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Economic Growth. Assorted Topics. Before the Industrial Revolution. Up until 1500, there had been almost zero growth of output per worker After 1800, we see large sustained increases in worldwide standards of living population growth accelerated output per capita grew.

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Economic Growth

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Economic Growth

Assorted Topics

Before the Industrial Revolution

  • Up until 1500, there had been almost zero growth of output per worker

  • After 1800, we see large sustained increases in worldwide standards of living

    • population growth accelerated

    • output per capita grew

Economic Growth through Deep Time

World Population Growth since 1000

Premodern Economies

  • There are two principal reasons that there were no sustained increases in the productivity of labor before 1500

    • resource scarcity

    • expanding populations

Premodern Economies

  • Remember that Y/L depends on two factors

    • the economy’s capital intensity (K/Y)

    • the efficiency of labor (E)

  • The level of Y/L is therefore

Premodern Economies

  • Also remember that, in the long run, K/Y tends to approach an equilibrium

    • sustained growth must be driven by sustained increases in the efficiency of labor

  • If productivity does not grow, it must be because labor efficiency did not grow

Premodern Economies

  • Natural resources played an important role

    • as populations grew, the stocks of natural resources had to be divided among more and more people

    • increases in technological capability induce increases in fertility that inevitably run into natural-resource scarcity

Premodern Economies

  • Thomas R. Malthus

    • first academic professor of economics

    • introduced the idea that increases in technology inevitably run into natural resource scarcity

      • implies that increases in technology lead to an increase in the size of the population but not to an increase in the standard of living

The End of theMalthusian Age

  • We no longer live in a Malthusian age

    • for at least 200 years, new technologies and better organizations have made improvements in the efficiency of labor possible

    • these improvements have not been neutralized by natural-resource scarcity

The End of theMalthusian Age

  • However, a Malthusian age may return

    • suppose that the population in the 21st and 22nd centuries grows at the same rate it did in the 20th century (1.33%)

      • the population will double in 72/1.33 = 54 years

      • In 200 years, there would be nearly 90 billion people on earth

The End of theMalthusian Age

  • It is likely that the population explosion is almost over

    • the United Nations predicts that the world population will grow from over 7 billion today to around 10 billion by 2050

    • after that, the population increase may stop as birth rates have been on the decline around the world

The End of theMalthusian Age

  • What caused the end of the Malthusian age?

    • the pace at which inventions occurred increased steadily

    • by about 1500, technological progress passed the point at which it could offset increased scarcity of natural resources due to population growth

The Demographic Transition

  • As material standards of living rise far above subsistence, countries undergo a demographic transition

    • birth rates rise

    • death rates fall

    • birth rates fall

Stylized Picture of the Demographic Transition

The Demographic Transition

  • In the world today, not all countries have gone through their demographic transitions

    • Nigeria, Iraq, Pakistan, and the Congo are projected to have population growth rates greater than 2% per year over the next generation

Expected Population Growth Rates, Present-2020

Expected Population Growth Rates, 1997-2015

The Industrial Revolution

  • The industrial revolution began the era of modern economic growth

    • new technological leaps revolutionized industries and generated major improvements in living standards

  • Great Britain was the center of the industrial revolution

    • English became the world’s de facto second language

The Industrial Revolution

  • The new technologies were not confined to Great Britain

    • they spread rapidly to western Europe and the United States

    • they spread less rapidly to southern and eastern Europe and Japan

Industrialized Areas of the World, 1870

The Industrial Revolution

  • Why did the Industrial Revolution take place in Great Britain and why did it occur around 1800?

