Brad de Long on the “Marshallian toolkit”

Brad de Long, a Berkeley economist, has an interesting post on his weblog about limitations of current models in economics. The "Marshallian toolkit" means basically the kind of economics you find in a microeconomics textbook (in a more sophisticated form, of course). Brad is claiming that these models simply fail to explain what makes some economies grow and others stagnate.

An example of the kind of model Brad refers to is the Solow growth model, which has three basic inputs: the amount of labor, the amount of capital (which includes things like factories), and a third factor, productivity, which represents how efficiently capital and labor are used. Changes in capital and labor are explainable in terms of conventional economics, but productivity is basically a black box for technological change. When economists fit the model against the data, it turns out that truly dramatic economic growth comes from increase in productivity, the very factor that is beyond the reach of conventional economics.

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