Economic growth can be defined as the increase or improvement in the inflation-adjusted
market value
Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...
of the goods and services produced by an
economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
in a financial year. Statisticians conventionally measure such growth as the percent rate of increase in the real
gross domestic product
Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...
, or
real
Real may refer to:
Currencies
* Brazilian real (R$)
* Central American Republic real
* Mexican real
* Portuguese real
* Spanish real
* Spanish colonial real
Music Albums
* ''Real'' (L'Arc-en-Ciel album) (2000)
* ''Real'' (Bright album) (2010) ...
GDP.
Growth is usually calculated in real terms – i.e.,
inflation-adjusted terms – to eliminate the distorting effect of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
on the prices of
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...
produced.
Measurement of economic growth uses
national income accounting
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted nati ...
. Since economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. The economic growth-rates of countries are commonly compared using the ratio of the
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
to population (
per-capita income
The median income is the income amount that divides a population into two equal groups, half having an income above that amount, and half having an income below that amount. It may differ from the mean (or average) income. Both of these are ways of ...
).
The "rate of economic growth" refers to the
geometric annual rate of growth in GDP between the first and the last year over a period of time. This growth rate represents the trend in the average level of GDP over the period, and ignores any fluctuations in the GDP around this trend.
Economists refer to economic growth caused by more efficient use of inputs (increased
productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
of
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the la ...
, of
physical capital
Physical capital represents in economics one of the three primary factors of production. Physical capital is the apparatus used to produce a good and services. Physical capital represents the tangible man-made goods that help and support the produc ...
, of
energy
In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of heat a ...
or of
material
Material is a substance or mixture of substances that constitutes an object. Materials can be pure or impure, living or non-living matter. Materials can be classified on the basis of their physical and chemical properties, or on their geologi ...
s) as ''
intensive growth
In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and o ...
''. In contrast, GDP growth caused only by increases in the amount of inputs available for use (increased population, for example, or new territory) counts as ''
extensive growth Extensive growth, in economics, is growth in the quantity of output produced based on the expansion of the quantity of inputs used. It contrasts with intensive growth, which arises from inputs being used more productively. For example, GDP growth c ...
''.
Development of new goods and services also generates economic growth. As it so happens, in the U.S. about 60% of
consumer spending
Consumer spending is the total money spent on final goods and services by individuals and households.
There are two components of consumer spending: induced consumption (which is affected by the level of income) and autonomous consumption (which ...
in 2013 went on goods and services that did not exist in 1869.
Measurement
The economic growth rate is calculated from data on GDP estimated by countries'
statistical agencies. The rate of growth of GDP
per capita
''Per capita'' is a Latin phrase literally meaning "by heads" or "for each head", and idiomatically used to mean "per person". The term is used in a wide variety of social sciences and statistical research contexts, including government statistic ...
is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst.
Long-term growth
Living standards vary widely from country to country, and furthermore, the change in living standards over time varies widely from country to country. Below is a table which shows GDP per person and annualized per person GDP growth for a selection of countries over a period of about 100 years. The GDP per person data are adjusted for inflation, hence they are "
real
Real may refer to:
Currencies
* Brazilian real (R$)
* Central American Republic real
* Mexican real
* Portuguese real
* Spanish real
* Spanish colonial real
Music Albums
* ''Real'' (L'Arc-en-Ciel album) (2000)
* ''Real'' (Bright album) (2010) ...
". GDP per person (more commonly called "per capita" GDP) is the GDP of the entire country divided by the number of people in the country; GDP per person is conceptually analogous to "
average income
Per capita income (PCI) or total income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population.
Per capita i ...
".
Seemingly small differences in yearly GDP growth lead to large changes in GDP when
compounded over time. For instance, in the above table, GDP per person in the United Kingdom in the year 1870 was $4,808. At the same time in the United States, GDP per person was $4,007, lower than the UK by about 20%. However, in 2008 the positions were reversed: GDP per person was $36,130 in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
and $46,970 in the United States, i.e. GDP per person in the US was 30% more than it was in the UK. As the above table shows, this means that GDP per person grew, on average, by 1.80% per year in the US and by 1.47% in the UK. Thus, a difference in GDP growth by only a few tenths of a percent per year results in large differences in outcomes when the growth is persistent over a generation. This and other observations have led some economists to view GDP growth as the most important part of the field of
macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
:
Growth and innovation
![Creative Economics The system of economic growth in developed regions](https://upload.wikimedia.org/wikipedia/commons/b/ba/Creative_Economics_The_system_of_economic_growth_in_developed_regions.PNG)
It has been observed that GDP growth is influenced by the size of the economy. The relation between GDP growth and GDP across the countries at a particular point of time is convex. Growth increases with GDP reaches its maximum and then begins to decline. There exists some extremum value. This is not exactly middle-income trap. It is observed for both developed and developing economies. Actually, countries having this property belong to ''conventional growth domain''. However, the extremum could be extended by technological and policy innovations and some countries move into ''innovative growth domain'' with higher limiting values.
Determinants of per capita GDP growth
![Historic world GDP per capita](https://upload.wikimedia.org/wikipedia/commons/2/22/Historic_world_GDP_per_capita.svg)
In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input (labor productivity), hours worked (intensity), the percentage of the working-age population actually working (participation rate) and the proportion of the working-age population to the total population (demographics). "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."
Economists distinguish between long-run economic growth and short-run economic changes in
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
. Short-run variation in economic growth is termed the ''
business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
''. Generally, economists attribute the ups and downs in the business cycle to fluctuations in
aggregate demand
In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...
. In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation.
Productivity
Increases in labor
productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
(the ratio of the value of output to labor input) have historically been the most important source of real per capita economic growth.
In a famous estimate, MIT Professor
Robert Solow
Robert Merton Solow, GCIH (; born August 23, 1924) is an American economist whose work on the theory of economic growth culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Ma ...
concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.
Increases in productivity lower the real cost of goods. Over the 20th century the real price of many goods fell by over 90%.
Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation.
Further
division of labour
The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise (specialisation). Individuals, organizations, and nations are endowed with, or acquire specialised capabilities, and ...
(specialization) is also fundamental to rising productivity.
Before
industrialization
Industrialisation ( alternatively spelled industrialization) is the period of social and economic change that transforms a human group from an agrarian society into an industrial society. This involves an extensive re-organisation of an econo ...
technological progress resulted in an increase in the population, which was kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the
Malthusian trap
Malthusianism is the idea that population growth is potentially exponential while the growth of the food supply or other resources is linear, which eventually reduces living standards to the point of triggering a population die off. This event, c ...
.
The rapid economic growth that occurred during the
Industrial Revolution
The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe, and the United States, that occurred during the period from around 1760 to about 1820–1840. This transition included going f ...
was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized eventually saw their population growth slow down, a phenomenon known as the
demographic transition
In demography, demographic transition is a phenomenon and theory which refers to the historical shift from high birth rates and high death rates in societies with minimal technology, education (especially of women) and economic development, to l ...
.
Increases in productivity are the major factor responsible for per capita economic growth—this has been especially evident since the mid-19th century. Most of the economic growth in the 20th century was due to increased output per unit of labor, materials, energy, and land (less input per widget). The balance of the growth in output has come from using more inputs. Both of these changes increase output. The increased output included more of the same goods produced previously and new goods and services.
[Kendrick, J. W. 1961]
Productivity trends in the United States
," Princeton University Press
During the
Industrial Revolution
The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe, and the United States, that occurred during the period from around 1760 to about 1820–1840. This transition included going f ...
,
mechanization
Mechanization is the process of changing from working largely or exclusively by hand or with animals to doing that work with machinery. In an early engineering text a machine is defined as follows:
In some fields, mechanization includes the ...
began to replace hand methods in manufacturing, and new processes streamlined production of chemicals, iron, steel, and other products.
[
] Machine tool
A machine tool is a machine for handling or machining metal or other rigid materials, usually by cutting, boring, grinding, shearing, or other forms of deformations. Machine tools employ some sort of tool that does the cutting or shaping. All m ...
s made the economical production of metal parts possible, so that parts could be interchangeable.
(See:
Interchangeable parts
Interchangeable parts are parts ( components) that are identical for practical purposes. They are made to specifications that ensure that they are so nearly identical that they will fit into any assembly of the same type. One such part can freely r ...
.)
During the
Second Industrial Revolution
The Second Industrial Revolution, also known as the Technological Revolution, was a phase of rapid scientific discovery, standardization, mass production and industrialization from the late 19th century into the early 20th century. The Firs ...
, a major factor of
productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
growth was the substitution of inanimate power for human and animal labor. Also there was a great increase in power as steam-powered
electricity generation
Electricity generation is the process of generating electric power from sources of primary energy. For electric utility, utilities in the electric power industry, it is the stage prior to its Electricity delivery, delivery (Electric power transmi ...
and internal combustion supplanted limited wind and
water power
Hydropower (from el, ὕδωρ, "water"), also known as water power, is the use of falling or fast-running water to produce electricity or to power machines. This is achieved by converting the gravitational potential or kinetic energy of a wa ...
.
Since that replacement, the great expansion of total power was driven by continuous improvements in
energy conversion efficiency
Energy conversion efficiency (''η'') is the ratio between the useful output of an energy conversion machine and the input, in energy terms. The input, as well as the useful output may be chemical, electric power, mechanical work, light (radia ...
.
Other major
historical sources of productivity were
automation
Automation describes a wide range of technologies that reduce human intervention in processes, namely by predetermining decision criteria, subprocess relationships, and related actions, as well as embodying those predeterminations in machines ...
, transportation infrastructures (canals, railroads, and highways), new materials (steel) and power, which includes steam and internal combustion engines and
electricity
Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described ...
. Other
productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
improvements included
mechanized agriculture
Mechanised agriculture or agricultural mechanization is the use of machinery and equipment, ranging from simple and basic hand tools to more sophisticated, motorized equipment and machinery, to perform agricultural operations. In modern times, po ...
and scientific agriculture including chemical
fertilizer
A fertilizer (American English) or fertiliser (British English; see spelling differences) is any material of natural or synthetic origin that is applied to soil or to plant tissues to supply plant nutrients. Fertilizers may be distinct from ...
s and livestock and poultry management, and the
Green Revolution
The Green Revolution, also known as the Third Agricultural Revolution, was a period of technology transfer initiatives that saw greatly increased crop yields and agricultural production. These changes in agriculture began in developed countrie ...
