Affordable Access

Long Term Growth and the Wealth of a Nation: Growth Miracles and Lost Decades

  • Economics


So what is a crisis Long Term Growth and the Wealth of a Nation: Growth Miracles and Lost Decades Jean-Pierre Courbois June 1, 2009 Adam Smith’s title notwithstanding, wealth has always remained minor partner to income in macroeconomic theory. We all recognize some influence of wealth on consumption spending and short term economic performance. Spending decisions are based partly on wealth, on permanent rather than current income. But we have not explored the link between wealth and long term economic growth. This paper links economic growth to the price of capital. Where past work on endogenous growth concerns the expansion of the pool of ideas and knowledge, we focus instead on the decision process by which these ideas are adopted. The theory is based on two hypotheses: that economic growth is an important determinant of the price of capital and that the price of capital, in turn, explains the rate of economic growth. A financial approach to the valuation of capital assets leads to the specification of the impact of economic growth on the price of stocks, land and other assets. The second hypothesis is based on the Schumpeterian process of creative destruction that pits new technologies and new patterns of specialization against the old. Equilibrium is achieved between the new and the old through adjustments in the price of capital. When the price of capital increases, the profitability of implementing new technology decreases. Entrepreneurial activity is directed away from innovation and toward the exploitation of more valuable existing wealth. Conversely, a fall in the price stimulates innovation. Therefore rational decisions of innovators determine the course of innovation in response to the price of existing wealth. The model explains several puzzling empirical regularities in the succession of market upheavals that characterize modern economic history. It shows why asset prices are subject to the violent shifts so often a

There are no comments yet on this publication. Be the first to share your thoughts.