Daniel J. Choi

This paper was written for Economics 1339: Generating Wealth of Nations, a Harvard undergraduate course taught by visiting professor Jeffrey Borland.

Introduction

The convergence hypothesis at its most fundamental level posits that countries with lower productivity will tend to grow at faster rates than their more productive neighbors. This theory follows directly from the law of diminishing returns, which explains that the marginal output of a production factor progressively decreases as the factor is increased. Following this logic, a less productive country can exploit the same techniques utilized in more productive countries to achieve a greater output for any given level of input. While theoretically sound, the convergence hypothesis relies upon one key assumption that is not brought to bear in the real world – either no other determinants of productivity growth exist, or countries with varying productivities are equal in all other aspects. Empirical evidence runs contrary to both possibilities. For example, in the period from 1870 to 1913, America continued to increase its already well-established lead in productivity, while the average productivity level of laggard countries in Europe fell. Following the Second World War, however, Europe’s rapid growth and convergence with the United States seems to validate the hypothesis. These discrepancies imply the existence of other important determinants of growth. This paper seeks to examine the mechanisms by which convergence occurs to uncover the characteristics that explain why some laggard countries experience accelerated growth rates, why others with high productivity remain leaders, and why still others fail to ever catch up.

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This paper was written for Economics 1339: Generating Wealth of Nations, a Harvard undergraduate course taught by visiting professor Jeffrey Borland.

Introduction

The recent economic downturn of the late-2000s, labeled the “Great Recession” by some, shares several interesting characteristics with the Great Depression of the 1930s. This is especially surprising given the vast body of economic study dedicated to the ascertainment of the Great Depression’s causes and ways to ensure that such an economic crisis never occurs again. The existence of such parallels, then, underlines the power of economic forces to produce these business cycles despite mankind’s best attempts to stabilize the worldwide economy. This paper aims to investigate commonalities and differences between the Great Depression and the Great Recession and furthermore to motivate the study’s relevance to policy reform attempts at combating the most recent contraction. To do so, it examines two aspects of each crisis – its probable causes and the manner of its subsequent worldwide propagation.

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This paper was written for Economics 1339: Generating Wealth of Nations, a Harvard undergraduate course taught by visiting professor Jeffrey Borland.

Introduction

Defined by Douglass North as the “humanly devised constraints that shape human interaction,” institutions understandably affect many aspects of society, and as such they are often placed at the center of studies regarding the causes of economic development. Indeed, institutions play a strong, if not causal role in economic growth. Though their influence alone cannot explain all economic development, institutions in its various forms are, at the very least, one of the necessary pre-conditions of economic growth and key accomplices of economic stagnation.

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This paper was written for Economics 1339: Generating Wealth of Nations, a Harvard undergraduate course taught by visiting professor Jeffrey Borland.

Introduction

Despite its abolishment of the international slave trade in 1808, America in the period following the American Revolutionary War was home to an ever-increasing population of both free and enslaved African Americans. This growing demographic posed a threat to the white community, which was concerned about the implications of black assimilation into American society. Many northerners were afraid of free blacks taking their jobs, while slave owners in the South were concerned that the presence of freedmen living in slave states would encourage slave revolts and runaways. In response, some proposed an expatriation of African Americans to colonies in Africa, which would grant blacks their freedom and whites their peace of mind. This idea took hold, and in 1816, the American Colonization Society (ACS) was formed with the mission to facilitate the establishment of such settlements. In addition to the central goal of mitigating white-black tensions in America, the operation also aimed to “civilize” and evangelize African natives. The ACS also stressed the economic benefits of establishing trade agreements with the African populations via colonies, which would secure for American merchants trade currently monopolized by Europeans. In 1819, when the ACS received funding from Congress, the enterprise began in earnest, and the first of many ships set sail for West Africa, with three white ACS agents and 88 emigrants on board. Over the next few decades, the ACS would work closely with the Liberian colonies in a struggle to establish permanent, self-sufficient settlements.

Prior to the 1830s, the US government only maintained an official interest in Liberia insofar as it served as an outpost from which to execute America’s anti-slave trade campaign. The Monroe Doctrine, which stymied international involvement between the Eastern and Western hemispheres, prevented the government from taking a more direct interest in Liberia’s internal affairs. Instead, the American Colonization Society maintained control over the territory’s administration until 1838, when Liberia proclaimed itself a self-governing commonwealth. This declaration of sovereignty was prompted by criticism that accused the ACS of attempting to acquire an empire as well as the ACS’s own financial problems. At this point, ACS still maintained some control over Liberia’s internal affairs, but its political and commercial influence waned substantially. In 1847, Liberia declared itself a Republic and legislative powers found themselves in the hands of the settlers. This paper examines the ways in which government policy affected the economic growth of the Liberian settler society from the early periods of its settlement in the 1820s to the worldwide depression in the latter part of the 19th century.

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This paper was written for Economics 1339: Generating Wealth of Nations, a Harvard undergraduate course taught by visiting professor Jeffrey Borland.

Introduction

The United States during the later part of the 20th century experienced a reversal in the pattern of decreasing income inequality that had slowly been establishing itself since the end of the Great Depression. Indeed, by 1982, inequality in the distribution of American family incomes had eclipsed the same figure measured in 1950, the year that had seen the highest level of inequality since record keeping began in 1947.

Figure 1 (above) depicts the top ten percent income share in the United States during the decades between World War I and present day. The data points are logically separated into three discrete periods – The Great Depression (characterized by high inequality), the Great Compression (a decrease in inequality), and the Great Divergence (a return to higher inequality). This last period came as a surprise to many who had previously studied income inequality in America. At the time, the prevailing school of thought regarding the mechanics of economic inequality was one first proposed by Simon Kuznets in his 1955 paper entitled “Economic Growth and Income Inequality”. Kuznets hypothesized that as economies matured in less developed regions, certain emergent factors like industrialization and urbanization would increase income inequality. Then, as those economies continued to develop, social and political forces would come into play to relieve the poorest in society while the upper income group would experience slower growth than under early industrialization. These two observations produced an inverted-U curve of inequality as a function of development, a model that had been supported by empirical evidence from the first half of the 20th century. Around the 1980s, however, income inequality began a steady climb that has carried through to present day. Furthermore, a closer look at family incomes during this time reveals that the income gap has increased the most between the top and the middle of the distribution, while it has remained fairly stable between the middle and bottom. The search for causes of this upward trend in income inequality has been the topic of much research, though a consensus has hardly been reached. Truly, pinpointing a cause would help address inequality in the real world and its associated negative effects, such as increased rates of mortality and obesity. This paper presents a survey of the most compelling theories for income inequality in America and seeks to identify the strengths and weaknesses of each.

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