    • the establishment of limited government, security of property, and freedom of contract in Great Britain after the Glorious Revolution of 1688

    • the creation of modern science and the technological tradition of sustained inquiry into how the world worked

American Long-Run Growth, 1800-1973

  • Growth in the second half of the 19th century was faster than it had been in the first half

  • Growth accelerated further in the early part of the 20th century

    • a second wave of industrialization occurred from new inventions and innovations

American Long-Run Growth, 1800-1973

  • During the late 19th century, the capital-output ratio increased greatly

    • the creation of railroads generated the possibility of supplying an entire continental market from a single factory

    • this encouraged investment by entrepreneurs

American Long-Run Growth, 1800-1973

  • Growth slowed slightly during the Great Depression and World War II

    • 1.4 percent per year from 1929 to 1950

  • Growth accelerated from 1950 to 1973 (2.1 percent)

U.S. Measured Economic Growth: Real GDP per Worker 1995 Prices,1890-2004

American Long-Run Growth, 1800-1973

  • Next to none of the growth since 1929 was the result of increases in K/Y

    • almost all of it was the result of increases in the efficiency of labor

American Long-Run Growth, 1800-1973

  • Many economists believe that official estimates of output per worker overstate inflation and understate real economic growth by 1 percent per year

    • national income accountants have a hard time valuing the boost to productivity and standards of living generated by new inventions

Labor-Time Costs of Commodities, 1895-1997

American Long-Run Growth, 1800-1973

  • Structural changes also occurred

    • a large drop in the proportion of the labor force working as farmers occurred

    • new methods of travel were developed

    • a large number of innovative technologies and business practices were adopted

American Long-Run Growth, 1800-1973

  • The U.S. became the world’s leader (in terms of technology) during the 20th century because

    • the U.S. had an exceptional commitment to education

    • the U.S. was the largest market in the world

    • the U.S. was extraordinarily rich in natural resources

    • the U.S. avoided fratricide

American Economic Growth Since 1973

  • Between 1973 and 1995 measured output per worker grew at only 0.6 percent per year

    • between 1950 and 1973, labor productivity growth had been 2.1 percent per year

  • The other major industrial economies in western Europe, Japan and Canada also experienced a slowdown in productivity

The Magnitude of the Post-1973 Productivity Growth Slowdown in the G-7 Economies

Modern Economic Growth around the World

  • The industrial core of the world economy experienced a large increase in its level of material productivity and living standards during the 19th and 20th centuries

  • Elsewhere the growth of productivity levels and living standards was slower

  • The world has become a more and more unequal place

World Distribution of Income Today, Selected Countries

World Distribution of Income Today, Selected Countries

Modern Economic Growth around the World

  • The U.S. has not been the fastest-growing economy in the world

    • a number of other countries at different levels of industrialization, development, and material productivity a century ago have now converged

    • their current levels of productivity, economic structures, and standards of living are very close to those of the U.S.

Convergence among the G-7 Economies: Output per Capita as a Share of U.S. Level

Modern Economic Growth around the World

  • By and large, the economies that have converged belong to the Organization for Economic Cooperation and Development (OECD)

    • group of countries that gave or received aid under the Marshall Plan to help rebuild or reconstruct after World War II

Modern Economic Growth around the World

  • The OECD countries adopted a common set of economic policies

    • large private sectors free of government regulation of prices

    • investment with its direction determined by profit-seeking businesses

    • large social insurance systems to redistribute income

    • governments committed to avoiding mass unemployment

Modern Economic Growth around the World

  • The OECD countries ended up with mixed economies

    • markets direct the flow of resources

    • governments stabilize the economy, provide social-insurance safety nets, and encourage entrepreneurship and enterprise

Modern Economic Growth around the World

  • As the OECD countries became richer, they completed their demographic transitions

  • The policy emphasis on free enterprise boosted investment

  • Equilibrium capital-output ratios rose

  • Diffusion of technology from the U.S. occurred

Modern Economic Growth around the World

  • Economic growth has not been limited to OECD countries

    • since World War II, several countries in east Asia have experienced stronger growth than has ever been seen anywhere in world history

    • these successful east Asian countries are somewhat similar to the OECD economies in terms of economic policy and structure

Modern Economic Growth around the World

  • Many countries have not been so fortunate

  • Countries that have been ruled by communists in the 20th century have remained poor

