Lucas' View on Free Trade

Continued from the previous post, I would like to quote a couple of paragraphs from the Lucas' book on economic growth. In the introductory chapter, the author mentions the connection between international trade and economic growth, which illustrates his (and perhaps most economists') view on free trade. While this part is written as an introduction to Chapter 3 ("Making a Miracle"), his evocative illustration provides better economic understanding and insight  of free trade in general.  This could also contribute to the debate on free trade (especially, on TPP issues in Japan).

The most spectacular growth successes of the postwar world have been associated with growth in international trade. This is the single empirical generalization that strikes everyone who is trying to understand economic growth in the last 50 years. Countries like Japan, South Korea, Taiwan, Hong Kong, and Singapore began producing goods they had never made before and exporting them to the United States, successfully competing with American and European producers who had the advantages of decades of experience. At the other extreme, the Communist countries that cut themselves off from trade with the West stagnated, as did India and many Latin American economies that used tariff walls to protect inefficient domestic producers from outside competition. These observations seem to provide further confirmation of the usual economic arguments in favor of free trade, arguments that seem to me as true and as relevant now as they were when Hume an Smith first articulated them. 

But classis trade theory does not really help in understanding the connections between trade and growth that we see in the postwar period. One problem is that while some of the Asian successes - in Taiwan and Honk Kong - were associated with liberal trade policy, others - Japan, Korea, and Singapore - occurred in heavily managed environments, under policies that Smith would certainly have criticized as mercantilist. (I agree with Smith that the mercantilist economies would have hared even better without managed trade, but this view is obviously not a straightforward statement of the facts.) A second, more important, barrier to the application of the theory of gains-from-trade to postwar growth is that quantitative versions of the theory do not yield estimated benefits of tariff reduction that are of the right order of magnitude to account for the growth miracles. (...) These models support a compelling case for the importance of free trade. What they do not provide, though, is a theoretical link between free trade and economic growth that is both rapid and sustained.

Romer vs. Uzawa-Lucas

As I illustrated in the previous post, the most cited paper of Robert Lucas is written about (endogenous) economic growth. Surprisingly, its citation is even greater than those of Paul Romer (1986a, 1986b), the pioneering papers in this field (according to Google Scholar).
To understand the essence of these models and their differences, I have checked the Lucas' book on economic growth (this is actually a volume of collected papers), and found insightful exposition.



In the Introduction of the book, the author first provides a nice summary of Paul Romer's pioneering works.

Paul Romer (1986a, 1986b) worked out an explicit model of a growing economy that reconciled the opposing forces of increasing an diminishing returns, and did so in a way that generated sustained production growth and was at the same time consistent with market equilibrium of many, competing producers. The economics of Romer's model are closely related to the ideas of Allyn Young (1928), but his development of these ideas is entirely new. In the theory, goods are produced with a single kind of capital - Romer called it "knowledge capital" - and each producer's output depends both on his own stock of this capital and on the stock held by other firms. Aggregating over producers, production in the economy as a whole is subject to increasing returns: Every 10 percent increase in the total stock of knowledge capital leads to an output increase of more than 10 percent. But an individual producer, who has no control over the economy's total stock of capital, faces diminishing returns to increases in his own capital. Thus the fact of increasing inequality among the economies of the world is reconciled with the absence of a tendency to monopolization within each economy.

Then, the author relates Romer's idea with his own (Lucas, 1988).

Section 4 of my "On the Mechanics of Economic Development" constructs a model designed to deal with the problem posed by diminishing returns along the lines proposed by Romer. In doing this, I found it more convenient to make use of a model of Uzawa (1965) in which there is both physical and human capital but returns, private and social, depend only on the ratio of these two stocks. The theory replaces the increasing returns assumed by Romer with a kind of constant returns, yielding a system which is easier to analyze than Romer's but which circumvents the problems of diminishing returns in a similar way.
The human capital model I used involves an external effect of human capital, patterned on the external effect of knowledge capital that Romer introduced. But in my analysis, this external effect is not needed to ensure the existence of a competitive equilibrium the way it is in Romer's model. If this effect is removed, the model continues to be internally consistent and is in fact even easier to analyze. [footnote] 

[footnote]: Rebelo (1991) stripped the model down to its simplest one-capital-good "Ak" form. Caballe and Santos (1993) provide an elegant analysis of the off-balanced-path dynamics of an Uzawa model without a production externality.

References
Caballe, Jordi, and Manuel S. Santos (1993) "On Endogenous Growth with Physical and Human Capital." Journal of Political Economy, 101: 1042-1067. [313]
Lucas, Robert E., Jr (1988) "On the mechanics Economic Development." Journal of Monetary Economics, 22: 3-42. [13791]
Rebelo, Sergio (1991) "Long Run Policy Analysis and Long Run Growth." Journal of Political Economy, 99: 500-521. [2748]
Romer, Paul M. (1986a) "Increasing Returns and Long-Run Growth." Journal of Political Economy, 94: 1002-1037. [12099]
Romer, Paul M. (1986b) "Cake Eating, Chattering, and Jumps: Existence Results for Variational Problems." Econometrica, 54: 897-908. [58]
Uzawa, Hirofumi (1965) "Optimum Technical Change in an Aggregative Model of Economic Growth." International Economic Review, 6: 18-31. [1142]
Young, Allyn A. (1928) "Increasing Returns and Economic Progress." Economic Journal, 38: 527-542. [2014]

(Number in [ ] shows the citation in Google Scholar.)

Growth "higher" than Rational Expectations

Professor Robert E. Lucas Jr. at Chicago Univ. is perhaps the most famous macroeconomist in the (at least academic) world. He is especially well-known to his series of works on rational expectations.  In fact, he received the Nobel Prize in 1995 due to this contribution:

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1995 was awarded to Robert E. Lucas Jr. "for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy" (from the official website of the Nobel Prize).

However, somewhat surprisingly, I just noticed that Professor Lucas' most cited paper is NOT about rational expectations. According to Google Scholar (search result is here), his most cited paper is "On the mechanics of economic development" (Journal of Monetary Economics, 1988), which is cited more than three times as much as the second one, "Econometric policy evaluation: A critique." The citation of the former exceeds 13,000, which is amazingly high in the field of Economics (maybe in other fields, too).

The "mechanics" paper is a seminal pioneering work in endogenous growth theory and is built on the idea of Uzawa ("Optimum Technical Change in An Aggregative Model of Economic Growth", International Economic Review, 1965); because of this, the model is often called Uzawa-Lucas model. Professor Paolo Mattana, the author of "The Uzawa-Lucas Endogenous Growth Model" explain the model as follows:

R. Lucas, in the late 1980s, writes a path-breaking paper: by taking some initial intuitions of Uzawa (1965) a step further, he proposes a two-sector capital accumulation growth model where human capital plays the role of the key variable through which ongoing growth can be generated. Human capital is understood to refer, in Becker's tradition, to the skills and knowledge intensity of the labor force and is accumulated in the learning (or educational) sector via a linear constant-returns to scale technology, only requiring older vintages of human capital. The Uzawa-Lucas economy differs in a fundamental way from the standard neoclassical model; since a lower bound to the return of accumulation is implicitly imposed, the long-run growth rate basically reflects an endogenous equilibrium where only the "primitives" of a specific economy (endowments, technology and preferences) are relevant. Other factors, such as increasing population or exogenous technical progress, crucial in the traditional theory, have, conversely, no critical influence.