Modeling the Growth of the World Economy: The Basic Overlapping Generations Model

The previous chapter provided a detailed introduction to empirical data concerning the long run growth of the world economy as a whole and to the international economic relations prevailing among nearly 100 nation states. In this chapter we intend to explore within a simple theoretical model the driving forces behind the apparently unbounded growth of the global market economy, and for the moment simply disregard the international relations among countries. In order to go some way towards addressing the frequently expressed fear that globalization has gone too far we begin by envisioning a world economy where globalization has come to an end. In other words, we assume a fully integrated world economy with a single global commodity market and a uniform global labor and capital market. Although the present world economy is still quite far away from achieving full integration dealing with this commonly cited bogey of globalization critics would nevertheless appear worthwhile. In view of Kaldor’s (1961) stylized facts presented in Chap. 1 it is not surprising at all that economic growth attracted the attention of economic theorists in postWWII period of the 1950s and 1960s. In contrast to the rather pessimistic growth projections of the leading post-Keynesian economists, Harrod (1939) and Domar (1946), the GDP growth rate, especially in countries destroyed in WWII, dramatically exceeded its long run average (of about 2 % p.a.) and remained at the higher level at least for a decade. As it is well-known, Solow (1956) and Swan (1956) were the first to provide neoclassical growth models of closed economies. This rather optimistic growth models were better akin to the growth reality of the post-war period than the postKeynesian approaches. However, savings behavior in Solow’s and Swan’s macroeconomic growth models lacked intertemporal micro-foundations. In order to address this drawback from the perspective of current mainstream growth theory (Acemoglou 2009) our basic growth model of the world economy is based on Diamond’s (1965) classic overlapping generations’ (OLG) version of neoclassical