The Iron Curtain: GDP-per-Capita Levels of Matched Pairs of Countries

Modern Economic Growth around the World

  • Individuals living in countries outside of the Iron Curtain have higher levels of GDP-per-capita

    • they may not have better education, health care, or a more favorable income distribution

Modern Economic Growth around the World

  • Even if attention is confined to noncommunist-ruled economies, there has still been enormous divergence in relative output-per-worker levels over the past 100 years

Sources of Divergence

  • The principal cause of the large variation in output per worker between countries today are differences in their equilibrium capital-output ratios

    • K/Y is determined by

      • the level of investment

      • the growth rate of the labor force

Sources of Divergence

  • Two secondary causes of the large variation in output per worker between countries today are

    • openness to creating and adapting the technologies that enhance the efficiency of labor

    • the level of education today

GDP-per-Worker Levels and Average Years of Schooling

Cause and Effect,Effect and Cause

  • High population growth and low output per worker go together

    • rapid population growth reduces the equilibrium capital-output ratio

    • poor countries have not undergone their demographic transitions

Cause and Effect,Effect and Cause

  • Other vicious circles can occur

    • poor countries will have a high relative price for capital equipment

      • this implies that poor countries get less investment out of any given effort at saving

    • good education is harder to provide in poor countries

  • Setting the demographic transition in motion will offset these problems

Hopes for Convergence

  • The context of economic “stagnation” and “failure” are relative terms

    • net national product in Argentina is about three times what it was in 1900

    • net national product in Norway is about nine times what it was in 1900

  • The world’s industrial leaders provide a benchmark of how much better things could have been

Hopes for Convergence

  • Differences in productivity and living standards between national economies should be eroded over time due to

    • world trade

    • migration

    • flows of capital

    • developing countries entering the demographic transition

Policies for Saving, Investment, and Education

  • Policies to boost saving include

    • ensuring that savers get a reasonable rate of return on their savings

    • minimizing restrictions on entrepreneurship

    • keeping inflation low

    • keeping government deficits to a minimum

Policies for Saving, Investment, and Education

  • Policies to boost investment for a given level of savings include

    • welcoming money from foreign investors

    • allowing businesses to freely earn and spend foreign exchange

      • reducing tariffs and quotas

      • subsidizing investment and expansion by businesses that successfully compete in world markets

Policies for Saving, Investment, and Education

  • Promoting universal access to education can provide two important benefits

    • a better-educated workforce is likely to be more productive

    • educated women will likely pursue opportunities outside the home

      • the birth rate will likely fall

      • the demographic transition will occur more quickly

Policies for Technological Advance

  • Technological progress has two components

    • science

    • research and development

      • amounts to 3 percent of GDP in the U.S. and other industrial economies

Policies for Technological Advance

  • Businesses conduct investments in research and development to increase profit

  • Research and development is a public good

    • other firms can copy it

    • patents limit the ability of other firms to do so

Policies for Technological Advance

  • Governments seeking to establish patent laws face a dilemma

    • if the patent laws are strong, much of the modern technology in the economy will be restricted in use

    • if the patent laws are weak, profits that innovators and inventors can earn will be low

      • pace of technological improvement will slow

Government Failure

  • The broad experience of growth in developing countries (with the exception of east Asian and OECD countries) has been that governments often will not create policies that assist in growth and development

Government Failure

  • Typical systems of regulation in developing countries have retarded development by

    • “prestige” industrialization programs

    • inducing firms and entrepreneurs to devote their energies to seeking rents

    • creating systems of regulation and project approval that have become extortion machines for manufacturing bribes for the bureaucrats

Government Failure

  • Neoliberalism describes much of the recent thinking about the proper role of government in economic growth

    • the government has a sphere of core competencies at which it is effective

      • administration of justice, maintenance of macroeconomic stability, provision of social insurance, some infrastructure development

    • governments should limit role to their core competencies

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