THE FOUR WHEELS OF GROWTH
appropriation of land and the accumulation
Human Resources
Labor inputs consist of quantities of workers
and of the skills of the workforce.
Natural Resources
The second classic factor of production is
natural resources. The important resources
here are arable land, oil, gas, forests, water,
and mineral deposits. Some high-income
countries like Canada and Norway
Capital
Capital includes tangible capital goods like
roads, power plants, and equipment like
trucks and computers, as well as intangible
items such as patents, trademarks, and
computer software.
Technological Change and Innovation
In addition to the three classic factors
discussed
above, technological advance has been a vital
fourth ingredient in the rapid growth of living
standards. Historically, growth has defi nitely
not been a process
THEORIES OF ECONOMIC
GROWTH
The Classical Dynamics of
Smith and Malthus
Early economists like Adam Smith and T. R.
Malthus stressed the critical role of land in
economic growth. In The Wealth of Nations
(1776), Adam Smith provided a handbook
of economic development. He began with a
hypothetical idyllic age: “that original state
of things, which precedes both the
of [capital] stock.” This was a time when
land was freely available to all, and before
capital accumulation had begun to matter.
The dour Reverend
T. R. Malthus thought that population
pressures would drive the economy to a
point where workers were at the minimum
level of subsistence. Malthus reasoned
that whenever wages were above the
subsistence level, population would expand;
below-subsistence wages would lead to
high mortality and population decline. Only
at subsistence wages could there be a
stable equilibrium of population. He
believed the working classes were destined
to a life that is brutish, nasty, and short.
This gloomy picture led Thomas Carlyle to
criticize economics as “the dismal science.”
Economic Growth with
Capital Accumulation:
The Neoclassical Growth Model
Malthus’s forecast was dramatically wide of
the mark because he did not recognize that
technological innovation and capital
investment could overcome the law of
diminishing returns. Land did not become
the limiting factor in production. Instead,
the fi rst Industrial Revolution brought forth
power-driven machinery that increased
production, factories that gathered teams
of workers into giant fi rms, railroads and
steamships that linked together the far
points
of the world, and iron and steel that made
possible stronger machines and faster
locomotives. As market economies entered
the twentieth century, a second
Industrial Revolution grew up around the
telephone, automobile, and electricity
industries. Capital accumulation and new
technologies became the dominant forces
affecting economic development.
. The neoclassical growth model
describes an economy in which a single
homogeneous output is produced by two
types of inputs—capital and labor. In
contrast to the Malthusian analysis, labor
growth is assumed to be a given. In
addition, we assume that the economy is
competitive and always operates at full
employment, so we
can analyze the growth of potential output.
Long-Run Steady State. What is the
long-run equilibrium in the neoclassical
growth model without technological
change? Eventually, the capital-labor ratio
will stop rising. In the long run, the
economy will enter a steady state in which
capital deepening ceases, real
wages stop growing , and capital returns
and real interest rates are constant .
Seven Basic Trends of Economic Growth
Economists studying the economic history
of advanced nations have found that the
following trends apply in most countries:
1. The capital stock has grown more
rapidly than population and employment,
resulting from capital deepening.
2. For most of the period since 1900, there
has been a
strong upward trend in real average hourly
earnings.
3. The share of labor compensation in
national income
has been remarkably stable over the last
century.
4. There were major oscillations in real
interest rates and
the rate of profi t, particularly during
business cycles,
but there has been no strong upward or
downward
trend over the post-1900 period.
5. Instead of steadily rising, which would
be predicted by
the law of diminishing returns with
unchanging technology, the capital-output
ratio has actually declined
since the start of the twentieth century.
6. For most of the period since 1900, the
ratios of national
saving and of investment to GDP were
stable. Since1980, the national saving rate
has declined sharply in
the United States.
7. After effects of the business cycle are
removed, national
product has grown at an average rate of 3.3
percent
per year. Output growth has been much
higher than a
weighted average of the growth of capital,
labor, and
resource inputs, suggesting that
technological innovation must be playing a
key role in economic growth.