‘Uncertainty Over Risk' to Transform China's Growth : Theoretical Basis to Reassess Investment Spending in National Income Simulations

Item Type Journal paper
Abstract China plans the next steps of its remarkably successful economic transformation on the basis of innovation-based endogenous economic growth. Policy-makers across the world aim to generate endogenous or Schumpeterian growth to complement the better understood mainstream varieties of growth; Smithian (trade) and Solovian (capital investment). Schumpeterian growth is associated with the undertaking of uncertain investments with Type III Knightian unknown probabilities. Uncertainty undertakers, investors in innovation, generate true or naïve profits and hence quality economic growth. Facing the ‘unknown' makes this investment type distinct; these investors must rely (to a degree significantly higher than their risk-return investor paradigm peers), on decision-making supported by behavioural (including non-rational choice theory) premises. This paper suggests that before encouraging endogenous Schumpeterian growth, policy-makers must first develop methods to measure this distinct economic activity associated with investment flows in the discrete uncertainty-(naïve) profit paradigm. Such investment flows have distinct properties (compared to classical risk-return investments) and are also constitutive of the investment spending function of national accounts. The Discrete Investment Theorem* postulates two types of investment classes. On one hand, the type of growth resulting from investment in inputs (capital and labour as specified in mainstream economic models). On the other hand, endogenous Schumpeterian growth resulting from innovation. That is, [I = I(u) + I(r)], where [I(r)] represents investment in risk-return projects and [I(u)] investment in uncertainty-profit projects. The GDP spending function [Y = C + I + G + NX] is also the result of past deconstruction (e.g., Marshall did not distinguish between consumer and investment spending). Entrepreneurship (including intra-preneurship, whether corporate or governmental) in its innovative high-growth variety, is the economic activity leading to endogenous growth, and at present it is not measured separately in economic models. In [I(u)] we have an independent (and actionable) variable standing for endogenous growth in econometric simulations. For China's economic policy-makers this approach to national income simulations, could yet be another method to manage the next stages of economic transformation towards an innovation-based economy relying on Schumpeterian growth.
Authors Casas Klett, Tomas
Journal or Publication Title China Studies Quarterly
Language English
Keywords Economic Growth; Investment Spending; Uncertainty; Innovation; China's Economic Transformation; Entrepreneurship, Schumpeter JEL Classification: E22; L26; D81; E27
Subjects economics
HSG Classification contribution to scientific community
Refereed Yes
Date 1 July 2014
Publisher Shanghai People's Publishing House
Place of Publication Shanghai, China
Number 4
Page Range 140-162
Number of Pages 23
Depositing User Dr. Tomas Casas Klett
Date Deposited 03 Jan 2015 21:37
Last Modified 20 Jul 2022 17:23
URI: https://www.alexandria.unisg.ch/publications/238143



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Casas Klett, Tomas (2014) ‘Uncertainty Over Risk' to Transform China's Growth : Theoretical Basis to Reassess Investment Spending in National Income Simulations. China Studies Quarterly, (4). 140-162.


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