Robert E. Lucas, Jr. - Consultant
Published December 1, 2001 | December 2001 issue
Editor's note: In this excerpt from a forthcoming book from Harvard University Press, Lectures on Economic Growth, the Nobel-winning economist Robert E. Lucas Jr. makes his case that for a lesser-developed country to transform to a modern, growing economy, it must experience an increase in the rate of the accumulation of human capital. Societies and their citizens must be open to the "new possibilities that development creates."
The first part of this excerpt describes Lucas' introduction to the ideas surrounding economic growth, and the second
partincluding a reference to the work of V.S. Naipaul, the 2001 recipient of the Nobel Prize in Literatureframes the central idea that runs through the entire book: the pre-eminence of accumulating human capital.
"On the Mechanics of Economic Development" (Chapter 1 of this volume) was written for the 1985 Marshall Lectures at Cambridge University. My week in Cambridge was part of a month-long trip that included weeks in England, Israel, Finland, and France. This was my first visit to any of these four countries, and indeed my first trip of more than a day or two outside the United States. In Finland I gave the Yrjö Jahnsson Lectures, later published as Models of Business Cycles. In Israel I gave the David Horowitz Lectures, basically a repeat of the Marshall Lectures. In France I spoke at the University of Paris, Dauphine; and at the evening seminar series chaired by Edmund Malinvaud.
None of these hosts had asked me to speak on economic growth and development. I was expected to speak on rational expectations and macroeconomics, as I did in Finland. But the Jahnsson Lectures had proved difficult to writeI was in the process of adjusting my thinking on business cycles to the shock of Kydland and Prescott's workand I did not look forward to the prospect of spending the latter half of my career trying to hang on to what I had done in the first half. The invitation from Cambridge came well in advance, so I had plenty of time. Why not use the opportunity to try something new?
Though I had never written on growth or development, I had been interested in these topics for as long as I could remember. How can an economist not be interested in the wealth of nations? I had taught an undergraduate elective course in development economics at Carnegie-Mellon, and again at Chicago: an excuse to look at some data, read some papers, and work out some models, without the responsibility for covering the literature that teaching a graduate course entails. The question I asked myself and my students in these classes was whether one could use modern growth theoryas exemplified by Robert Solow's (1956) paperto think about the behavior of poor countries as well as rich ones.
The modern theory of growth, which originated in the 1960s and has continued to be developed in new, interesting ways, provides a tractable and empirically fairly successful account of twentieth-century growth in the United States and the post-World War II growth of Japan and much of Europe. Growth theory has matured into a successful basis for applied economics, in the sense that it provides an agreed-upon framework for quantitative studies of taxation, monetary policy, and social insurance. The basic idea of "On the Mechanics of Economic Development," articulated in its initial sections, was to see if modern growth theory could also be adapted for use as a theory of economic development.
Adaptation of some kind was evidently necessary: The balanced paths of growth theory, with constant income growth and the assumed absence of population pressures, obviously do not fit all of economic history or even all of the behavior that can be seen in today's world. The theory is, and was designed to be, a model of the behavior in the recent past of a subset of highly successful societies. The strategy I adopted in "Mechanics" was to take the fact that the industrial revolution had occurred in some societies as an unexplained given, and to try to think about the economics of the relations between economies in which sustained growth was under way and economies that remained stagnant.
The central idea in all the essays in this volume is that the successful transformation from an economy of traditional agriculture to a modern, growing economy depends crucially on an increase in the rate of accumulation of human capital. As have Schultz and Becker and others before me, I have tried to show how this idea, embodied in aggregative models of economic growth, produces behavior that conforms better to the facts of economic development than the behavior predicted by models centered on other visions of the engine of growth. Yet the sources and perhaps even the character of this increase in human capital growth remain somewhat ill understood, a deus ex machina, an invisible cause to which important visible effects are attributed.
But what is visible depends on where one looks. Look, for example, at V.S. Naipaul's great novel of economic development, A House for Mr. Biswas. The novel begins with the story of Mohun Biswas's birth and death, all within its first 40 pages. He is born in rural Trinidad, a grandson of immigrants who had come from India as indentured servants. As a small boy, his ambition is to become a herder of cattle like his older brothers. At his death, he is an unemployed journalist in Port-of-Spain, living in a ramshackle house, with no assets to support his wife and large family after he is gone. What life within such limits is to sustain the reader for the novel's remaining 540 pages? Yet measured by the cultural distance between Mr. Biswas's parents and his children, his life is a story of amazing progress. By the end of Biswas's life, his oldest son, AnandNaipaul's own fictional counterpartis a scholarship student at Oxford. Between Anand and Mohun Biswas's parents is the entire 25-to-1 difference between living standards in India and living standards in Western Europe and the United States.
