CHAPTER TWO LITERATURE REVIEW Theories of Economic Growth and Government Expenditure
Economic growth is a mandatory task for governments of developing countries in order to extricate poverty and improve the well being of their people. Thus, these countries usually pursue fiscal policy which would help them achieve accelerated economic growth. Ever since the inception of systematic economic analysis at the time of the classical economist, from William petty to David Ricardo, the problem of economic growth was high on the agenda of economists. Interest in the study of economic growth was central in classical political economy from Adam smith to David Ricardo, and it stayed as focal point in critics of classical economy by Karl Marx too. But the agenda was thrown to the periphery during the so-called ‘marginal revolution’. John Von Neumann’s growth models and Roy Harod’s, had tried to make generalization of Keyne’s principle of effective demand to lung-run. This has re-ignited interest in the growth theory.
It was the publication of papers by Robert Solow and Nicolas Kaldor in the Mid-1950s, growth theory that made growth theory to become a central topic until the early years of 1970s. It then took around a decade for economic growth to once again get the focus in economic theorizing. The recent famous theory is called ‘endogenous growth theory’, according to which the growth rate is determined with-in the model and is not given as an exogenous variable (Salvadori, 2003).