.
Interchangeable parts
Interchangeable parts are parts ( components) that are identical for practical purposes. They are made to specifications that ensure that they are so nearly identical that they will fit into any assembly of the same type. One such part can freely r ...
made with
machine tool
A machine tool is a machine for handling or machining metal or other rigid materials, usually by cutting, boring, grinding, shearing, or other forms of deformations. Machine tools employ some sort of tool that does the cutting or shaping. All m ...
s powered by
electric motor
An electric motor is an Electric machine, electrical machine that converts electrical energy into mechanical energy. Most electric motors operate through the interaction between the motor's magnetic field and electric current in a Electromagneti ...
s evolved into
mass production
Mass production, also known as flow production or continuous production, is the production of substantial amounts of standardized products in a constant flow, including and especially on assembly lines. Together with job production and batch ...
, which is universally used today.
![Cost of chicken in time worked](https://upload.wikimedia.org/wikipedia/commons/7/72/Cost_of_chicken_in_time_worked.jpg)
Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled
reaper
A reaper is a agricultural machinery, farm implement or person that wikt:reap#Verb, reaps (cuts and often also gathers) crops at harvest when they are ripe. Usually the crop involved is a cereal grass. The first documented reaping machines were ...
s and
combine harvester
The modern combine harvester, or simply combine, is a versatile machine designed to efficiently harvest a variety of grain crops. The name derives from its combining four separate harvesting operations—reaping, threshing, gathering, and winnow ...
s, and
steam
Steam is a substance containing water in the gas phase, and sometimes also an aerosol of liquid water droplets, or air. This may occur due to evaporation or due to boiling, where heat is applied until water reaches the enthalpy of vaporization ...
-powered factories.
The invention of processes for making cheap
steel
Steel is an alloy made up of iron with added carbon to improve its strength and fracture resistance compared to other forms of iron. Many other elements may be present or added. Stainless steels that are corrosion- and oxidation-resistant ty ...
were important for many forms of
mechanization
Mechanization is the process of changing from working largely or exclusively by hand or with animals to doing that work with machinery. In an early engineering text a machine is defined as follows:
In some fields, mechanization includes the ...
and transportation. By the late 19th century both prices and weekly work hours fell because less labor, materials, and energy were required to produce and transport goods. However, real wages rose, allowing workers to improve their diet, buy consumer goods and afford better housing.
Mass production
Mass production, also known as flow production or continuous production, is the production of substantial amounts of standardized products in a constant flow, including and especially on assembly lines. Together with job production and batch ...
of the 1920s created
overproduction
In economics, overproduction, oversupply, excess of supply or glut refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment.
The de ...
, which was arguably one of several
causes of the Great Depression
The causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. The sp ...
of the 1930s. Following the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
, economic growth resumed, aided in part by increased demand for existing goods and services, such as automobiles, telephones, radios, electricity and household appliances. New goods and services included television, air conditioning and commercial aviation (after 1950), creating enough new demand to stabilize the work week. The building of highway infrastructures also contributed to post-World War II growth, as did capital investments in manufacturing and chemical industries. The post-World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the
Middle East
The Middle East ( ar, الشرق الأوسط, ISO 233: ) is a geopolitical region commonly encompassing Arabian Peninsula, Arabia (including the Arabian Peninsula and Bahrain), Anatolia, Asia Minor (Asian part of Turkey except Hatay Pro ...
. By
John W. Kendrick's estimate, three-quarters of increase in U.S. per capita GDP from 1889 to 1957 was due to increased productivity.
Economic growth in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
slowed down after 1973. In contrast, growth in
Asia
Asia (, ) is one of the world's most notable geographical regions, which is either considered a continent in its own right or a subcontinent of Eurasia, which shares the continental landmass of Afro-Eurasia with Africa. Asia covers an area ...
has been strong since then, starting with
Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
and spreading to
Four Asian Tigers
The Four Asian Tigers (also known as the Four Asian Dragons or Four Little Dragons in Chinese and Korean) are the developed East Asian economies of Hong Kong, Singapore, South Korea, and Taiwan. Between the early 1960s and 1990s, they underwent ra ...
,
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
,
Southeast Asia
Southeast Asia, also spelled South East Asia and South-East Asia, and also known as Southeastern Asia, South-eastern Asia or SEA, is the geographical United Nations geoscheme for Asia#South-eastern Asia, south-eastern region of Asia, consistin ...
, the
Indian subcontinent
The Indian subcontinent is a list of the physiographic regions of the world, physiographical region in United Nations geoscheme for Asia#Southern Asia, Southern Asia. It is situated on the Indian Plate, projecting southwards into the Indian O ...
and
Asia Pacific
Asia-Pacific (APAC) is the part of the world near the western Pacific Ocean. The Asia-Pacific region varies in area depending on context, but it generally includes East Asia, Russian Far East, South Asia, Southeast Asia, Australia and Pacific Is ...
.
In 1957
South Korea
South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
had a lower per capita
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
than
Ghana
Ghana (; tw, Gaana, ee, Gana), officially the Republic of Ghana, is a country in West Africa. It abuts the Gulf of Guinea and the Atlantic Ocean to the south, sharing borders with Ivory Coast in the west, Burkina Faso in the north, and To ...
, and by 2008 it was 17 times as high as Ghana's. The Japanese economic growth has slackened considerably since the late 1980s.
Productivity in the United States grew at an increasing rate throughout the 19th century and was most rapid in the early to middle decades of the 20th century.
U.S. productivity growth spiked towards the end of the century in 1996–2004, due to an acceleration in the rate of technological innovation known as
Moore's law
Moore's law is the observation that the number of transistors in a dense integrated circuit (IC) doubles about every two years. Moore's law is an observation and projection of a historical trend. Rather than a law of physics, it is an empir ...
.
After 2004 U.S. productivity growth returned to the low levels of 1972–96.
Factor accumulation
Capital in economics ordinarily refers to physical capital, which consists of structures (largest component of physical capital) and equipment used in business (machinery, factory equipment, computers and office equipment, construction equipment, business vehicles, medical equipment, etc.). Up to a point increases in the amount of capital per worker are an important cause of economic output growth. Capital is subject to
diminishing returns
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal ( ceteris paribu ...
because of the amount that can be effectively invested and because of the growing burden of depreciation. In the development of economic theory, the distribution of income was considered to be between labor and the owners of land and capital. In recent decades there have been several Asian countries with high rates of economic growth driven by capital investment.
The work week declined considerably over the 19th century. By the 1920s the average work week in the U.S. was 49 hours, but the work week was reduced to 40 hours (after which overtime premium was applied) as part of the
National Industrial Recovery Act
The National Industrial Recovery Act of 1933 (NIRA) was a US labor law and consumer law passed by the 73rd US Congress to authorize the president to regulate industry for fair wages and prices that would stimulate economic recovery. It also ...
of 1933.
Demographic factors may influence growth by changing the employment to population ratio and the labor force participation rate.
Industrialization
Industrialisation ( alternatively spelled industrialization) is the period of social and economic change that transforms a human group from an agrarian society into an industrial society. This involves an extensive re-organisation of an econo ...
creates a
demographic transition
In demography, demographic transition is a phenomenon and theory which refers to the historical shift from high birth rates and high death rates in societies with minimal technology, education (especially of women) and economic development, to l ...
in which birth rates decline and the average age of the population increases.
Women with fewer children and better access to market employment tend to join the labor force in higher percentages. There is a reduced demand for child labor and children spend more years in school. The increase in the percentage of women in the labor force in the U.S. contributed to economic growth, as did the entrance of the
baby boomer
Baby boomers, often shortened to boomers, are the Western demographic cohort following the Silent Generation and preceding Generation X. The generation is often defined as people born from 1946 to 1964, during the mid-20th century baby boom. T ...
s into the workforce.
See:
Spending wave
Other factors affecting growth
Human capital
Many theoretical and empirical analyses of economic growth attribute a major role to a country's level of
human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
, defined as the skills of the population or the work force. Human capital has been included in both neoclassical and endogenous growth models.
A country's level of human capital is difficult to measure since it is created at home, at school, and on the job. Economists have attempted to measure human capital using numerous proxies, including the population's level of literacy, its level of numeracy, its level of book production/capita, its average level of formal schooling, its average test score on international tests, and its cumulative depreciated investment in formal schooling. The most commonly-used measure of human capital is the level (average years) of school attainment in a country, building upon the data development of
Robert Barro
Robert Joseph Barro (born September 28, 1944) is an American macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. Barro is considered one of the founders of new classical macroeconomics, along with Robert Lucas, J ...
and Jong-Wha Lee. This measure is widely used because Barro and Lee provide data for numerous countries in five-year intervals for a long period of time.
One problem with the schooling attainment measure is that the amount of human capital acquired in a year of schooling is not the same at all levels of schooling and is not the same in all countries. This measure also presumes that human capital is only developed in formal schooling, contrary to the extensive evidence that families, neighborhoods, peers, and health also contribute to the development of human capital. Despite these potential limitations, Theodore Breton has shown that this measure can represent human capital in log-linear growth models because across countries GDP/adult has a log-linear relationship to average years of schooling, which is consistent with the log-linear relationship between workers' personal incomes and years of schooling in the
Mincer model.
Eric Hanushek
Eric Alan Hanushek (; born May 22, 1943) is an economist who has written prolifically on public policy with a special emphasis on the economics of education. Since 2000, he has been a Paul and Jean Hanna Senior Fellow at the Hoover Institution, a ...
and Dennis Kimko introduced measures of students' mathematics and science skills from international assessments into growth analysis. They found that this measure of human capital was very significantly related to economic growth. Eric Hanushek and
Ludger Wößmann
Ludger Wößmann (; born in Sendenhorst on July 1, 1973) is a German economist and professor of economics at the Ludwig Maximilian University of Munich (LMU). Moreover, being one of the world's foremost economics of education, education economis ...
have extended this analysis. Theodore Breton shows that the correlation between economic growth and students' average test scores in Hanushek and Wößmann's analyses is actually due to the relationship in countries with less than eight years of schooling. He shows that economic growth is not correlated with average scores in more educated countries.
Hanushek and Wößmann further investigate whether the relationship of knowledge capital to economic growth is causal. They show that the level of students' cognitive skills can explain the slow growth in Latin America and the rapid growth in East Asia.
