Allocation and growth in economics: are they complementary ideas?

Two important ideas in economics that seem in some ways incompatible are those of the efficient allocation of resources and that of growth. Neoclassical microeconomics in its basic form is thought to encourage governments to pursue free market policies so that resource allocation is efficient and maximises the welfare of society in the form of utility. It is concerned with a static model of allocation. By contrast, theories of growth are concerned with change over time, that is a dynamic process.

Since growth is an inescapable characteristic of the forces unleashed by capitalism, periods of recession not withstanding, it makes sense to try to construct models that encompass this dynamic process. More heterodox analyses of growth often try to take account of the transformation of the economy and society which result, while more mainstream models tend to ignore these aspects.

Can these two ideas, one focused on the statics of allocation and the other on the dynamics of what the classical economists called accumulation (growth), be reconciled?

If growth over time is a dynamic process of structural change in the economy and society, it might make sense to view it as a process of a continuous reallocation of resources. The traditional factors of production in economics are land, labour and capital (and sometimes entrepreneurship). As growth proceeds, particularly in the initial transition to a capitalist economy associated with industrialisation, the ownership of these factors or property rights can change rapidly, enabling capital to be concentrated in relatively few hands, with labour as a potentially employed workforce, combined in the production process to enable productivity growth.

In more advanced economies, growth is still associated with structural change, as the service sector tends to become more dominant in terms of the employment and also output share and some form of relative deindustrialisation takes place. So a change in the allocation of resources occurs during all growth processes. Arguably it is unhelpful to view this as static, rather than dynamic, but allocation or reallocation is definitely going on. If we drop the label ‘static’, in favour of the analysis of dynamic processes, the idea of resource allocation can remain important albeit in a growth setting. Hence the two ideas could be seen to be complementary and there is room for some mutual reconciliation between neoclassical and heterodox economic theories. This rules out neither free market nor interventionist government policies, which I will not discuss here, although each can be argued for in different contexts.

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