Lucas: On the Mechanics of Development Planning

RE Lucas, “On the Mechanics of Development Planning,” Journal of Monetary Economics 22, no. 1 (1988): 3-42.

"This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing" (3).

The piece begins with a general overview of 1983 data regarding income, development and growth levels. There is clearly a large array of different levels of living standards and material improvement. Lucas exits this overview of the statistics by wondering whether or not there is something the countries with lower growth rates can do to improve their situation. "Once one starts to think about them, it is hard to think about anything else" (5). This, then, becomes the catalyst for a theory of economic development.

"Even granted its limitations, the simple neoclassical model has made basic contributions to our thinking about economic growth. Qualitatively, it emphasizes a distinction between 'growth effects'--changes in parameters that alter growth rates along balanced paths--and 'level effects--changes that raise or lower balanced growth paths without affecting their slope--that is fundamental in thinking about policy changes" (12).

"In the absence of differences in pure technology then, and under the assumption of no factor mobility, the neoclassical model predicts a strong tendency to income equality and equality in growth rates, tendencies we can observe within countries and, perhaps, within the wealthiest countries taken as a group, but which simply cannot be seen in the world at large. When factor mobility is permitted, this prediction is very powerfully reinforced. Factors of production, capital or labor or both, will flow to the highest returns, which is to say where each is relatively scarce. Capital-labor ratios will move rapidly to equality, and with them factor prices" (16).

Lucas finds that the human capital model performs as well as the Solow model. "What can be concluded from these exercise? Normatively, it seems to me, very little: The model I have just described has exactly the same ability to fit US data as does the Solow model in which equilibrium and efficient growth rates coincide" (27).

"The model I have just worked through treats the decision to accumulate human capital as equivalent to a decision to withdraw effort from production--to go to school, say. As many economists have observed, on-the-job-training or learning-by-doing appear to be at least as important as schooling in the formation of human capital. It would not be difficult to incorporate such effects into the previous model, but it is easier to think about one thing at a time so I will just set out an example of a system...in which all human capital accumulation is learning-by-doing" (27).

UPDATE:

"My aim, as I said at the beginning of these lectures, has been to try to find what I called 'mechanics' suitable for the study of economic development: that is, a system of differential equations the solution to which imitates some of the main features of the economic behavior we observe in the world economy" (39).

"The model that I think is central was developed in section 4. It is a system with a given rate of population growth but which is acted on by no other outside or exogenous forces. There are two kinds of capital...in the system:P physical capital that is accumulated and utilized in production under a familiar neoclassical technology, and human capital that enhances the productivity of both labor and physical capital , and is accumulated according to a 'law' having the crucial property that a constant level of effort produces a constant growth rate of the stock, independent of the level already attained" (39).

"A successful theory of economic development clearly needs, in the first place, mechanics that are consistent with sustained growth and with sustained diversity in income levels...But there is no one pattern of growth to which all economies conform, so a useful theory needs also to capture some forces for change in these patterns, and a mechanics that permits these forces to operate" (41).