Biswas himself is no Horatio Alger figure. His talents are modest, and his willingness to ingratiate himself with those who might advance his career is nonexistent. He passes from one mediocre, limited job to another. But his unwillingness to accept the limits of each current situation as permanent, to make the best of it, turns out to be his strength. Through all his misfortunes and setbacks Mr. Biswas is able to maintain the sense of himself as a man with possibilities, with options, a man who is in a position to set limits on what he will put up with. And equally important, he lives in a society that will let him survive with this attitude. An African slave with these attitudes, working the same sugar cane fields as Biswas's father and brothers did, would have been beaten to death, or starved as an outcast. So too might have been his own grandfather. But in the Trinidad of the interwar and World War II periods, options were available. A man with a little literacy could move from rural to small town to Port-of-Spain jobs, jobs where he could interact with people who could teach him a little more. Somehow Biswas survives, marries, supports a family after a fashion, and succeeds in passing on to some of his children this sense of living in a world with possibilities, a world that can reward those who accept the challenges it offers.
We know from direct experience that the passage in two generations from traditional agricultural society to the modern world that A House for Mr. Biswas describes is not a singular one. In my neighborhood in Chicago I bring my shirts to a laundry operated by a Korean woman, recently arrived, whose English is barely adequate to enable her to conduct her business. Her shop is open from 7 to 7, six days a week. As I enter, her 3-year-old daughter is seated on the counter being drilled in arithmeticwhich she is very good at and clearly enjoys enormously. Fifteen years from now this girl will be beginning her studies at Chicago or Caltech, alongside the children of professors and Mayflower descendants.
The mathematics and science that this girl will study and perhaps contribute to were not created by the efforts of her and her family, just as the culture in which V. S. Naipaul was immersed when he arrived at Oxford was not the product of his and his father's effort. These are parts of the body of knowledge that is generally available for access by suitably prepared people, "free to the people" as Andrew Carnegie had engraved over the entrances to the public libraries he built. The growth of what Kuznets called "the stock of useful knowledge" is, as everyone agrees, an essential factor in the industrial revolution. Without the existence of this stock, the efforts of families like the Naipauls would add up to nothing, or next to nothing.
Without in any way disputing this point, I am making a complementary point: Growth in the stock of useful knowledge does not generate sustained improvement in living standards unless it raises the return to investing in human capital in most families. This condition is a statement about the nature of the stock of knowledge that is required, about the kind of knowledge that is "useful." But more centrally, it is a statement about the nature of the society. For income growth to occur in a society, a large fraction of people must experience changes in the possible lives they imagine for themselves and their children, and these new visions of possible futures must have enough force to lead them to change the way they behave, the number of children they have, and the hopes they invest in these children: the way they allocate their time. In the words of a more recent title of Naipaul's, economic development requires "a million mutinies."
For someone born into a traditional agricultural society, these decisionswhat occupation to follow, what training to acquire, when and whom to marry, how many children to try to have and how to raise themhave already been made. It is not that there is nothing to think and argue aboutMr. Biswas's in-laws argued over which sister gave her children the best beatings!but that none of the possibilities being argued over leads anywhere new.
This situation cannot be changed by new knowledge, by the arrival of a blueprint. A blueprint that showed how to raise yields per acre in Jamaica to the levels of yields in Java would have a dramatic initial effect on Jamaican farm output, but as Malthus and Ricardo showed two centuries ago, a new equilibrium would be established with larger production and population and no increase in average farm income: High yield per acre is the reason that Java is the most densely populated agricultural area on earth, but it has no connection with sustained growth in living standards. In the end, the blueprint changes nothing in the lives and the life-decisions of those who work on the farms. It creates no new possibilities for individual families.
In a successfully developing society, new options continually present themselves and everyone sees examples of people who have responded creatively to them. Within a generation, those who are bound by tradition can come to seem quaint, even ridiculous, and they lose their ability to influence their children by example or to constrain them economically. The people who respond to the new possibilities that development creates are also the ones who make sustained development possible. Their decisions to take new risks and obtain new skills make new possibilities available for those around them. Their decisions to have fewer children and to try to prepare those children to exploit the opportunities of the modern world increase the fraction of people in the next generation who can contribute to the invention of new ways of doing things.
In economically successful societies, today, these are all familiar features of the lives of ordinary people. In pre-industrial societies, all of these features are rare, confined if present at all to small elites. If these observations are central to an understanding of economic growth, as I believe they are, then we want to work toward aggregative models of growth that focus on them.
Excerpted from Lectures on Economic Growth by Robert E. Lucas Jr. published in February 2002 by Harvard University Press. Copyright (c) 2002 by the President and Fellows of Harvard College. Used by permission. All rights reserved.
Read a Region interview with Lucas.