Modeling growing economies in equilibrium and disequilibrium

Abstract

v PREFACEDuring the 1960s and early 1970s multisectoral models developed along two distinct paths.In the first tradition, "systems" models of global growth (e .g., Meadows et aI., 1972) dealt with cumulative interactions among sectors, and showed that resource-intensive rapid growth would result in economic collapse, and, worse yet, that the world would not recognize the catastrophe before it occurred. These models possessed no prices to encourage resource saving, nor did they induce technological change to augment supply, both of which would attenuate or eliminate the predicted catastrophe. At the same time, there appeared a set of increasingly complex planning models, characterized by highly disaggregated inputoutput structures, and focusing on "internal-consistency" compromises to reconcile various demand and supply imbalances implied by the process of economic growth (for a review, see Blitzer et al., 1975). Here too, little attention was paid to how these inconsistencies could be reconciled without invoking ad hoc government policies to ameliorate their consequences.A second and quite different tradition began with the pioneering study by Johanson (l959); in his general equilibrium model, price adjustments reconcile demand and supply and optimal resource allocation is generated endogenously without the intervention of ad hoc policy.The 1970s saw an explosion of complex multisectoral growth models in the first tradition. They incorporated fairly rigid technological relations, utilized large and expanding data bases, and relied extensively on computers for their solution and analysis. These complex models stressed sectoral detail and did not dwell on the actions of the economic agents that in the real world tie these sectors together into a viable political economy. Rather, governments largely represented the agents responsible for setting goals and "reconciling" perceived shortages or glu ts of commodities and factors. These models were expanding black boxes with thousands of equations and an even larger number of parameters designed to guide the policy makers in aggregate economic management.The first tradition had its detractors and many scholars were beginning to recognize the possibility that complex government planning models were yielding diminishing returns: their data requirements were excessive; they highlighted limited choices rather than flexible tradeoffs; they demanded sophisticated control systems to implement their objectives; and they were unreliable in predicting the future course of economic events (see , for a review ofsome of these models). At the same time, macroeconomic theory was being treated with increasing skepticism, and scholars showed an increasing interest in the microeconomic foundations of the aggregate economy (for a review, see Weintraub, 1977).The stage was set to move back toward the second tradition, to simpler general equilibrium models, which highlight specifications of microeconomic behavior. For modeling market economies this meant increased attention to the role of p...