Page - (000022) - in Disrupted Development and the Future of Inequality in the Age of Automation

12 L. SCHLOGL AND A. SUMNER returns leads to an optimal allocation of factors of production at least in the medium-to-long term. These schools see little importance in sec- tors although the latter is concerned with activities. In contrast, a third school—a Lewisian or Kaldorian or even simply, the classical school, given its historic roots—where sectors matter as does activity specific- ity. This is to the point that manufacturing is special as it has increas- ing returns to scale (in direct contrast to neoclassical theory of constant or decreasing returns to scale), provides a host of spillovers and there is a core premise that equilibrium may not prevail and a structural imbal- ance—in the sectoral distribution of factors of production—which is not optimal for economic development and growth may persist even in the long run. The first school—neoclassical theory—is indifferent to sectors and specificity of economic activity (Herrendorf, Rogerson, & Valentinyi, 2014). This school is represented by Solow convergence models (traditional and augmented), endogenous models based on increas- ing returns, and models based on market imperfections in tech- nological change. Although the importance of the shift to higher productivity is not disputed in neoclassical economics, a one-sector model of economic growth has become standard in macroeconomics. In this one- sector model of economic growth there is no account of the process of inter-sectoral reallocation of economic activity or structural transforma- tion. This is because, in the neoclassical growth model (of Solow, 1956), growth is driven by incentives to save, accumulate physical and human capital, and innovate. The neoclassical position is that poor countries will grow faster than rich countries and countries with the same technology will converge at a similar income level (see discussion in Sutirtha, Kessler, and Subramanian, 2016). A second school—neo-Schumpeterian—like the neoclassical school, is indifferent to sectors too. However, this neo-Schum- peterian school is concerned with economic activities specificity. This school is associated with Roemer and the neo-Schumpeterians who argue that research and development matter, but that there is nothing special about manufacturing in terms of increasing returns to scale of manufactur- ing or positive spillovers for example. The third school, which may be labeled as the Classical School given its roots in Ricardo and classical political economy or the Lewis-Kaldor School given the elucidation of economic development as structural transformation in both Lewis (see for example, 1954, 1958, 1969, 1972, 1976, 1979) and Kaldor (1957, 1967, 1978 [1966]) among others such