Neoclassical Theory of Economic Growth

1. Neoclassical Theory Causes of Economic Growth
a. Increase in labor quantity (population growth)
b. Improvement of labour through training and education
c. Increase in capital (higher savings and investments)
d. Improvements in technology
Neoclassicals believe that government control inhibits growth as it encourages corruption, inefficiency and offers no profit motive for entrepreneurship. Underdevelopment is seen as the result of government inefficient use of resources and state intervention in markets through the regulation of prices. Thus, they argue that since government intervention is the root of underdevelopment in LDCs themselves, and only when they use supply-side policies are free up markets will growth and development occur. This shifts the Long Run Aggregate Supply.
2. Neoclassical Economists advocate the following strategies:
a. Competitive free markets
b. Privatization of state owned industries
c. Move from closed to open economies (no trade, to trade)
d. Opening the domestic economy through encouraging free trade (abolish protectionism) and foreign direct investment These policies can stimulate investment, create higher output and income. Thus this increases savings.
3. Problems with the Model – the model makes a number of unrealistic assumptions and ignores a number of crucial issues:

a. assumes that creation of free market and private enterprise is possible and desirable
b. existence of market failure such as externalities associated with economic growth are ignored
c. problem of uneven distribution of income is ignored

4. Population Pyramid: how population is structured is also of importance to economists. The structure of the population can be considered in terms of:
Proportion of different age groups (ex. large young mean high birth rate, less old mean high death rate)
Proportion of males and females

5. Impact of pyramid on economist/growth
Ageing or youthful populations may have implications of the following:
Labour availability or unemployment
Economic growth
Size and nature of markets
Dependency ratios
Welfare services such as pensions, old peoples homes
Educational provision
Housing market