Joerg Baten and
Jan Luiten van Zanden
Jan Luiten van Zanden (born 15 November 1955) is a Dutch economic historian and professor of Global Economic History at Utrecht University. He is a widely acknowledged specialist in Dutch, European and Global Economic History.
Career
Van Zand ...
employ book production per capita as a proxy for sophisticated literacy capabilities and find that "Countries with high levels of human capital formation in the 18th century initiated or participated in the industrialization process of the 19th century, whereas countries with low levels of human capital formation were unable to do so, among them many of today's Less Developed Countries such as India, Indonesia, and China."
Health
Here, health is approached as a functioning from
Amartya Sen
Amartya Kumar Sen (; born 3 November 1933) is an Indian economist and philosopher, who since 1972 has taught and worked in the United Kingdom and the United States. Sen has made contributions to welfare economics, social choice theory, econom ...
and
Martha Nussbaum
Martha Craven Nussbaum (; born May 6, 1947) is an American philosopher and the current Ernst Freund Distinguished Service Professor of Law and Ethics at the University of Chicago, where she is jointly appointed in the law school and the philosoph ...
's
Capability Approach
The capability approach (also referred to as the capabilities approach) is a normative approach to human welfare that concentrates on the actual capability of persons to achieve lives they value rather than solely having a right or freedom to d ...
that an individual has to realise the achievements like economic success. Thus health in a broader sense is not the absence of illness, but the opportunity for people to biologically develop to their full potential their entire lives
It is established that human capital is an important asset for economic growth, however, it can only be so if that population is healthy and well-nourished. One of the most important aspects of health is the mortality rate and how the rise or decline can affect the labour supply predominant in a developing economy.
Mortality decline triggers greater investments in individual human capital and an increase in economic growth.
Matteo Cervellati and
Uwe Sunde
Uwe Sunde (born in Garmisch-Partenkirchen on May 29, 1973) is a German economist and currently Professor of Economics at the Ludwig Maximilian University of Munich (LMU) as well as a Research Professor in the ifo Center for Labour and Demographi ...
and
Rodrigo.R Soares consider frameworks in which mortality decline has an influence on parents to have fewer children and to provide quality education for those children, as a result instituting an economic-demographic transition.
The relationship between health and economic growth is further nuanced by distinguishing the influence of specific diseases on
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
per capita from that of aggregate measures of
health
Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
, such as
life expectancy
Life expectancy is a statistical measure of the average time an organism is expected to live, based on the year of its birth, current age, and other demographic factors like sex. The most commonly used measure is life expectancy at birth ...
Thus, investing in health is warranted both from the growth and equity perspectives, given the important role played by health in the economy. Protecting health assets from the impact of systemic transitional costs on economic reforms, pandemics, economic crises and natural disasters is also crucial. Protection from the shocks produced by illness and death, are usually taken care of within a country’s social insurance system. In areas such as Sub-Saharan Africa, where the prevalence of
HIV and AIDS
Human immunodeficiency virus infection and acquired immunodeficiency syndrome (HIV/AIDS) is a spectrum of conditions caused by infection with the human immunodeficiency virus (HIV), a retrovirus. Following initial infection an individual m ...
, has a comparative negative impact on economical development. It will be interesting to see how research in the areas of health in near future uncover how the world will be performing living with the
SARS-CoV-2
Severe acute respiratory syndrome coronavirus 2 (SARS‑CoV‑2) is a strain of coronavirus that causes COVID-19 (coronavirus disease 2019), the respiratory illness responsible for the ongoing COVID-19 pandemic. The virus previously had a ...
, especially looking at the economic impacts it already has in a space of two years. Ultimately, when people live longer on average,
human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
expenditures are more likely to pay off, and all of these mechanisms center around the complementarity of longevity,
health
Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
, and
education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...
, for which there is ample empirical evidence.
Political institutions
“As institutions influence behavior and incentives in real life, they forge the success or failure of nations.”[.]
In economics and economic history, the transition to capitalism
Capitalism is an economic system based on the private ownership of the means of production and their operation for Profit (economics), profit. Central characteristics of capitalism include capital accumulation, competitive markets, pric ...
from earlier economic systems was enabled by the adoption of government policies that facilitated commerce and gave individuals more personal and economic freedom. These included new laws favorable to the establishment of business, including contract law and laws providing for the protection of private property, and the abolishment of anti-usury laws.
Much of this literature was built on the success story of the British state after the Glorious Revolution
The Glorious Revolution; gd, Rèabhlaid Ghlòrmhor; cy, Chwyldro Gogoneddus , also known as the ''Glorieuze Overtocht'' or ''Glorious Crossing'' in the Netherlands, is the sequence of events leading to the deposition of King James II and ...
of 1688, in which high fiscal capacity combined with constraints on the power of the king generated some respect for the rule of law. However, others have questioned that this institutional formula is not so easily replicable elsewhere as a change in the Constitution—and the type of institutions created by that change—does not necessarily create a change in political power if the economic powers of that society are not aligned with the new set of rule of law institutions. In England, a dramatic increase in the state's fiscal capacity followed the creation of constraints on the crown, but elsewhere in Europe increases in state capacity
State capacity is the ability of a government to accomplish policy goals, either generally or in reference to specific aims. A state that lacks capacity is defined as a fragile state or, in a more extreme case, a failed state. Higher state capacity ...
happened before major rule of law reforms.
There are many different ways through which states achieved state (fiscal) capacity and this different capacity accelerated or hindered their economic development. Thanks to the underlying homogeneity of its land and people, England was able to achieve a unified legal and fiscal system since the Middle Ages that enabled it to substantially increase the taxes it raised after 1689. On the other hand, the French experience of state building faced much stronger resistance from local feudal powers keeping it legally and fiscally fragmented until the French Revolution despite significant increases in state capacity during the seventeenth century. Furthermore, Prussia and the Habsburg empire—much more heterogeneous states than England—were able to increase state capacity during the eighteenth century without constraining the powers of the executive. Nevertheless, it is unlikely that a country will generate institutions that respect property rights and the rule of law without having had first intermediate fiscal and political institutions that create incentives for elites to support them. Many of these intermediate level institutions relied on informal private-order arrangements that combined with public-order institutions associated with states, to lay the foundations of modern rule of law states.
In many poor and developing countries much land and housing are held outside the formal or legal property ownership registration system. In many urban areas the poor "invade" private or government land to build their houses, so they do not hold title to these properties. Much unregistered property is held in informal form through various property associations and other arrangements. Reasons for extra-legal ownership include excessive bureaucratic red tape in buying property and building. In some countries, it can take over 200 steps and up to 14 years to build on government land. Other causes of extra-legal property are failures to notarize transaction documents or having documents notarized but failing to have them recorded with the official agency.[
]
Not having clear legal title to property limits its potential to be used as collateral to secure loans, depriving many poor countries of one of their most important potential sources of capital. Unregistered businesses and lack of accepted accounting methods are other factors that limit potential capital.
Businesses and individuals participating in unreported business activity and owners of unregistered property face costs such as bribes and pay-offs that offset much of any taxes avoided.
"Democracy Does Cause Growth", according to Acemoglu et al. Specifically, "democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public goods provision, and reducing social unrest." UNESCO
The United Nations Educational, Scientific and Cultural Organization is a specialized agency of the United Nations (UN) aimed at promoting world peace and security through international cooperation in education, arts, sciences and culture. It ...
and the United Nations
The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and international security, security, develop friendly relations among nations, achieve international cooperation, and be ...
also consider that cultural property
Cultural property does not have a universal definition, but it is commonly considered to be tangible (physical, material) items that are part of the cultural heritage of a group or society, as opposed to less tangible cultural expressions. They in ...
protection, high-quality education, cultural diversity and social cohesion in armed conflicts are particularly necessary for qualitative growth.
According to Daron Acemoglu
Kamer Daron Acemoğlu (; born September 3, 1967) is a Turkish-born American economist who has taught at the Massachusetts Institute of Technology (MIT) since 1993. He is currently the Elizabeth and James Killian Professor of Economics at MIT. H ...
, Simon Johnson and James Robinson, the positive correlation between high income and cold climate is a by-product of history. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where these colonizers faced high mortality rates (e.g., due to the presence of tropical diseases), they could not settle permanently, and they were thus more likely to establish extractive institutions, which persisted after independence; in places where they could settle permanently (e.g. those with temperate climates), they established institutions with this objective in mind and modeled them after those in their European homelands. In these 'neo-Europes' better institutions in turn produced better development outcomes. Thus, although other economists focus on the identity or type of legal system of the colonizers to explain institutions, these authors look at the environmental conditions in the colonies to explain institutions. For instance, former colonies have inherited corrupt governments and geopolitical boundaries (set by the colonizers) that are not properly placed regarding the geographical locations of different ethnic groups, creating internal disputes and conflicts that hinder development. In another example, societies that emerged in colonies without solid native populations established better property rights and incentives for long-term investment than those where native populations were large.
In ''Why Nations Fail'', Acemoglu and Robinson said that the English in North America started by trying to repeat the success of the Spanish Conquistador
Conquistadors (, ) or conquistadores (, ; meaning 'conquerors') were the explorer-soldiers of the Spanish and Portuguese Empires of the 15th and 16th centuries. During the Age of Discovery, conquistadors sailed beyond Europe to the Americas, O ...
s in extracting wealth (especially gold and silver) from the countries they had conquered. This system repeatedly failed for the English . Their successes rested on giving land and a voice in the government to every male settler to incentivize productive labor. In Virginia it took twelve years and many deaths from starvation before the governor decided to try democracy.
Entrepreneurs and new products
Policymakers and scholars frequently emphasize the importance of entrepreneurship for economic growth. However, surprisingly few research empirically examine and quantify entrepreneurship's impact on growth. This is due to endogeneity—forces that drive economic growth also drive entrepreneurship. In other words, the empirical analysis of the impact of entrepreneurship on growth is difficult because of the joint determination of entrepreneurship and economic growth. A few papers use quasi-experimental designs, and have found that entrepreneurship and the density of small businesses indeed have a causal impact on regional growth.
Another major cause of economic growth is the introduction of new products and services and the improvement of existing products. New products create demand, which is necessary to offset the decline in employment that occurs through labor-saving technology (and to a lesser extent employment declines due to savings in energy and materials). In the U.S. by 2013 about 60% of consumer spending was for goods and services that did not exist in 1869. Also, the creation of new services has been more important than invention of new goods.
