The Emperor Has New Clothes: Empirical Tests of Mainstream Theories of Economic Growth

Citation

Greasley D, Hanley N, McLaughlin E & Oxley L (2014) The Emperor Has New Clothes: Empirical Tests of Mainstream Theories of Economic Growth. Stirling Economics Discussion Paper, 2014-08.

Abstract
Modern macroeconomic theory utilises optimal control techniques to model the maximisation of individual well-being using a lifetime utility function. Agents face choices over current and future consumption (with resultant implied savings decisions) seeking to maximise the present value of current plus future well-being. However, such inter-temporal welfare-maximising assumptions remain empirically untested. In the work presented here we test whether welfare was in (historical) fact maximised in the US between 1870-2000 and find empirical support for the optimising basis of growth theory, but only once a comprehensive view of what constitutes a country's wealth or capital is taken into account.

Keywords
inter-temporal utility maximisation; modern growth theory; US; comprehensive wealth

JEL codes

• E21: Macroeconomics: Consumption; Saving; Wealth
• E22: Investment; Capital; Intangible Capital; Capacity
• C61: Optimization Techniques; Programming Models; Dynamic Analysis