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Notes
For those familiar with the first edition the wholly new chapters are: chapter 3 (Poverty Traps), chapter 7 (Why has the elasticity of substitution been systematically measured as smaller than one?), chapter 10 (Deriving all central equations of the calculus of variations at a single stroke of the pen), chapter 16 (Why is traditional optimal growth theory mute?) and chapter 19 (Capital and economic growth in the coming century).
For a survey on normalization see Klump et al. (2012).
That this question has haunted the growth literature is nicely summarized by the following story from Solow (2007): “... I buttonholed Joan [Robinson] in her office one day and said: ‘Imagine that Mao Tse-Tung calls you in’—she was in her Chinese period then—‘and asks. [T]he People’s Republic has been investing 20 per cent of its national income for a very long time. There is now a proposal to increase that to 23 per cent. To make a correct decision, we need to know the consequences of such a change. Professor Robinson, how should we calculate what will happen if we increase our investment quota and sustain it?’ ‘So what will you tell Chairman Mao?’ I asked Joan. She baulked and bridled and dodged and changed the subject, but for once I was relentless. ‘Come on, Joan, this is Chairman Mao asking a legitimate economic question; the future of the People’s Republic and possibly of mankind may depend on the answer. What do you tell him?’ Finally, she grumbled: ‘Well, I guess a constant capital–output ratio will do.”’ The story is in a sense particularly ironic since China in the modern period has accumulated a higher savings rate (around 40 %) than any other country in history, and an ever expanding capital-income ratio.
As an earlier review of the first edition of the book suggested, this then becomes a special case of the more general utility function: “...Using the sum of the consumption stream alone as an objective function, is tantamount to using a CRRA utility function with an infinitely high intertemporal elasticity of substitution ...i.e., a linear utility function. In other words ... simply a special case of the latter.” (Schrettl 2010, p. 284).
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McAdam, P. de La Grandville, Olivier: Economic growth: a unified approach. J Econ 119, 91–96 (2016). https://doi.org/10.1007/s00712-016-0481-9
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DOI: https://doi.org/10.1007/s00712-016-0481-9