On the System-Theoretical Foundations of Non-Economic Parameter Constancy Assumptions in Economic Growth Modeling

Abstract

Most growth models assume that some of the model parameters that are determined in non-economic systems are exogenous and constant. Such non-economic parameter constancy assumptions (abbr. ‘NEPCAs’) seem inevitable in economic growth modeling, yet they are not necessarily consistent with the empirical evidence on significant cross-system interactions, i.e., long-run interactions between the economic system and the non-economic systems (e.g., socio-cultural, political, and ecological system). We derive the system-theoretical conditions under which NEPCAs can be good approximations of cross-system interactions: we (a) discuss the standard types of dynamic equilibrium and the problems that arise when using them to justify NEPCAs in growth models (in presence of cross-system interactions), (b) formulate an equilibrium type (a ‘stable partial dynamic equilibrium’) that solves these problems, and (c) demonstrate the applicability of this equilibrium type as a foundation of the NEPCAs used in the AK growth model. Finally, we discuss some topics for further research.

Keywords: economic growth, long run, parameter conditions, cross-system interactions, economic system, socio-cultural system, political system, ecological system, dynamic systems theory, dynamic equilibrium, AK model, population growth

JEL Classification: O40, A12