion-Howitt: Creative Destruction
  • Sectors and Production
  • Grossman-Helpman: Foreign Trade and Growth
  • G. Mankiw
  • Middle-Income-Trap: End of Growth?
  • In Conclusion
  • Concluding Remarks for the Chapter
  • Chapter 5: An Alternative Growth Model
  • Introduction
  • The Purpose
  • “Productive” Factors & “Production” Factors or Inputs
  • Productive Factors
  • Factors (Inputs) of Production
  • “Productive” Factors and Value-creation
  • The Genesis of Growth
  • Some Basic Assumptions
  • An Attempt at an Alternative Growth Model
  • Initial Case: A Simple “Stationary” Output, Exchange & Distribution Model
  • A Simple “Short-run” Growth Model: 1
  • Assuming Access to a “New” Market
  • A Simple “Long-run” Growth Model: 2
  • “New Markets” for the “New Product”
  • Conlusions to be Drawn from the Simple Growth Models
  • Limit of Short-run Growth
  • Technological Innovations and Producers
  • The Importance of Innovations
  • Conclusions
  • A Note on Labor, Innovation & Value-Price Theory
  • Chapter 6: Short-run Growth in the Real Economy
  • 1- Short-run Growth: A “Given” Technology
  • 1-a) EE and/or TE growth
  • 1-b) Extended Production for New Markets
  • Eight Methods to Increase Short-run Growth
  • Chapter 7: Long-run Groth in the Real Economy
  • Technological (Macro) Productivity Growth
  • a) A “Given” Product, but a “New” Production Method
  • b-) New Products
  • Growth: Reconsidered - Both in the Short- & Long-run
  • The Concrete Effects of Innovations
  • Given Product – New Method of Production
  • Technological Productivity Growth
  • “Given” Product – “New” Production Process
  • New Product
  • New Product and Functional Income Distribution
  • New Product, “Monopoly” and Profit Rate
  • Innovations, Growth and Price
  • A “Given Product” but a “New Production Process”
  • “New” Product and “New” Price
  • Other Factors Influencing Price Level
  • Technology Transfer & Long-run Growth
  • Measures to be Taken
  • Major Costs of Technology Transfer Through FDIs
  • Conclusion
  • Chapter 8: Growth & The Service Sector
  • “Productivity” & “Productivity Growth” in the Services Sector
  • “Productivity “in the Services Sector
  • “Productivity Growth” in the Services Sector
  • “New” Types of Services and Long-run Growth
  • Competition in the Services Sector
  • Global (International) Trade in the Services Sector
  • Chapter 9: Growth & Income Distribution
  • Functional Income Distribution
  • An Ideal Income Distribution
  • Pareto Optimum
  • Optimum Functional Income Distribution and Growth
  • Initial Case: Functional Income Distribution: with a “Given” Technology
  • 1- “Efficiency Growth” & Income Distribution
  • 2- “Innovation” & Income Distribution
  • Wage Rise in the Long-run & its Impact on Income Distribution
  • Technological Imperfections & Global Income Distribution
  • “Technology-intensive” & “Labor-intensive” Methods of Production
  • Concluding Remarks
  • Chapter 10: Growth or Development?
  • Growth
  • Development
  • Elements of the Development Theory
  • Development Economics
  • Chapter 11: Epilogue & a Suggestion
  • Developed Countries & Long-run Growth
  • LDCs & Long-run Growth
  • Producing New Technologies
  • More Efficient Use of Technologies
  • Efficient Use of Political, Institutional & Cultural Framework
  • A Suggestion to Boost Global Cempetition
  • Firms that “Only Produce Technology”
  • Suggestions for “Fairer” Income Distribution & Increased Democracy at Work
  • Is “Unlimited Growth” Desirable?
  • Bibliography

← 14 | 15 →Introduction

Let’s go back in time 60 years. Few homes had a TV-set. There were few TV-channels. Transmission was in black-and-white. Nowadays, we are hard put to find any home; even in the less developed countries that hasn’t got a TV-set. Now we have multi-channel, “smart”, color T.V.s. Communication systems have mushroomed. Sixty years ago you were lucky to have a “land-line”. Today, almost everyone has a “mobile”, if not a “smart phone”. High quality communication through the internet is a fact of daily life. Automobiles, airplanes and household appliances are all becoming “smart”. As we write, there is a “totally computerized” car being presented at the Istanbul motor show that doesn’t need a driver!