Structural change
Economic growth in the U.S. and other developed countries went through phases that affected growth through changes in the labor force participation rate and the relative sizes of economic sectors. The transition from an agricultural economy to manufacturing increased the size of the sector with high output per hour (the high-productivity manufacturing sector), while reducing the size of the sector with lower output per hour (the lower productivity agricultural sector). Eventually high productivity growth in manufacturing reduced the sector size, as prices fell and employment shrank relative to other sectors. The service and government sectors, where output per hour and productivity growth is low, saw increases in their shares of the economy and employment during the 1990s. The public sector has since contracted, while the service economy expanded in the 2000s.
The structural change could also be viewed from another angle. It is possible to divide real economic growth into two components: an indicator of extensive economic growth—the ‘quantitative’ GDP—and an indicator of the improvement of the quality of goods and services—the ‘qualitative’ GDP.
Growth theories
Adam Smith
Adam Smith pioneered modern economic growth and performance theory in his book The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
'','' first published in 1776. For Smith, the main factors of economic growth are division of labour and capital accumulation. However, these are conditioned by what he calls "the extent of the market". This is conditioned notably by geographic factors but also institutional ones such as the political-legal environment.
Malthusian theory
Malthusianism is the idea that population growth is potentially exponential while the growth of the food supply or other resources is linear, which eventually reduces living standards to the point of triggering a population die off. The Malthusian theory also proposes that over most of human history technological progress caused larger population growth but had no impact on income per capita in the long run. According to the theory, while technologically advanced economies over this epoch were characterized by higher population density, their level of income per capita was not different from those among technologically regressed society.
The conceptual foundations of the Malthusian theory were formed by Thomas Malthus, and a modern representation of these approach is provided by Ashraf and Galor. In line with the predictions of the Malthusian theory, a cross-country analysis finds a significant positive effect of the technological level on population density and an insignificant effect on income per capita significantly over the years 1–1500.
Classical growth theory
In classical ( Ricardian) economics, the theory of production and the theory of growth are based on the theory of sustainability and law of variable proportions, whereby increasing either of the factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...
(labor or capital), while holding the other constant and assuming no technological change, will increase output, but at a diminishing rate that eventually will approach zero. These concepts have their origins in Thomas Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book '' An Essay on the Principle of Population'', Mal ...
’s theorizing about agriculture. Malthus's examples included the number of seeds harvested relative to the number of seeds planted (capital) on a plot of land and the size of the harvest from a plot of land versus the number of workers employed. (See also Diminishing returns
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal ( ceteris paribu ...
)
Criticisms of classical growth theory are that technology, an important factor in economic growth, is held constant and that economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
are ignored.
One popular theory in the 1940s was the big push model, which suggested that countries needed to jump from one stage of development to another through a virtuous cycle, in which large investments in infrastructure and education coupled with private investments would move the economy to a more productive stage, breaking free from economic paradigms appropriate to a lower productivity stage. The idea was revived and formulated rigorously, in the late 1980s by Kevin Murphy, Andrei Shleifer
Andrei Shleifer ( ; born February 20, 1961) is a Russian-American economist and Professor of Economics at Harvard University, where he has taught since 1991. Shleifer was awarded the biennial John Bates Clark Medal in 1999 for his seminal works in ...
and Robert Vishny
Robert Ward Vishny (born c. 1959) is an American economist and is the Myron S. Scholes Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He was the Eric J. Gleacher Distinguished Service Professor o ...
.
Solow–Swan model
Robert Solow
Robert Merton Solow, GCIH (; born August 23, 1924) is an American economist whose work on the theory of economic growth culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Ma ...
and Trevor Swan
Trevor Winchester Swan (14 January 1918 – 15 January 1989) was an Australian economist. He is best known for his work on the Solow–Swan growth model, published simultaneously by American economist Robert Solow, for his work on integrating i ...
developed what eventually became the main model used in growth economics in the 1950s. This model assumes that there are diminishing returns
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal ( ceteris paribu ...
to capital and labor. Capital accumulates through investment, but its level or stock continually decreases due to depreciation. Due to the diminishing returns to capital, with increases in capital/worker and absent technological progress, economic output/worker eventually reaches a point where capital per worker and economic output/worker remain constant because annual investment in capital equals annual depreciation. This condition is called the 'steady state'.
In the Solow–Swan model if productivity increases through technological progress, then output/worker increases even when the economy is in the steady state. If productivity increases at a constant rate, output/worker also increases at a related steady-state rate. As a consequence, growth in the model can occur either by increasing the share of GDP invested or through technological progress. But at whatever share of GDP invested, capital/worker eventually converges on the steady state, leaving the growth rate of output/worker determined only by the rate of technological progress. As a consequence, with world technology available to all and progressing at a constant rate, all countries have the same steady state rate of growth. Each country has a different level of GDP/worker determined by the share of GDP it invests, but all countries have the same rate of economic growth. Implicitly in this model rich countries are those that have invested a high share of GDP for a long time. Poor countries can become rich by increasing the share of GDP they invest. One important prediction of the model, mostly borne out by the data, is that of ''conditional convergence''; the idea that poor countries will grow faster and catch up with rich countries as long as they have similar investment (and saving) rates and access to the same technology.
The Solow–Swan model is considered an "exogenous" growth model because it does not explain why countries invest different shares of GDP in capital nor why technology improves over time. Instead, the rate of investment and the rate of technological progress are exogenous. The value of the model is that it predicts the pattern of economic growth once these two rates are specified. Its failure to explain the determinants of these rates is one of its limitations.
Although the rate of investment in the model is exogenous, under certain conditions the model implicitly predicts convergence in the rates of investment across countries. In a global economy with a global financial capital market, financial capital flows to the countries with the highest return on investment. In the Solow-Swan model countries with less capital/worker (poor countries) have a higher return on investment due to the diminishing returns to capital. As a consequence, capital/worker and output/worker in a global financial capital market should converge to the same level in all countries. Since historically financial capital has not flowed to the countries with less capital/worker, the basic Solow–Swan model has a conceptual flaw. Beginning in the 1990s, this flaw has been addressed by adding additional variables to the model that can explain why some countries are less productive than others and, therefore, do not attract flows of global financial capital even though they have less (physical) capital/worker.
In practice, convergence was rarely achieved. In 1957, Solow applied his model to data from the U.S. gross national product to estimate contributions. This showed that the increase in capital and labor stock only accounted for about half of the output, while the population increase adjustments to capital explained eighth. This remaining unaccounted growth output is known as the Solow Residual. Here the A of (t) "technical progress" was the reason for increased output. Nevertheless, the model still had flaws. It gave no room for policy to influence the growth rate. Few attempts were also made by the RAND Corporation the non-profit think tank and frequently visiting economist Kenneth Arrow to work out the kinks in the model. They suggested that new knowledge was indivisible and that it is endogenous with a certain fixed cost. Arrow's further explained that new knowledge obtained by firms comes from practice and built a model that "knowledge" accumulated through experience.
According to Harrod, the natural growth rate is the maximum rate of growth allowed by the increase of variables like population growth, technological improvement and growth in natural resources.
In fact, the natural growth rate is the highest attainable growth rate which would bring about the fullest possible employment of the resources existing in the economy.
Endogenous growth theory
Unsatisfied with the assumption of exogenous technological progress in the Solow–Swan model, economists worked to " endogenize" (i.e., explain it "from within" the models) productivity growth in the 1980s; the resulting endogenous growth theory
Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external forces. Endogenous growth theory holds that investment in human capital, innovation, and knowledge are significant contributors to econom ...
, most notably advanced by Robert Lucas, Jr.
Robert Emerson Lucas Jr. (born September 15, 1937) is an American economist at the University of Chicago, where he is currently the John Dewey Distinguished Service Professor Emeritus in Economics and the College. Widely regarded as the central ...
and his student Paul Romer
Paul Michael Romer (born November 6, 1955) is an American economist and policy entrepreneur who is a University Professor in Economics at New York University. Romer is best known as the former Chief Economist of the World Bank and for co-recei ...
, includes a mathematical explanation of technological advancement. This model
A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure.
Models c ...
also incorporated a new concept of human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
, the skills and knowledge that make workers productive. Unlike physical capital
Physical capital represents in economics one of the three primary factors of production. Physical capital is the apparatus used to produce a good and services. Physical capital represents the tangible man-made goods that help and support the produc ...
, human capital has increasing rates of return. Research done in this area has focused on what increases human capital (e.g. education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...
) or technological change (e.g. innovation
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...
). The quantity theory
A theory is a rational type of abstract thinking about a phenomenon, or the results of such thinking. The process of contemplative and rational thinking is often associated with such processes as observational study or research. Theories may be s ...
of endogenous productivity growth was proposed by Russian economist Vladimir Pokrovskii
Vladimir Nikolajevich Pokrovskii (russian: Влад’имир Никол’аевич Покр’овский; born 11 May 1934) is a Russian scientist known for his original contributions to polymer physics and economic theory. He was the found ...
. The theory explains growth as a consequence of the dynamics of three factors, among them a technological chracteristis of production equipment, without any arbitrary parameters, which makes it possible to reproduce historical rates of economic growth with considerable precision.
On Memorial Day weekend in 1988, a conference in Buffalo brought together the great minds in economics the idea was to evaluate the conflicting theories of growth. Romer, Krugman, Barro, Becker were in attendance along with many other rising stars and high profiled economists of the time. Amongst many papers that day the one that stood out was Romer's "Micro Foundations for Aggregate Technological Change." The Micro Foundation claimed that endogenous technological change had the concept of Intellectual Property imbedded and that knowledge is an input and output of production. Romer argued that outcomes to the national growth rates were significantly affected by public policy, trade activity, and intellectual property. He stressed that cumulative capital and specialization were key, and that not only population growth can increase capital of knowledge, it was human capital that is specifically trained in harvesting new ideas.
While intellectual property may be important, Baker (2016) cites multiple sources claiming that "stronger patent protection seems to be associated with slower growth". That's particularly true for patents in the ethical health care industry. In effect taxpayers pay twice for new drugs and diagnostic procedures: First in tax subsidies and second for the high prices of diagnostic procedures treatments. If the results of research paid by taxpayers were placed in the public domain, Baker claims that people everywhere would be healthier, because better diagnoses and treatment would be more affordable the world over.
