On the probability distribution of long-term changes in the growth rate of the global economy: An outside view

Original Abstract

Daniel Kahneman and Amos Tversky argued for challenging inside views (informed by contextual specifics) with outside views (based on historical "base rates" for certain event types). A reasonable inside view of the prospects for the global economy in this century is that growth will converge to 2.5%/year or less: population growth is expected to slow or halt by 2100; and as more countries approach the technological frontier, economic growth should slow as well. To test that view, this paper models gross world product (GWP) observed since 10,000 BCE or earlier, in order to estimate a base distribution for changes in the growth rate as a function of the GWP level. For econometric rigor, it casts a GWP series as a sample path in a stochastic diffusion whose specification is novel yet rooted in neoclassical growth theory. After estimation, most observations fall between the 40th and 60th percentiles of predicted distributions. The fit implies that GWP explosion is all but inevitable, in a median year of 2047. The friction between inside and outside views highlights two insights. First, accelerating growth is more easily explained by theory than is constant growth. Second, the world system may be less stable than traditional growth theory and the growth record of the last two centuries suggest.