Today’s consumers enjoy the use of an immense variety of products that are of an unprecedented quality. “New” products are continuously being developed and introduced into the markets. In the developed countries, an increasingly large part of a person’s income is being spent on unessential items. Items that we “want” but don’t “need”! This signifies an increased per capita or nationwide prosperity.

The critical questions are: Why do countries grow? Why do they grow at different rates? What is the role of “labor” or “human capital” or “capital” or “technological progress” in this process? Why is the income gap between the relatively richer and relatively poorer countries not converging? How could the development gap between countries converge?

Until Solow’s “re-discovery” of the vital role played by technological progress in growth in the 1950s, emphasis was placed on the “saving-investment” approach. Technology was considered as a “given”. The only factor influencing long-run growth was an “exogenous growth in population”. However and here’s the rub, even in the case of a population growth, the markets were bound to saturate, sooner or later. As the markets saturate, the demand for products declines which would lead to a decline in profits. In this case the market would come to a static equilibrium and growth would end. But, in fact, this doesn’t happen.

This approach in the pre-Solow period inevitably led to an undermining of technological progress’ role in the growth process. Consequently, any analysis about the origin of technology and its contribution to growth was ignored for a long time. Yet the long-term profit rate shows no tendency to decline towards zero nor does the market show a tendency towards a “static” equilibrium. The economy is actually “dynamic” and “growing”. Soon after Solow’s “re-discovery”, another significant contribution to growth theory was the “re-discovery” of the role of “the quality of laborer” or “human capital”.

← 15 | 16 →According to Mankiw (1995), the question; “Why do countries grow at different rates?” has a priority over the question “Why does growth occur?” Mankiw’s view is misguiding. Unless we understand the internal dynamics of the growth process, we cannot understand why countries grow at different rates”. An understanding of, where new technology is being developed, how the global technology markets function and how monopolistic control functions, is important in understanding the technology market “imperfections” (defects) in the global economy. If we don’t correctly understand these issues, our knowledge of how economies function will be both inadequate and fruitless.

The Purpose & Scope of this Study

The driving force behind the book was the inadequacy of the available theories to explain the “growth process” in a satisfactory manner. The theories on growth, especially the neoclassical ones, fell far short in explaining and understanding real events. The assumptions of these so called “scientific” theories were unrealistic and “utopian”. A Nobel Laureate admitted frankly that his “mechanical growth model” referred, in fact, to utopian economic relationships. The mainstream “scientific” theories were lacking in any awareness of historical developments. They did not take into account the impact of human values or the institutional setting on the economy.

Many attempts have been made to introduce new and more realistic theories about growth. However, there still seems to be scope for another perspective on the subject that would attempt to explain the growth and development processes in both the developed and less developed countries. We need new theories capable of explaining the growth process in a realistic manner which are able to account for the long run growth based on the new ideas (technologies) created by the creative mental labor.

The purpose of this study is to demonstrate that the “cause(s)” of long-run growth is “technological progress” which is the product of “creativemental labor. The higher the “quality of labor” (human capital) becomes, the higher the potential to introduce new technology, given an appropriate cultural, institutional and technological infrastructure. In the absence of technological progress, long-run growth would inevitably end, while the rate of profit would continuously decline towards zero, cet. par.

Yet, the “real” evidence shows that growth is a continuous process. That is because; “creative mental labor” has an unlimited ability to introduce new technologies which secure the introduction of “new productsand/or “new methods of production”. This is exactly the opposite of what the pessimist economists once suggested.

← 16 | 17 →The creation of new technologies alone is not sufficient to secure welfare growth. There is also a need for an appropriately qualified labor force in order to make efficient use of the new technologies. Access to a qualified labor force is as important as the creation of a new technology because in the absence of an appropriately qualified labor force new technologies cannot be used efficiently.

In this work, Chapter-1 introduces some general information on growth. In Chapter-2, the key concepts of growth such as “productivity”, “productivity increase e.g., “growth”, the measurement of productivity will be presented and explained. These key concepts are critically important in understanding the “new” ideas and the alternative approach which will be presented later in our analysis. So the reader is asked to bear them in mind.

We will outline the “Classical” theories of growth by A. Smith, Ricardo, and Marx in Chapter-3. Up to date theories in regard to growth will be dealt with Chapter-4. It is interesting that practically all Classical economists were very aware of technological progress and its impact on growth together with the importance of the so called human capital. However, somehow since the 1870s, these key factors were ignored by economists, except for some like J. Schumpeter. Solow “re-discovered” them in the 1950s and introduced them into the growth model; but merely as an “external” factor; the source of which was “unknown”. What a marvelous achievement in the name of “science”!

