Choose The Path Of Economic Growth

Growth is one of the most important and controversial subjects in macroeconomics. The research on growth by all famous Economists can be divided into four classes: Classical growth theories, modern growth theories, growth accounting, and endogenous growth theories. The first illustration about economic growth was putted in pure product theory and the Tableau Ecollomique developed from that by Francois, Quesnay. He regarded the economic growth as a result of the reinvestment of agricultural surplus production, and the development of agriculture was the only headspring of economic growth. The first economist who research Growth as a systematic theory is Adam, Smith who is a British. All words in Smith' s An Inquiry into Nature and Causes of the Wealth of Natures were about the nature or reason of Growth and how to create proper environment for economic growth. As the concluder of Classical economics, David, Ricardo emphasized on how the ratio between parts of Income (salary, profit and rent) influenced economic growth through capital accumulation. Other Classical economists such as Malthus had also made great contributions. They all believe the advancement of technology would propel the economic growth and development. In a word, the main implication of Classical growth theory is that growth is determined by the accumulation of matters. Based on the criticizing and inheriting Classical theories, Modern economists on growth had made great achievements. The Theories being regarded as mainstream are Harrod-Domar theories, the Neo-classical growth theories, Neo-Cambridge theories, and optimal path for growth which were represented by Ramsey-Cass-Koopmans model and Diamond Overlapping Model. Mainstream theories had erected a universal structure for the subject of growth and become the most crucial fundamental of successive theories. Theories of Growth accounting represented by Denison and Kuznets have become an important branch of growth subject. The main outcomes are total factors productivity by Denison and Kendrick, Analysis of longtime-trend and comparison by kuznets, and quality analysis of capital and labor by Jorgenson. The growth accounting theories mainly research how to measure the quantity of factors such as capital, labor and technique devoted. So they had formed an independent system in the subject of economic growth. Knowledge has become more and more important since 1980s, so many investments were made in high-technology commodities and services. In the new circumstance, external technology by Solow can no longer explain growth exactly. So endogenous growth theories were born. There are so many economists who contribute to endogenous growth theories. for example, Romer, Paul; Lucas, Robert; Grossman, Gene; Barro, Robet; Aghion, Philippe; Krugman, Paul; Helpmen, E.; Jones, Larry; Becker, Gary; Yang Xiao-kai; and Stokey, Nancy. Among their theories, the most famous two are knowledge driving model by Romer, Paul and Human Resouce model by lucas, Robert Etc. Endogenous growth theories have been regarded as mainstream theories at present. But in them, labor as a variable is always external and all variables have no accordance with statistical standards. As a result, the explanation and application of them are greatly limited. So a new endogenous model in which all factors are endogenous and according with statistical standards should be designed to develop these theories. The premises are as follows: First, It is the government but not enterprises or individuals who determine the system of macro-economy. Government is never dead. It is only the benefit of whole country that would be considered. Utility of a certain individual or profit of enterprise can never limit the decision of government. The main object of government is per person national income; Secondly, time is continuous. Discount rate is r, growth rate of population is n, original population is N .There is a function of aggregate production at any time. The idiographic form of aggregate product is Yt = At?KtεL1t? ε,(0<ε<1), where At , Kt,Ltare all endogenous variables. Third, cost must be spent on researching and developing technology. The idiographic form of cost function is C A = B?Ktα?Lβt?Atθ?A&t, in which α, β,θ,Bare all positive constants. Forth, capital in use will discount both in quantity and value, the idiographic form of discounting function is C K = M?Ktσ?K&t,in which σ,M are all positive constants. Fifth, cost must be spent when increasing employees because a person should be transferred to a labor before production. The idiographic form of transfer cost is C L = D?e( n+r)tL&t. Finally, labor can be compensated in salary. Capital operation can be compensated in interest. These two parts will not be lost of national income. So they needn't be minus from the object function of per person national income. Considering all these premises, we can describe the government behavior under optimal state benefit:Max eYKLACKLAACKKCLdtN tttAttttKttLt1n rt[(,,)(,,,)(,)()]0∫( )?& ?&?&+ ∞? + St. A( 0)= A0 ,K(0)=K0,L(0)=L0 After a little complicate deducing process, we can draw some very beautiful results. The implements of these results are as follows: In order to reach the optimal path of economic growth, the growth rate of labor, capital, and technology must satisfy some fixed relations. The optimal path also depends on the growth rate of every factor respectively reaching its own growth path which is a logical growth path adding a constant. In long-term, growth rate of every factor will limit to its own stable value that is its final equilibrium value. So growth rate of production will also limit to its equilibrium value. Moreover, data from the nine developed countries by Jorgenson can be employed to examine and metric the result of this model. In econometric point, the relations between growth rate of capital, labor and technology can be evaluated, so the growth paths of every factor. Using these evaluations, we can forecast the growth tendency of Chinese economy. Comparing the growth history of typical developed countries with China, we can draw the conclusion that in Chinese growth history, investments of capital were overemphasized, while the progress of technology and the best combinations of factors were neglected. So Chinese growth type nowadays that depends on mater investment mainly is not sustainable. Having finished the mathematic solve and econometric analysis, we can put out some suggestions about state policies. 1. Under the hypothesis of maximizing the long-term welfare of citizens, the growth rate of an economy should follow a fixed path. Only high growth rate will not content citizens. It is not scandalous that developing countries set high growth rate as a target for policies. But the trend of growth rate to descend in the long-term is ineluctable, and shouldn't be maintain reluctantly. 2. Drawing on the foreign direct investment and advanced technique can alleviate the problem of scaring capital and technique resources in growth, and will be advantageous to the long-term development. This kind of use is beneficial only if the scale is appropriate. The use of foreign resources will reduce gradually with the development, so the foreign capital will not control native economy in long-term. 3. With high-speed progress of technique and growth of capital, labor may be constrained to the native conditions. So ushering in labor at the same time with outputting capital will be beneficial in long-term.4. The quality lifting of labor and the quantity increasing of capital must be emphasized while developing technique. Unilateral emphasis of the high-tech industry would make relations between the growth rate of technique, capital and labor out of balance. This would result in the lost of national income and be disadvantage for the economic development in long run. When the relations of become out of balance obviously, the government must adopt emollient measures to adjust in order to guaranteeing the coordinal development of the national economy. 5. The optimal growth path of factors should be reached according to the experience of developed countries and our native conditions. When settling the target of technique progress, the capital promoting function should be taken into consideration and the cost for research and development should not be very high. When the relations of growth rate of factors, the equation evaluated by datum of success country experience should be mainly considered; When settling the growth rate of aggregate productions, the policies should be adjusted according to the happiness of citizens in real economy with the consideration of the history of economy and the request of long-term development.