macro chapter 7 limits to growth summary


Chapter 7 limits to growth summary

Land and natural resources are important inputs into production. This is particularly the case
if ' land' is interpreted in a broad sense to include all the life support services of the natural
environment. This chapter has developed an extended Solow model where capital and labour
are combined with natural resources in production. By the replication argument, an increase
in all factor inputs yields constant returns to scale, but the need for natural resources implies
diminishing returns to the combination of labour and capital. The crucial issue is whether technological
progress is suffic ient to generate perpetual economic growth despite the scarcity of
natural resources.
2. In a three-factor Solow model where labour and capital are combined with a fixed supply of
land, technological progress serves in part to offset the negative influence of increasing land
scarcity on income per worker. Hence the growth rate of per capita income is lower than the
rate of labour-augmenting technological progress even if there is no population growth.
Positive population growth implies a further drag on growth in per capita income when land is
in fixed supply and could even bring growth to a halt, as predicted by the classical economists.
However, for parameter values characteristic of developed countries, a fixed supply of
natural resources would not realistically prevent sustained positive growth in income per
capita.
3. The Solow model with a fixed supply of land predicts that a country with a higher initial stock
of land per worker will have a higher level of GOP per worker, all other things equal. The international
empirical evidence is consistent with this prediction.
4. In a three-factor Solow model where labour and capital are combined with an exhaustible
natural resource ('oil'), the gradual depletion of the natural resource creates even stronger
diminishing returns to capital and labour than in the model with a fixed stock of land. Hence a
higher rate of technical progress is required to outweigh the negative effect on growth arising
from population growth and increasing natural resource scarcity.
5. The Solow model with oil implies that a larger initial stock of the exhaustible resource per
worker should, ceteris paribus, yield a higher GOP per worker. Confirming this, the international
evidence shows a positive relationship between the stock of subsoil assets and the
level of real GOP per worker.
6. We also developed a four-factor Solow model where production uses a fixed stock of land as
well as inputs of an exhaustible natural resource in combination with capital and labour. In
such an economy positive economic growth is sustainable for parameter values typical for
Western countries, but may not be attainable in poor developing countries which have not
managed to bring population growth under control.
7. The Solow model with land and oil predicts that the average rate of growth in GOP per worker
will be lower the higher the rate of population growth, other things equal. The international
cross-country evidence does indeed show a negative relationship between population growth
and economic growth, and the quantitative relationship is roughly in line with the prediction of
the Solow model. However, causality may not only run from population growth to economic
growth, but also in the opposite direction.
8. A crucial assumption in the Solow model with scarce natural resources is that there are
unlimited technological possibilities of substituting capital and (educated) labour for
increasingly scarce natural resource inputs. This assumption should not be taken literally, but
should be seen as reflecting a belief that growing scarcity of a particular natural resource will
generate an economic incentive to develop new substitute inputs. Much of the debate about
the possible limits to growth is really about the validity of the assumption of unlimited substitution
possibilities. Resolving this issue requires insight into the natural sciences as well as
into economics.

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