Preface

Living conditions, wages and wealth vary among families, races, cities, regions and countries. It is important to study how persistent disparities in aggregate growth rates across nations, regions or groups of people have led to differences in welfare and happiness. Do traditional cultural values like the Protestant Ethic or Confucianism promote or resist economic growth? Is high personal saving rate a social evil or virtue? What are the sources of Mainland China's continued growth in the last two decades? Will income/wealth inequality among the individuals or regions be reduced as an economy is expanding? Does everyone benefit from economic globalization? If not, who will benefit from economic globalization? Is globalization sustainable? Will globalization and technological progress enlarge or reduce inequalities among nations, regions, or individual groups?

Economic theory is supposed to explain the economic mechanisms and to provide intellectual insights into these important issues. Indeed, there are a wide array of different theories, concepts and results. Nevertheless, growth theory has been split between partial and conflicting representations of economic growth. Diverse growth models have co-existed but not in a structured relationship with each other. Economic students are trained to understand economic phenomena by severally incompatible theories one by one in the same course. In order to overcome the incoherence, we need a general theoretical framework which enables us to account for the phenomena explained by the current theories in a unified manner and to draw together all of the disparate branches of growth theory into a single organized system of knowledge.

One purpose of this book is to make a theoretical integration of well-established growth theories, not to mention to provide some new insights into complexity of economic systems. Our integration is based on conceptual integration. We analyze growth phenomena in different subfields with a few basic concepts and assumptions. We try to grasp essential features of modern economic growth, which may be described as dynamic interdependence among capital, knowledge, population, economic structure, and exchange values. It has been long recognized that population growth, capital accumulation, creativity, and knowledge utilization are the basic dynamic forces of economic evolution. Theoretical economists have generally concentrated their attention either on capital accumulation or technical progress or population dynamics. The unique character of this book is that we construct a compact framework, which represents dynamics among the three basic forces with endogenous economic structures and preference change. In our approach, individuals' creativity, learning, knowledge utilization, diffusion of knowledge, saving, and life-styles and their synergies emerge as the decisive factors according for economic evolution.

This book provides a powerful - but easy to operate - engine of analysis that sheds light not only on economic growth per se, but on many other dimensions that interact with growth, including inequality, unemployment, education, research policy, and knowledge creation and utilization. In particular, we introduce endogenous growth theories, which treat endogenous technological change and innovation within a dynamic framework. Building and analyzing various tractable and flexible models within a compact whole, the book helps the reader to visualize economic life as an endless succession of physical capital accumulation, human capital accumulation, changes in preference, innovation wrought by competition, and monopoly and government intervention.

The book starts with a growth model in which capital accumulation is the key element for economic growth. We differ from the traditional growth theory in that we introduce a novel economic mechanism to determine consumers' decision on consumption and savings. The novel utility maximization solves the problem that there is no profound rational decision mechanism for consumers in the Solow model and avoids the complication that the Ramsey growth theory brings about. Through numerous examples, we demonstrate that the novel utility functions help us to analytically handle many economic problems in a consistent manner.¹

The study of capital accumulation and perfect competition is the first step in the long journal toward revealing complexity of socioeconomic evolution. Our approach not only takes account of capital accumulation, but also treats knowledge creation and diffusion, human capital accumulation and education, institutions, monopoly, population growth, and cultural communications as endogenous processes of economic evolution. We don't supplant capital accumulation as the key process of economic growth but to supplement it with these processes. Since it is difficult to get explicit solutions for some of the growth models, we simulate models to demonstrate some dynamic properties of models. The recent surge of simulations in growth theory has been impelled by current developments in computer processing, algorithm design, software, and data storage. We will combine computer simulation and mathematical (analytical) methods. Analytical methods help us derive basic qualitative properties of models, such as existence, uniqueness, and stability of equilibrium point(s). Since most of growth models are described by nonlinear differential equations, simulation by computer provides an effective way to illustrate time-dependent paths of these dynamic systems.

Finally, it should be remarked that economic theories based on population growth, preference change, capital and knowledge accumulation are unlikely to explain cross-country differences in incomes and wealth. A genuine understanding of economic growth has to be examined in a broad vision including cultural values and national spirits. Geography matters. For instance, my recent works on the Confucian regions show that the Confucian values are essential for understanding sustainable economic growth of these regions.²

Wei-Bin Zhang
Beppu City, Japan, January 2005

¹ This book is concentrated on dynamics of national economies with capital and knowledge accumulation, and preference changes. The novel approach to consumers has been applied to international trade theory, interregional economics, and urban economics by Zhang (2000b, 2001, 2003a, 2005). The numerous dynamic models in different fields of economics show that the approach can effectively solve many dynamic problems which are often analytically intractable by the traditional approaches. For instance, an analytical advantage of this approach over the Ramsey approach is that our approach results in lower dimensional dynamical systems than the Ramsey approach for similar economic issues.

² In a series of books, I explain economic development of East Asian economies in perspectives of Confucianism, applying modem economic theories (Zhang, 1998, 1999b, 2000a, 2002, 2003b, 2003c, 2003d, 2004). These studies on Confucianism and industrialization are based on the vision that the economic development of the East Asian economies is a consequence of dynamic interactions of cultural values, international environment, institutions, and economic forces. These works are considered as an integrated part of applying contemporary economic ideas to concrete economic systems. As far as broad vision (in Schumpeter's sense) is concerned, the works are strongly influenced by, except the mainstreams of economics over history, the works on Confucianism and industrialization by Max Weber (1864-1920) and Michio Morishima (1923-2004).