One branch of endogenous growth theory was developed on the foundations of the Schumpeterian theory, named after the 20th-century Austrian
Austrian may refer to:
* Austrians, someone from Austria or of Austrian descent
** Someone who is considered an Austrian citizen, see Austrian nationality law
* Austrian German dialect
* Something associated with the country Austria, for example: ...
economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
Joseph Schumpeter
Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at Ha ...
. The approach explains growth as a consequence of innovation
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...
and a process of creative destruction that captures the dual nature of technological progress: in terms of creation, entrepreneurs introduce new products or processes in the hope that they will enjoy temporary monopoly-like profits as they capture markets. In doing so, they make old technologies or products obsolete. This can be seen as an ''annulment'' of previous technologies, which makes them obsolete, and "destroys the rents generated by previous innovations". A major model that illustrates Schumpeterian growth
Creative destruction (German: ''schöpferische Zerstörung'') is a concept in economics which since the 1950s is the most readily identified with the Austrian-born economist Joseph Schumpeter who derived it from the work of Karl Marx and popu ...
is the .
Unified growth theory
Unified growth theory
Unified growth theory was developed in light of the failure of endogenous growth theory to capture key empirical regularities in the growth processes and their contribution to the momentous rise in Economic inequality, inequality across nations in ...
was developed by Oded Galor
Oded Galor (born 1953) is an Israeli-American economist who is currently Herbert H. Goldberger Professor of Economics at Brown University. He is the founder of unified growth theory. Galor has contributed to the understanding of process of devel ...
and his co-authors to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole.[Galor O., 2005, "From Stagnation to Growth: Unified Growth Theory". ''Handbook of Economic Growth'', Elsevier ] Unlike endogenous growth theory that focuses entirely on the modern growth regime and is therefore unable to explain the roots of inequality across nations, unified growth theory captures in a single framework the fundamental phases of the process of development in the course of human history: (i) the Malthusian epoch that was prevalent over most of human history, (ii) the escape from the Malthusian trap
Malthusianism is the idea that population growth is potentially exponential while the growth of the food supply or other resources is linear, which eventually reduces living standards to the point of triggering a population die off. This event, c ...
, (iii) the emergence of human capital as a central element in the growth process, (iv) the onset of the fertility decline, (v) the origins of the modern era of sustained economic growth, and (vi) the roots of divergence in income per capita across nations in the past two centuries. The theory suggests that during most of human existence, technological progress was offset by population growth, and living standards were near subsistence across time and space. However, the reinforcing interaction between the rate of technological progress and the size and composition of the population has gradually increased the pace of technological progress, enhancing the importance of education in the ability of individuals to adapt to the changing technological environment. The rise in the allocation of resources towards education triggered a fertility decline enabling economies to allocate a larger share of the fruits of technological progress to a steady increase in income per capita, rather than towards the growth of population, paving the way for the emergence of sustained economic growth. The theory further suggests that variations in biogeographical characteristics, as well as cultural and institutional characteristics, have generated a differential pace of transition from stagnation to growth across countries and consequently divergence in their income per capita over the past two centuries.
Inequality and growth
Theories
The prevailing views about the role of inequality in the growth process has radically shifted in the past century.
The classical perspective, as expressed by Adam Smith, and others, suggests that inequality fosters the growth process. Specifically, since the aggregate saving increases with inequality due to higher property to save among the wealthy, the classical viewpoint suggests that inequality stimulates capital accumulation and therefore economic growth.
The Neoclassical perspective that is based on representative agent
Economists use the term representative agent to refer to the typical decision-maker of a certain type (for example, the typical consumer, or the typical firm).
More technically, an economic model is said to have a representative agent if all agen ...
approach denies the role of inequality in the growth process. It suggests that while the growth process may affect inequality, income distribution has no impact on the growth process.
The modern perspective which has emerged in the late 1980s suggests, in contrast, that income distribution
In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes eco ...
has a significant impact on the growth process. The modern perspective, originated by Galor and Zeira, highlights the important role of heterogeneity
Homogeneity and heterogeneity are concepts often used in the sciences and statistics relating to the uniformity of a substance or organism. A material or image that is homogeneous is uniform in composition or character (i.e. color, shape, siz ...
in the determination of aggregate economic activity, and economic growth. In particular, Galor and Zeira argue that since credit markets are imperfect, inequality has an enduring impact on human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
formation, the level of income per capita, and the growth process. In contrast to the classical paradigm, which underlined the positive implications of inequality for capital formation and economic growth, Galor and Zeira argue that inequality
Inequality may refer to:
Economics
* Attention inequality, unequal distribution of attention across users, groups of people, issues in etc. in attention economy
* Economic inequality, difference in economic well-being between population groups
* ...
has an adverse effect on human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
formation and the development process, in all but the very poor economies.
Later theoretical developments have reinforced the view that inequality has an adverse effect on the growth process. Specifically, Alesina and Rodrik and Persson and Tabellini advance a political economy mechanism and argue that inequality has a negative impact on economic development since it creates a pressure for distortionary redistributive policies that have an adverse effect on investment and economic growth.
In accordance with the credit market imperfection approach, a study by Roberto Perotti showed that inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. In contrast, his examination of the political economy channel found no support for the political economy mechanism. Consequently, the political economy perspective on the relationship between inequality and growth have been revised and later studies have established that inequality may provide an incentive for the elite to block redistributive policies and institutional changes. In particular, inequality in the distribution of land ownership provides the landed elite with an incentive to limit the mobility of rural workers by depriving them from education and by blocking the development of the industrial sector.
A unified theory of inequality and growth that captures that changing role of inequality in the growth process offers a reconciliation between the conflicting predictions of classical viewpoint that maintained that inequality is beneficial for growth and the modern viewpoint that suggests that in the presence of credit market imperfections, inequality predominantly results in underinvestment in human capital and lower economic growth. This unified theory of inequality and growth, developed by Oded Galor and Omer Moav, suggests that the effect of inequality on the growth process has been reversed as human capital has replaced physical capital as the main engine of economic growth. In the initial phases of industrialization, when physical capital accumulation was the dominating source of economic growth, inequality boosted the development process by directing resources toward individuals with higher propensity to save. However, in later phases, as human capital become the main engine of economic growth, more equal distribution of income, in the presence of credit constraints, stimulated investment in human capital and economic growth.
In 2013, French economist Thomas Piketty
Thomas Piketty (; born 7 May 1971) is a French economist who is Professor of Economics at the School for Advanced Studies in the Social Sciences, Associate Chair at the Paris School of Economics and Centennial Professor of Economics in the I ...
postulated that in periods when the average annual rate on return on investment in capital (''r'') exceeds the average annual growth in economic output (''g''), the rate of inequality will increase. According to Piketty, this is the case because wealth that is already held or inherited, which is expected to grow at the rate ''r'', will grow at a rate faster than wealth accumulated through labor, which is more closely tied to ''g''. An advocate of reducing inequality levels, Piketty suggests levying a global wealth tax
A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownershi ...
in order to reduce the divergence in wealth caused by inequality.
Evidence: reduced form
The reduced form empirical relationship between inequality and growth was studied by Alberto Alesina and Dani Rodrik, and Torsten Persson and Guido Tabellini. They find that inequality is negatively associated with economic growth in a cross-country analysis.
Robert Barro
Robert Joseph Barro (born September 28, 1944) is an American macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. Barro is considered one of the founders of new classical macroeconomics, along with Robert Lucas, J ...
reexamined the reduced form relationship between inequality on economic growth in a panel of countries. He argues that there is "little overall relation between income inequality and rates of growth and investment". However, his empirical strategy limits its applicability to the understanding of the relationship between inequality and growth for several reasons. First, his regression analysis control for education, fertility, investment, and it therefore excludes, by construction, the important effect of inequality on growth via education, fertility, and investment. His findings simply imply that inequality has no direct effect on growth beyond the important indirect effects through the main channels proposed in the literature. Second, his study analyzes the effect of inequality on the average growth rate in the following 10 years. However, existing theories suggest that the effect of inequality will be observed much later, as is the case in human capital formation, for instance. Third, the empirical analysis does not account for biases that are generated by reverse causality and omitted variables.
Recent papers based on superior data, find negative relationship between inequality and growth. Andrew Berg and Jonathan Ostry of the International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
, find that "lower net inequality is robustly correlated with faster and more durable growth, controlling for the level of redistribution". Likewise, Dierk Herzer and Sebastian Vollmer find that increased income inequality reduces economic growth.
Evidence: mechanisms
The Galor and Zeira's model predicts that the effect of rising inequality on GDP per capita is negative in relatively rich countries but positive in poor countries. These testable predictions have been examined and confirmed empirically in recent studies. In particular, Brückner and Lederman test the prediction of the model by in the panel of countries during the period 1970–2010, by considering the impact of the interaction between the level of income inequality and the initial level of GDP per capita. In line with the predictions of the model, they find that at the 25th percentile of initial income in the world sample, a 1 percentage point increase in the Gini coefficient increases income per capita by 2.3%, whereas at the 75th percentile of initial income a 1 percentage point increase in the Gini coefficient decreases income per capita by -5.3%. Moreover, the proposed human capital mechanism that mediates the effect of inequality on growth in the Galor-Zeira model is also confirmed. Increases in income inequality increase human capital in poor countries but reduce it in high and middle-income countries.
This recent support for the predictions of the Galor-Zeira model is in line with earlier findings. Roberto Perotti showed that in accordance with the credit market imperfection approach, developed by Galor and Zeira, inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while lower level of human capital is associated with lower levels of economic growth. Princeton economist Roland Benabou's finds that the growth process of Korea and the Philippines "are broadly consistent with the credit-constrained human-capital accumulation hypothesis". In addition, Andrew Berg and Jonathan Ostry suggest that inequality seems to affect growth through human capital accumulation and fertility channels.
In contrast, Perotti argues that the political economy mechanism is not supported empirically. Inequality is associated with lower redistribution, and lower redistribution (under-investment in education and infrastructure) is associated with lower economic growth.
Importance of long-run growth
Over long periods of time, even small rates of growth
Growth may refer to:
Biology
* Auxology, the study of all aspects of human physical growth
* Bacterial growth
* Cell growth
* Growth hormone, a peptide hormone that stimulates growth
* Human development (biology)
* Plant growth
* Secondary growth ...