Neoclassical models shall be studied in two periods; the pre Solow and after. In the pre Solow era, growth models lacked any technological progress but had an extremely attractive feature; “equilibrium” which never had, or ever has had, anything to do with reality. In the post Solow era, the equilibrium “parable” and its fictitious assumptions survived at the expense of reality. But now technological progress had become an indispensable part of growth models. Nevertheless, the mainstream growth models continue to be largely a failure which is why we still need some “new” ideas.

Part-5 presents and discusses an “alternative growth model”, followed by a short-run growth analysis in Chapter-6 and a long-run growth analysis in Chapter-7. Short-run growth can be realized with a “given” technology through a process called “efficiency increase”. For long-run growth, on the other hand, technological progress which is the result of mental creativity is essential. In the absence of technological progress, no long-run growth can take place. The economy would saturate sooner or later, the profit rate would tend to fall towards zero and eventually growth would stop. This is not what happens in the real world because the creative mental labor constantly introduces “new” ideas and there seems to be no limit to the creative capabilities of the human mind.

← 17 | 18 →A new analysis of “Growth in the Service Sector” in Chapter -8 is a unique part of the book as most growth analyses refer to the industrial sector. Normally, traditional growth models do not make a clear distinction between the industrial sector and service sector.

How technological progress and growth effects the functional and global income distribution will be the subject of Chapter-9.

In the final Chapter-10, we shall present a proposal for improvement in the global growth and development of nations, which is expected to help the convergence of the global income gap. Increased global competition, as suggested, would benefit all countries and enterprises.

Which Criteria Can We Use as a Comparison?

What criteria can we use to define a more useful model of growth? How can we determine which one of the growth models is more useful for a researcher or a politician or an economic decision-maker? How can we evaluate their usefulness?

So called “scientific” theories or models have to be, in principle;



3-Explanatory and


If the existing “older” theories/models of growth were capable in guiding us in explaining the growth process or in comprehending the difference between the different growth rates or in formulating policies to achieve higher growth rates in a satisfactorily, there would be no incentive for us to research alternative models. Yet, as we all know, the existing “older” and more recent theories of growth fall short in explaining many of these aspects. These will be discussed in Chapter-4 and Chapter-5.

How can we know if the “new” ideas in this book are better alternatives? To find out, we can make an assessment of the alternative approaches. Generally the most suitable method seems to be to compare the two hypothesis using the statistical “likelihood principle” and see which one is closer to reality. The one which is simpler to explain, has less fictitious assumptions and is more representative of the actual economic relationships should be considered as “evidentially favorable”. Thus this theory/model should be considered “more useful”. For example; if a theory assumes “homogenous goods” while the alternative assumes “multiple goods”, the latter is preferable as more realistic thus it is a better theory or model. ← 18 | 19 →If one theory assumes the role of having “perfect knowledge”, while the alternative assumes knowledge is “imperfect”, the latter should be considered as a more practical theory as it is more relevant to the “real situation”. A theory assuming that technological progress is an “endogenous” factor should get more credits than the one assuming it to be an “exogenous” factor. This way all the pros and cons about different theories or models can be estimated and the theories can be classified according to their credits gained on the “usefulness” criterion.

Based on the “usefulness” criterion, as stated above, we claim that the “new” ideas throughout this book are “more useful” than the “older” theories or models, and are capable of giving a better account of real economic relationships. To prove that, we do not require sophisticated mathematical or econometric models. All we have to do is to ask the “actual” economic actors in the markets e.g. the business-people and managers who make the economic decisions that affect us all and have to account for the consequences of their decisions. After all we are talking about economic relationships which affect all of us.

Briefly, the “new” ideas presented in this book are:

1.Logically consistent and explanatory.

2.Assumptions are more realistic.

3.Closer to “actual” economic relationships.

4.Allowing logical, consistent and realistic predictions.


ISBN (Hardcover)
Publication date
2015 (April)
Economic theroies Wirtschaftswachstum Produktivität
Frankfurt am Main, Berlin, Bern, Bruxelles, New York, Oxford, Wien, 2015. 258 pp., 5 tables

Biographical notes

Hasan Gürak (Author)

Hasan Gürak was born in Istanbul and completed his studies in Germany, England and Sweden. Presently he is engaged in academic research in the field known as Heterodox Economics, aiming to develop alternative theories and analyses in mainstream economics.


Title: Economic Growth and Development