2.3.4 Mathematical Formulation
This reasoning helps in rewriting the economy’s aggregate production function as
Y ¼ IK
α hL
ð Þ
1Àα ,
where
I represents the influence of an economy’s infrastructure on the productivity of its
inputs,
K is physical capital,
h represents skills acquisition by the workers, as new equipment (capital goods) are
introduced,
L is labour force.
However, the outputs of two countries with identical K, h, and L may still differ
because the two economic environments differ. In one, capital may be spent on
fences, security systems, etc., where skills are focused on holding up investors or
bribe collection. In the other, all inputs focus on productive activities. Note: The
form of the function is chosen to produce what is called “constant return to scale”.
(Please see also Appendix 2.1).
2.3.5 Growth: Miracles and Disasters
The institutions and government policies constituting the economy’s infrastructure
will influence investment and productivity, thereby impacting on the wealth of the
nation. Fundamental modifications in infrastructure can therefore generate growth
miracles, or, in contrast, growth disasters.
According to North (1981), individuals in authority or power will follow paths or
actions that maximize their own utility. Instead of doing benevolent social planning,
to maximize or improve the welfare of society, government officials have vested
interests, just like other humans. If we try to imagine what the leaders and the voters
have to gain and/or lose and how easy/or difficult it is for the voters to replace the
leaders, it is possible to understand why certain laws, rules, and institutions are
implemented in an economy. There is a difference between:
(a) the ownership structure which maximizes rents to the ruler (and his group)
(b) a redistributive society which reduces transaction costs and encourages economic growth.
History has demonstrated how this difference has prevented many countries from
a sustainable economic growth.
Similarly, Mokyr (1990) explains how China lost its technological supremacy
after the fourteenth century, after having developed paper, gunpowder, ship2.3 Investing in a Business
43
This reasoning helps in rewriting the economy’s aggregate production function as
Y ¼ IK
α hL
ð Þ
1Àα ,
where
I represents the influence of an economy’s infrastructure on the productivity of its
inputs,
K is physical capital,
h represents skills acquisition by the workers, as new equipment (capital goods) are
introduced,
L is labour force.
However, the outputs of two countries with identical K, h, and L may still differ
because the two economic environments differ. In one, capital may be spent on
fences, security systems, etc., where skills are focused on holding up investors or
bribe collection. In the other, all inputs focus on productive activities. Note: The
form of the function is chosen to produce what is called “constant return to scale”.
(Please see also Appendix 2.1).
2.3.5 Growth: Miracles and Disasters
The institutions and government policies constituting the economy’s infrastructure
will influence investment and productivity, thereby impacting on the wealth of the
nation. Fundamental modifications in infrastructure can therefore generate growth
miracles, or, in contrast, growth disasters.
According to North (1981), individuals in authority or power will follow paths or
actions that maximize their own utility. Instead of doing benevolent social planning,
to maximize or improve the welfare of society, government officials have vested
interests, just like other humans. If we try to imagine what the leaders and the voters
have to gain and/or lose and how easy/or difficult it is for the voters to replace the
leaders, it is possible to understand why certain laws, rules, and institutions are
implemented in an economy. There is a difference between:
(a) the ownership structure which maximizes rents to the ruler (and his group)
(b) a redistributive society which reduces transaction costs and encourages economic growth.
History has demonstrated how this difference has prevented many countries from
a sustainable economic growth.
Similarly, Mokyr (1990) explains how China lost its technological supremacy
after the fourteenth century, after having developed paper, gunpowder, ship2.3 Investing in a Business
43