, such as a 2% annual increase, have large effects. For example, the United Kingdom experienced a 1.97% average annual increase in its inflation-adjusted GDP between 1830 and 2008. In 1830, the GDP was 41,373 million pounds. It grew to 1,330,088 million pounds by 2008. A growth rate that averaged 1.97% over 178 years resulted in a 32-fold increase in GDP by 2008.
The large impact of a relatively small growth rate over a long period of time is due to the power of exponential growth
Exponential growth is a process that increases quantity over time. It occurs when the instantaneous rate of change (that is, the derivative) of a quantity with respect to time is proportional to the quantity itself. Described as a function, a q ...
. The rule of 72
In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating an investment's doubling time. The rule number (e.g., 72) is divided by the interest percentage per period (usually years) to obtain the approximate numb ...
, a mathematical result, states that if something grows at the rate of x% per year, then its level will double every 72/x years. For example, a growth rate of 2.5% per annum leads to a doubling of the GDP within 28.8 years, whilst a growth rate of 8% per year leads to a doubling of GDP within nine years. Thus, a small difference in economic growth rates between countries can result in very different standards of living for their populations if this small difference continues for many years.
Quality of life
One theory that relates economic growth with quality of life is the "Threshold Hypothesis", which states that economic growth up to a point brings with it an increase in quality of life. But at that point – called the threshold point – further economic growth can bring with it a deterioration in quality of life. This results in an upside-down-U-shaped curve, where the vertex of the curve represents the level of growth that should be targeted. Happiness has been shown to increase with GDP per capita
Lists of countries by GDP per capita list the countries in the world by their gross domestic product (GDP) per capita. The lists may be based on nominal or purchasing power parity GDP. Gross national income (GNI) per capita accounts for inflows ...
, at least up to a level of $15,000 per person.
Economic growth has the indirect potential to alleviate poverty
Poverty is the state of having few material possessions or little income. Poverty can have diverse social, economic, and political causes and effects. When evaluating poverty in ...
, as a result of a simultaneous increase in employment opportunities and increased labor productivity
Workforce productivity is the amount of goods and services that a group of workers produce in a given amount of time. It is one of several types of productivity that economists measure. Workforce productivity, often referred to as labor product ...
.[Claire Melamed, Renate Hartwig and Ursula Grant 2011]
Jobs, growth and poverty: what do we know, what don't we know, what should we know?
London: Overseas Development Institute
ODI (formerly the 'Overseas Development Institute') is a global affairs think tank, founded in 1960. Its mission is "to inspire people to act on injustice and inequality through collaborative research and ideas that matter for people and the p ...
A study by researchers at the Overseas Development Institute
ODI (formerly the 'Overseas Development Institute') is a global affairs think tank, founded in 1960. Its mission is "to inspire people to act on injustice and inequality through collaborative research and ideas that matter for people and the p ...
(ODI) of 24 countries that experienced growth found that in 18 cases, poverty was alleviated.
In some instances, quality of life factors such as healthcare outcomes and educational attainment, as well as social and political liberties, do not improve as economic growth occurs.
Productivity increases do not always lead to increased wages, as can be seen in the United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, where the gap between productivity and wages has been rising since the 1980s.
Equitable growth
While acknowledging the central role economic growth can potentially play in human development Human development may refer to:
* Development of the human body
* Developmental psychology
* Human development (economics)
* Human Development Index, an index used to rank countries by level of human development
* Human evolution, the prehistoric ...
, poverty reduction
Poverty reduction, poverty relief, or poverty alleviation, is a set of measures, both economic and humanitarian, that are intended to permanently lift people out of poverty.
Measures, like those promoted by Henry George in his economics clas ...
and the achievement of the Millennium Development Goals
The Millennium Development Goals (MDGs) were eight international development goals for the year 2015 that had been established following the Millennium Summit of the United Nations in 2000, following the adoption of the United Nations Millenniu ...
, it is becoming widely understood amongst the development community that special efforts must be made to ensure poorer sections of society are able to participate in economic growth.[Claire Melamed, Kate Higgins and Andy Sumner (2010]
Economic growth and the MDGs
Overseas Development Institute
ODI (formerly the 'Overseas Development Institute') is a global affairs think tank, founded in 1960. Its mission is "to inspire people to act on injustice and inequality through collaborative research and ideas that matter for people and the p ...
The effect of economic growth on poverty reduction – the growth elasticity of poverty Growth elasticity of poverty (GEP) is the percentage reduction in poverty rates associated with a percentage change in per capita income, mean (per capita) income.
Mathematically;
: \mathrm=-\frac \,
where PR is a poverty measure and ''y'' is ...
– can depend on the existing level of inequality. For instance, with low inequality a country with a growth rate of 2% per head and 40% of its population living in poverty, can halve poverty in ten years, but a country with high inequality would take nearly 60 years to achieve the same reduction. In the words of the Secretary General
Secretary is a title often used in organizations to indicate a person having a certain amount of authority, power, or importance in the organization. Secretaries announce important events and communicate to the organization. The term is derived ...
of the United Nations Ban Ki-Moon
Ban Ki-moon (; ; born 13 June 1944) is a South Korean politician and diplomat who served as the eighth secretary-general of the United Nations between 2007 and 2016. Prior to his appointment as secretary-general, Ban was his country's Minister ...
: "While economic growth is necessary, it is not sufficient for progress on reducing poverty."
Critics such as the
Club of Rome
The Club of Rome is a nonprofit, informal organization of intellectuals and business leaders whose goal is a critical discussion of pressing global issues. The Club of Rome was founded in 1968 at Accademia dei Lincei in Rome, Italy. It consists ...
argue that a narrow view of economic growth, combined with globalization, is creating a scenario where we could see a systemic collapse of our planet's natural resources.
Concerns about negative environmental effects of growth have prompted some people to advocate lower levels of growth, or the abandoning of growth altogether. In academia, concepts like uneconomic growth
Uneconomic growth is economic growth that reflects or creates a decline in the quality of life. The concept is used in human development theory, welfare theory, and ecological economics. It is usually attributed to ecological economist Her ...
, steady-state economy
A steady-state economy is an economy made up of a constant stock of physical wealth (capital) and a constant population size. In effect, such an economy does not grow in the course of time. The term usually refers to the national economy o ...
and degrowth have been developed in order to achieve this and to overcome possible growth imperative
Growth imperative is a term in economic theory regarding a possible necessity of economic growth. On the micro level, it describes mechanisms that force firms or consumers (households) to increase revenues or consumption to not endanger their in ...
s. In politics, green parties
A green party is a formally organized political party based on the principles of green politics, such as social justice, environmentalism and nonviolence.
Greens believe that these issues are inherently related to one another as a foundation f ...
embrace the Global Greens Charter
The ''Global Greens Charter'' is a document that 800 delegates from the Green parties of 72 countries decided upon a first gathering of the Global Greens in Canberra, Australia in April 2001. The first part contains six guiding principles, whereas ...
, recognising that "... the dogma of economic growth at any cost and the excessive and wasteful use of natural resources without considering Earth's carrying capacity, are causing extreme deterioration in the environment and a massive extinction of species."
The 2019 '''' published by the United Nations
The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and international security, security, develop friendly relations among nations, achieve international cooperation, and be ...
' warned that given the substantial loss of biodiversity, society should not focus solely on economic growth. Anthropologist Eduardo S. Brondizio, one of the co-chairs of the report, said "We need to change our narratives. Both our individual narratives that associate wasteful consumption with quality of life and with status, and the narratives of the economic systems that still consider that environmental degradation and social inequality are inevitable outcomes of economic growth. Economic growth is a means and not an end. We need to look for the quality of life of the planet."
Those more optimistic about the environmental impacts of growth believe that, though localized environmental effects may occur, large-scale ecological effects are minor. The argument, as stated by commentator Julian Lincoln Simon
Julian Lincoln Simon (February 12, 1932 – February 8, 1998) was an American professor of business administration at the University of Maryland and a Senior Fellow at the Cato Institute at the time of his death, after previously serving as a ...
, states that if these global-scale ecological effects exist, human ingenuity will find ways to adapt to them. Conversely Partha Dasgupta
Sir Partha Sarathi Dasgupta (born on 17 November 1942), is an Indian-British economist who is the Frank Ramsey Professor Emeritus of Economics at the University of Cambridge, United Kingdom and Fellow of St John's College, Cambridge.
Personal ...
, in a 2021 report on the economics of biodiversity commissioned by the British Treasury, argues that biodiversity is collapsing faster than at any time in human history as a result of the demands of contemporary human civilization, which "far exceed nature's capacity to supply us with the goods and services we all rely on. We would require 1.6 Earths to maintain the world's current living standards." He says that major transformative changes will be needed "akin to, or even greater than, those of the Marshall Plan," including abandoning GDP as a measure of economic success and societal progress.
In 2019, a warning on climate change signed by 11,000 scientists from over 150 nations said economic growth is the driving force behind the "excessive extraction of materials and overexploitation
Overexploitation, also called overharvesting, refers to harvesting a renewable resource to the point of diminishing returns. Continued overexploitation can lead to the destruction of the resource, as it will be unable to replenish. The term app ...
of ecosystems" and that this "must be quickly curtailed to maintain long-term sustainability of the biosphere." They add that "our goals need to shift from GDP growth and the pursuit of affluence toward sustaining ecosystems and improving human well-being by prioritizing basic needs and reducing inequality." A 2021 paper authored by top scientists in ''Frontiers in Conservation Science'' posited that given the environmental crises including biodiversity loss
Biodiversity loss includes the worldwide extinction of different species, as well as the local reduction or loss of species in a certain habitat, resulting in a loss of biological diversity. The latter phenomenon can be temporary or permanent, de ...
and climate change
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
, and possible "ghastly future" facing humanity, there must be "fundamental changes to global capitalism," including the "abolition of perpetual economic growth."
Global warming
Up to the present, there is a close correlation between economic growth and the rate of carbon dioxide emissions
Greenhouse gas emissions from human activities strengthen the greenhouse effect, contributing to climate change. Most is carbon dioxide from burning fossil fuels: coal, oil, and natural gas. The largest emitters include coal in China and lar ...
across nations, although there is also a considerable divergence in carbon intensity
An emission intensity (also carbon intensity or C.I.) is the emission rate of a given pollutant relative to the intensity of a specific activity, or an industrial production process; for example grams of carbon dioxide released per megajoule ...
