Growth and Business Cycles : Swedish Manufacturing Industry 1952-2001

Abstract: This study shows that the mechanisms behind knowledge accumulation and the sources of productivity growth differ from industry to industry depending on what is produced and what technology is used. Although it is apparent to most researchers in the field that the only way to explain long-run growth in output per capita is through technological progress and accumulation of knowledge that counteract the dampening effect of diminishing returns, we are still in the dark about how such mechanisms operate. By focusing on the importance of separating industrial sectors with different methods of production and thereby including the possibility of TFP reflecting various growth mechanisms for diverse industries, this thesis tries to rethink the history of productivity growth in the Swedish manufacturing industry. A unique dataset, for the period 1952 to 2001, makes it possible to distinguish labour-intensive, capital-intensive and knowledge-intensive industries. Analysing the cointegration VAR model means that the sources of long-run productivity growth and business cycles are treated as separate yet interdependent issues. We show that, by applying relevant economic theory to representative data and using advanced econometric methods, it is feasible to test a variety of theoretical assumptions about endogenous growth on appropriate data. In so doing, we establish the important role of opportunity costs in allocating investments among various ways of accumulating knowledge. Since resources are scarce, investment in one form of knowledge accumulation takes place at the expense of another, which in turn has important implications for business cycles. We obtained the following results: the highest rate of knowledge accumulation was attained in industries using technologically advanced production processes and/or manufacturing technologically advanced goods. Business cycles reflect the sum of simultaneous productivity increases and productivity losses as altering opportunity costs allocated investments among knowledge-accumulating and/or growth-generating mechanisms. The productivity slowdown in 1975 was not as severe in all sectors; nor was the catch-up in the 1990s as strong in all industries. The concept of past-dependent knowledge accumulation giving rise to locked-in expertise, and rapidly falling rates of learning on aged techniques and old products, is put forward as the main explanations for why the severest productivity slowdown and failure to adjust to new economic conditions took place in capital-intensive industry. Rapidly increasing knowledge accumulation and monopoly profits explains why the '1975-crisis' hit knowledge- intensive industry the least, and why this industry showed the greatest catch-up between 1992 and 2001.

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