(carbon emissions per GDP). Up to the present, there is also a direct relation between global economic wealth and the rate of global emissions. The Stern Review
The Stern Review on the Economics of Climate Change is a 700-page report released for the Government of the United Kingdom on 30 October 2006 by economist Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environm ...
notes that the prediction that, "Under business as usual, global emissions will be sufficient to propel greenhouse gas concentrations to over 550 ppm by 2050 and over 650–700 ppm by the end of this century is robust to a wide range of changes in model assumptions." The scientific consensus is that planetary ecosystem functioning without incurring dangerous risks requires stabilization at 450–550 ppm.
As a consequence, growth-oriented environmental economists propose government intervention into switching sources of energy production, favouring wind
Wind is the natural movement of air or other gases relative to a planet's surface. Winds occur on a range of scales, from thunderstorm flows lasting tens of minutes, to local breezes generated by heating of land surfaces and lasting a few hou ...
, solar, hydroelectric
Hydroelectricity, or hydroelectric power, is electricity generated from hydropower (water power). Hydropower supplies one sixth of the world's electricity, almost 4500 TWh in 2020, which is more than all other renewable sources combined and ...
, and nuclear
Nuclear may refer to:
Physics
Relating to the nucleus of the atom:
* Nuclear engineering
*Nuclear physics
*Nuclear power
*Nuclear reactor
*Nuclear weapon
*Nuclear medicine
*Radiation therapy
*Nuclear warfare
Mathematics
*Nuclear space
*Nuclear ...
. This would largely confine use of fossil fuels to either domestic cooking needs (such as for kerosene burners) or where carbon capture and storage
Carbon capture and storage (CCS) or carbon capture and sequestration is the process of capturing carbon dioxide (CO2) before it enters the atmosphere, transporting it, and storing it (carbon sequestration) for centuries or millennia. Usually th ...
technology can be cost-effective and reliable. The Stern Review
The Stern Review on the Economics of Climate Change is a 700-page report released for the Government of the United Kingdom on 30 October 2006 by economist Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environm ...
, published by the United Kingdom Government in 2006, concluded that an investment of 1% of GDP (later changed to 2%) would be sufficient to avoid the worst effects of climate change, and that failure to do so could risk climate-related costs equal to 20% of GDP. Because carbon capture and storage are as yet widely unproven, and its long term effectiveness (such as in containing carbon dioxide 'leaks') unknown, and because of current costs of alternative fuels, these policy responses largely rest on faith of technological change.
British conservative politician and journalist Nigel Lawson
Nigel Lawson, Baron Lawson of Blaby, (born 11 March 1932) is a British Conservative Party politician and journalist. He was a Member of Parliament representing the constituency of Blaby from 1974 to 1992, and served in the cabinet of Margaret ...
has deemed carbon emission trading
Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG) is a form of carbon pricing; also known as cap and trade (CAT) or carbon pricing. It is an approach to limit climate change by creating a market with limited ...
an 'inefficient system of rationing
Rationing is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resources being distributed on a particular ...
'. Instead, he favours carbon tax
A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more sev ...
es to make full use of the efficiency of the market. However, in order to avoid the migration of energy-intensive industries, the whole world should impose such a tax, not just Britain, Lawson pointed out. There is no point in taking the lead if nobody follows suit.
Resource constraint
Many earlier predictions of resource depletion, such as Thomas Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book '' An Essay on the Principle of Population'', Mal ...
' 1798 predictions about approaching famines in Europe, ''The Population Bomb
''The Population Bomb'' is a 1968 book co-authored by Stanford University Professor emeritus Paul R. Ehrlich and Stanford senior researcher emeritus in conservation biology Anne Howland Ehrlich. It predicted worldwide famine due to overpopulati ...
'', and the Simon–Ehrlich wager The Simon–Ehrlich wager was a 1980 scientific wager between business professor Julian L. Simon and biologist Paul Ehrlich, betting on a mutually agreed-upon measure of resource scarcity over the decade leading up to 1990. The widely-followed con ...
(1980) have not materialized. Diminished production of most resources has not occurred so far, one reason being that advancements in technology and science have allowed some previously unavailable resources to be produced. In some cases, substitution of more abundant materials, such as plastics for cast metals, lowered growth of usage for some metals. In the case of the limited resource of land, famine was relieved firstly by the revolution in transportation caused by railroads and steam ships, and later by the Green Revolution
The Green Revolution, also known as the Third Agricultural Revolution, was a period of technology transfer initiatives that saw greatly increased crop yields and agricultural production. These changes in agriculture began in developed countrie ...
and chemical fertilizers, especially the Haber process
The Haber process, also called the Haber–Bosch process, is an artificial nitrogen fixation process and is the main industrial procedure for the production of ammonia today. It is named after its inventors, the German chemists Fritz Haber and C ...
for ammonia synthesis.[Opening line of the Preface.]
Resource quality is composed of a variety of factors including ore grades, location, altitude above or below sea level, proximity to railroads, highways, water supply and climate. These factors affect the capital and operating cost of extracting resources. In the case of minerals, lower grades of mineral resources are being extracted, requiring higher inputs of capital and energy for both extraction and processing. Copper
Copper is a chemical element with the symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pinkis ...
ore grades have declined significantly over the last century. Another example is natural gas
Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbo ...
from shale and other low permeability rock, whose extraction requires much higher inputs of energy, capital, and materials than conventional gas in previous decades. Offshore oil and gas have exponentially increased cost as water depth increases.
Some physical scientists like Sanyam Mittal regard continuous economic growth
Growth may refer to:
Biology
* Auxology, the study of all aspects of human physical growth
* Bacterial growth
* Cell growth
* Growth hormone, a peptide hormone that stimulates growth
* Human development (biology)
* Plant growth
* Secondary growth ...
as unsustainable. Several factors may constrain economic growth – for example: finite, peaked, or depleted resources.
In 1972, ''The Limits to Growth
''The Limits to Growth'' (''LTG'') is a 1972 report that discussed the possibility of exponential economic and population growth with finite supply of resources, studied by computer simulation. The study used the World3 computer model to simula ...
'' study modeled limitations to infinite growth; originally ridiculed, some of the predicted trends have materialized, raising concerns of an impending collapse
Collapse or its variants may refer to:
Concepts
* Collapse (structural)
* Collapse (topology), a mathematical concept
* Collapsing manifold
* Collapse, the action of collapsing or telescoping objects
* Collapsing user interface elements
** ...
or decline due to resource constraints.
''Malthusians'' such as William R. Catton, Jr. are skeptical of technological advances that improve resource availability. Such advances and increases in efficiency, they suggest, merely accelerate the drawing down of finite resources. Catton claims that increasing rates of resource extraction are "...stealing ravenously from the future".
Energy
Energy economic theories hold that rates of energy consumption and energy efficiency are linked causally to economic growth. The Garrett Relation holds that there has been a fixed relationship between current rates of global energy consumption and the historical accumulation of world GDP, independent of the year considered. It follows that economic growth, as represented by GDP growth, requires higher rates of energy consumption growth. Seemingly paradoxically, these are sustained through increases in energy efficiency. Increases in energy efficiency were a portion of the increase in Total factor productivity
In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs. Under some simplifying assumptions about the production technology, growt ...
. Some of the most technologically important innovations in history involved increases in energy efficiency. These include the great improvements in efficiency of conversion of heat to work, the reuse of heat, the reduction in friction and the transmission of power, especially through electrification
Electrification is the process of powering by electricity and, in many contexts, the introduction of such power by changing over from an earlier power source.
The broad meaning of the term, such as in the history of technology, economic histor ...
. There is a strong correlation between per capita electricity consumption and economic development.
Possibility of infinite economic growth
Ecological economics criticizes the possibility of infinite economic growth. Current economic models
In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework desig ...
suggest the economy can grow continuously as a perpetual motion machine
Perpetual motion is the motion of bodies that continues forever in an unperturbed system. A perpetual motion machine is a hypothetical machine that can do work infinitely without an external energy source. This kind of machine is impossible, a ...
. However, according to the laws of thermodynamics
Thermodynamics is a branch of physics that deals with heat, work, and temperature, and their relation to energy, entropy, and the physical properties of matter and radiation. The behavior of these quantities is governed by the four laws of the ...
, perpetual motion machines do not exist.[ Daly, Herman E., and Joshua C. Farley. Ecological Economics: Principles and Applications. Washington: Island, 2011. Print. p. 29.] Thus, no system can continue without inputs of new energy that exit as high entropy
Entropy is a scientific concept, as well as a measurable physical property, that is most commonly associated with a state of disorder, randomness, or uncertainty. The term and the concept are used in diverse fields, from classical thermodynam ...
waste. Just as no animal can live on its own waste, no economy can recycle the waste it produces without the input of new energy to reproduce itself.
Matter and energy enter the economy in the form of low entropy natural capital
Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. All of t ...
, such as solar energy
Solar energy is radiant light and heat from the Sun that is harnessed using a range of technologies such as solar power to generate electricity, solar thermal energy (including solar water heating), and solar architecture. It is an essenti ...
, oil well
An oil well is a drillhole boring in Earth that is designed to bring petroleum oil hydrocarbons to the surface. Usually some natural gas is released as associated petroleum gas along with the oil. A well that is designed to produce only gas may ...
s, fisheries
Fishery can mean either the enterprise of raising or harvesting fish and other aquatic life; or more commonly, the site where such enterprise takes place ( a.k.a. fishing ground). Commercial fisheries include wild fisheries and fish farms, both ...
, and mines. These materials and energy are used by households and firms alike to create products and wealth. After the materials are used up, the energy and matter leaves the economy in the form of high entropy waste that is no longer valuable to the economy. The natural materials that power the motion of the economic system
An economic system, or economic order, is a system of Production (economics), production, resource allocation and Distribution (economics), distribution of goods and services within a society or a given geographic area. It includes the combinati ...
from the environment, and the waste must be absorbed by the larger ecosystem in which the economy exists.
It cannot be ignored that the economy intrinsically requires natural resource
Natural resources are resources that are drawn from nature and used with few modifications. This includes the sources of valued characteristics such as commercial and industrial use, aesthetic value, scientific interest and cultural value. O ...
s and the creation of waste that must be absorbed in some manner. The economy can only continue churning if it has matter and energy to power it and the ability to absorb the waste it creates. This matter and low entropy energy and the ability to absorb waste exists in a finite amount, and thus there is a finite amount of inputs to the flow and outputs of the flow that the environment can handle, implying there is a sustainable limit to motion
In physics, motion is the phenomenon in which an object changes its position with respect to time. Motion is mathematically described in terms of displacement, distance, velocity, acceleration, speed and frame of reference to an observer and mea ...
, and therefore growth, of the economy. The Limits to Growth
''The Limits to Growth'' (''LTG'') is a 1972 report that discussed the possibility of exponential economic and population growth with finite supply of resources, studied by computer simulation. The study used the World3 computer model to simula ...
states that, due to those limits caused by thermodynamical laws, the avaliability of resources
Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon their a ...
will decrease in a context of everlasting growth, leading to the increase of the prices of those resources, therefore to a decrease of the investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
in industry. This decrease of industry will eventually lead to scarcity of goods and services that could eventually lead to a decrease of the living conditions and an increase of death rates all over the world.
See also
* American exceptionalism
American exceptionalism is the belief that the United States is inherently different from other nations.[Civilizing mission
The civilizing mission ( es, misión civilizadora; pt, Missão civilizadora; french: Mission civilisatrice) is a political rationale for military intervention and for colonization purporting to facilitate the Westernization of indigenous pe ...](_blank)
* Climate change
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
* Critique of political economy
Critique of political economy or critique of economy is a form of Social criticism, social critique that rejects the various social categories and structures that constitute the mainstream discourse concerning the forms and modalities of resourc ...
* Degrowth
* Development theory
Development theory is a collection of theories about how desirable change in society is best achieved. Such theories draw on a variety of social science disciplines and approaches. In this article, multiple theories are discussed, as are recent d ...
* Economic development
In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and o ...
* Export-oriented industrialization
Export-oriented industrialization (EOI) sometimes called export substitution industrialization (ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a ...
* Greed
Greed (or avarice) is an uncontrolled longing for increase in the acquisition or use of material gain (be it food, money, land, or animate/inanimate possessions); or social value, such as Social status, status, or Power (social and politica ...
* Green growth
Green growth is a term to describe a hypothetical path of economic growth that is environmentally sustainable. It is based on the understanding that as long as economic growth remains a predominant goal, a decoupling of economic growth from reso ...
* Green new deal
Green New Deal (GND) proposals call for public policy to address climate change along with achieving other social aims like job creation and reducing economic inequality. The name refers back to the New Deal, a set of social and economic refo ...
* Growth accounting Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy. Growth accounting decomposes ...
* ''The Limits to Growth
''The Limits to Growth'' (''LTG'') is a 1972 report that discussed the possibility of exponential economic and population growth with finite supply of resources, studied by computer simulation. The study used the World3 computer model to simula ...
''
* List of countries by real GDP growth rate
This article includes a lists of countries and dependent territories sorted by their real gross domestic product growth rate; the rate of growth of the value of all final goods and services produced within a state in a given year. The statistics ...
* Manifest destiny
Manifest destiny was a cultural belief in the 19th century in the United States, 19th-century United States that American settlers were destined to expand across North America.
There were three basic tenets to the concept:
* The special vir ...
* Orthodox Development
* Post-growth
Post-growth is stance on economic growth concerning the limits-to-growth dilemma — recognition that, on a planet of finite material resources, extractive economies and populations cannot grow infinitely. The term "post-growth" acknowledges t ...
* Productivism
Productivism or growthism is the belief that measurable productivity and growth are the purpose of human organization (e.g., work), and that "more production is necessarily good". Critiques of productivism center primarily on the limits to g ...
* Progress
Progress is the movement towards a refined, improved, or otherwise desired state. In the context of progressivism, it refers to the proposition that advancements in technology, science, and social organization have resulted, and by extension wi ...
* Propaganda
Propaganda is communication that is primarily used to influence or persuade an audience to further an agenda, which may not be objective and may be selectively presenting facts to encourage a particular synthesis or perception, or using loaded ...
* ''Prosperity Without Growth
''Prosperity Without Growth'' is a book by author and economist Tim Jackson. It was originally released as a report by the Sustainable Development Commission. The study rapidly became the most downloaded report in the Commission's nine-year h ...
''
* Status quo
is a Latin phrase meaning the existing state of affairs, particularly with regard to social, political, religious or military issues. In the sociological sense, the ''status quo'' refers to the current state of social structure and/or values. W ...
* Sufficiency economy
Sufficiency economy () is the name of a Thai development approach attributed to the late King Bhumibol Adulyadej's "sufficiency economy philosophy" (SEP). It has been elaborated upon by Thai academics and agencies, promoted by the Government of T ...
* Sustainability
Specific definitions of sustainability are difficult to agree on and have varied in the literature and over time. The concept of sustainability can be used to guide decisions at the global, national, and individual levels (e.g. sustainable livi ...
* Sustainable development
Sustainable development is an organizing principle for meeting human development goals while also sustaining the ability of natural systems to provide the natural resources and ecosystem services on which the economy and society depend. The des ...
* Thermoeconomics
Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of statistical mechanics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value and ...
* Uneconomic growth
Uneconomic growth is economic growth that reflects or creates a decline in the quality of life. The concept is used in human development theory, welfare theory, and ecological economics. It is usually attributed to ecological economist Her ...
* Unified growth theory
Unified growth theory was developed in light of the failure of endogenous growth theory to capture key empirical regularities in the growth processes and their contribution to the momentous rise in Economic inequality, inequality across nations in ...
* Universal basic income
Universal basic income (UBI) is a social welfare proposal in which all citizens of a given population regularly receive an unconditional transfer payment, that is, without a means test or need to work. It would be received independently of a ...
* Wealth redistribution
Redistribution of income and wealth is the transfer of income and wealth (including physical property) from some individuals to others through a social mechanism such as taxation, welfare, public services, land reform, monetary policies, confis ...
* The White Man's Burden
"The White Man's Burden" (1899), by Rudyard Kipling, is a poem about the Philippine–American War (1899–1902) that exhorts the United States to assume colonial control of the Filipino people and their country.Hitchens, Christopher. ''Bl ...
* World view
A worldview or world-view or ''Weltanschauung'' is the fundamental cognitive orientation of an individual or society encompassing the whole of the individual's or society's knowledge, culture, and point of view. A worldview can include natural p ...
References
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Further reading
* Argyrous, G., Forstater, M and Mongiovi, G. (eds.) (2004) ''Growth, Distribution, And Effective Demand: Essays in Honor of Edward J. Nell''. New York: M.E. Sharpe.
* Barro, Robert J. (1997) ''Determinants of Economic Growth: A Cross-Country Empirical Study.'' MIT Press: Cambridge, MA.
* Galor, O. (2005) ''From Stagnation to Growth: Unified Growth Theory.'' Handbook of Economic Growth, Elsevier.
* Halevi, Joseph; Laibman, David and Nell, Edward J. (eds.) (1992) Beyond the Steady State: Essays in the Revival of Growth Theory, edited with, London, UK:
*
* Jones, Charles I. (2002) ''Introduction to Economic Growth'' 2nd ed. W. W. Norton & Company: New York, N.Y.
* Lucas, Robert E., Jr. (2003) ''The Industrial Revolution: Past and Future'', Federal Reserve Bank of Minneapolis, ''Annual Report'
online edition
*
* Schumpeter, Jospeph A. (1912) ''The Theory of Economic Development'' 1982 reprint, Transaction Publishers
* Weil, David N. (2008) ''Economic Growth'' 2nd ed. Addison Wesley.
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External links
Articles and lectures
"Economic growth."
Encyclopædia Britannic. 2007. Encyclopædia Britannica Online. 17 November 2007.
Paul Romer
Paul Michael Romer (born November 6, 1955) is an American economist and policy entrepreneur who is a University Professor in Economics at New York University. Romer is best known as the former Chief Economist of the World Bank and for co-recei ...
's plain-English explanation of endogenous growth theory.
CEPR Economics Seminar Series
Two seminars on the importance of growth with economists Dean Baker
Dean Baker (born July 13, 1958) is an American macroeconomist who co-founded the Center for Economic and Policy Research (CEPR) with Mark Weisbrot. Baker has been credited as one of the first economists to have identified the 2007–08 United Sta ...
and Mark Weisbrot
Mark Alan Weisbrot is an American economist and columnist. He is co-director with Dean Baker of the Center for Economic and Policy Research (CEPR) in Washington, D.C. Weisbrot is President of Just Foreign Policy, a non-governmental organization ...
On global economic history
by Jan Luiten van Zanden. Explores the idea of the inevitability of the Industrial Revolution.
The Economist Has No Clothes
– essay by Robert Nadeau Robert Nadeau may refer to:
* Robert Nadeau (aikidoka) (born 1937), American aikido teacher
* Robert Nadeau (science historian) (born 1944), American professor of English at George Mason University
{{hndis, Nadeau, Robert ...
in Scientific American
''Scientific American'', informally abbreviated ''SciAm'' or sometimes ''SA'', is an American popular science magazine. Many famous scientists, including Albert Einstein and Nikola Tesla, have contributed articles to it. In print since 1845, it i ...
on the basic assumptions behind current economic theory
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
* World Growth Institute {{Unreferenced, date=May 2022
The World Growth Institute is an international non-government organization that is a think tank for economic growth issues. Staff and contributing fellows comprise former trade diplomats and other government officials ...
. An organization dedicated to helping the developing world realize its full potential via economic growth.
Why Does Growth Keep Slowing Down? St. Louis Federal Reserve Bank
Are there limits to economic growth? It’s time to call time on a 50-year argument
''Nature
Nature, in the broadest sense, is the physics, physical world or universe. "Nature" can refer to the phenomenon, phenomena of the physical world, and also to life in general. The study of nature is a large, if not the only, part of science. ...
'', 16 March 2022.
Data
Angus Maddison's Historical Dataseries
– series for almost all countries on GDP, population and GDP per capita from the year 0 up to 2003.
OECD economic growth statistics
- easy to use dataset showing GDP, per capita and population, by country and region, 1970 to 2008. Updated regularly.
{{DEFAULTSORT:Growth
Economic development
Macroeconomic indicators