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[[File:US corporate profits and business investment.png|thumb|Red: corporate profits after tax and inventory valuation adjustment. Blue: nonresidential fixed investment (roughly speaking, business investment), both as fractions of U.S. GDP, 1989-2012.]]
[[File:US corporate profits and business investment.png|thumb|Red: corporate profits after tax and inventory valuation adjustment. Blue: nonresidential fixed investment (roughly speaking, business investment), both as fractions of U.S. GDP, 1989-2012.]]
High business profits do not necessarily lead to increased economic growth. When businesses and banks have disincentive to spend accumulated capital, such as cash repatriation taxes from profits in overseas [[tax haven]]s and interest on [[excess reserves]] paid to banks, increased profits can lead to decreasing growth.<ref>[http://krugman.blogs.nytimes.com/2013/02/09/profits-and-business-investment/ "Profits and Business Investment"] Paul Krugman, ''New York Times", February 9, 2013</ref><ref>[http://krugman.blogs.nytimes.com/2013/02/10/still-says-law-after-all-these-years/ "Still Say’s Law After All These Years"] Paul Krugman, ''New York Times'', February 10, 2013</ref>
High business profits do not necessarily lead to increased economic growth. When businesses and banks have disincentive to spend accumulated capital, such as cash repatriation taxes from profits in overseas [[tax haven]]s and interest on [[excess reserves]] paid to banks, increased profits can lead to decreasing growth.<ref>[http://krugman.blogs.nytimes.com/2013/02/09/profits-and-business-investment/ "Profits and Business Investment"] Paul Krugman, ''New York Times", February 9, 2013</ref><ref>[http://krugman.blogs.nytimes.com/2013/02/10/still-says-law-after-all-these-years/ "Still Say’s Law After All These Years"] Paul Krugman, ''New York Times'', February 10, 2013</ref> In general, the level of output is set by business expenditure, but there is no reason to expect it stabilize at full utilization of the economy's resources.<ref>[http://www.lem.sssup.it/WPLem/documents/fazzari2.pdf "Aggregate Demand, Instability and Growth"] ''Review of Keynesian Economics'', January, 2013 (see also [http://slackwire.blogspot.com/2013/02/aggregate-demand-in-long-run.html this review] of the paper)</ref>


===Historical sources of economic growth===
===Historical sources of economic growth===

Revision as of 06:01, 26 February 2013

GDP real growth rates, 1990–1998 and 1990–2006, in selected countries.
Rate of change of Gross domestic product, world and OECD, since 1961
Economic growth caused the production-possibility frontier to shift outward.

Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.[1] Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to obviate the distorting effect of inflation on the price of the goods produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment".

As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries. See also Economic development.

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.

Definitions and history

Economic growth versus the business cycle

Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. The business cycle is made up of booms and drops in production that occur over a period of months or years. Generally, economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand.

In contrast, the topic of economic growth is concerned with the long-run trend in production due to strucural causes such as technological growth and factor accumulation. The business cycle moves up and down, creating fluctuations around the long-run trend in economic growth.

Red: corporate profits after tax and inventory valuation adjustment. Blue: nonresidential fixed investment (roughly speaking, business investment), both as fractions of U.S. GDP, 1989-2012.

High business profits do not necessarily lead to increased economic growth. When businesses and banks have disincentive to spend accumulated capital, such as cash repatriation taxes from profits in overseas tax havens and interest on excess reserves paid to banks, increased profits can lead to decreasing growth.[2][3] In general, the level of output is set by business expenditure, but there is no reason to expect it stabilize at full utilization of the economy's resources.[4]

Historical sources of economic growth

Main article: Productivity improving technologies (historical)

Economic growth has traditionally been attributed to the accumulation of human and physical capital, and increased productivity arising from technological innovation.[5] Economic growth was also the result of developing new products and services, which have been described as "demand creating".[6]

Before industrialization technological progress resulted in an increase in 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.[7] The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap.[8] Countries that industrialized eventually saw their population growth slow, a condition called demographic transition.

Increases in productivity are a 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 reduced inputs of labor, materials, energy, and land per unit of economic output (less input per widget). The balance of growth has come from using more inputs overall because of the growth in output (more widgets or alternately more value added), including new kinds of goods and services (innovations).[9]

During colonial times, what ultimately mattered for economic growth were the institutions and systems of government imported through colonization. There is a clear reversal of fortune between poor and wealthy countries, which is evident when comparing the method of colonialism in a region. Geography and endowments of natural resources are not the sole determinants of GDP. In fact, those that were blessed with good factor endowments experienced colonial extraction which only provided limited rapid growth; whereas, countries that were less fortunate in their original endowments experienced European settlement, relative equality, and demand for the rule of law. These initially poor colonies end up developing an open franchise, equality, and broad public education, which helps them experience greater economic growth than the colonies that had exploited their economies of scale.

During the Industrial Revolution, mechanization began to replace hand methods in manufacturing and new processes were developed to make chemicals, iron, steel and other products.[10] Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.[11] See: Interchangeable parts.

During the Second Industrial Revolution, a major factor of productivity growth was the substitution of energy from human and animal labor, to water and wind power with electrification and internal combustion.[10] Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency.[12] Other major historical sources of productivity were automation, transportation infrastructures (canals, railroads, and highways),[13][14] new materials (steel) and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, and the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, which is universally used today.[11]

Productivity lowered the cost of most items in terms of work time required to purchase. Real food prices fell due to improvements in transportation and trade, mechanized agriculture, fertilizers, scientific farming and the Green Revolution.

Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, and steam-powered factories.[15][16] The invention of processes for making cheap steel were important for many forms of mechanization and transportation. By the late 19th century prices, as well as 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.[15]

Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s.[17] Following the Great Depression, economic growth resumed, aided in part by demand for entirely new goods and services, such as telephones, radio, television, automobiles, and household appliances, air conditioning, and commercial aviation (after 1950), creating enough new demand to stabilize the work week.[18] 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.

Economic growth in Western nations slowed down after 1973. In contrast growth in Asia has been strong since then, starting with Japan and spreading to Korea, China, the Indian subcontinent and other parts of Asia. In 1957 South Korea had a lower per capita GDP than Ghana,[19] and by 2008 it was 17 times as high as Ghana's.[20] The Japanese economic growth has slackened considerably since the late 1980s.

Economic growth per capita

The concern about economic growth often focuses on the desire to improve a country's standard of living — the level of goods and services that, on average, individuals purchase or otherwise gain access to. It should be noted that if the population grows along with economic production, increases in GDP do not necessarily result in an improvement in the standard of living. When the focus is on standard of living, economic growth is expressed on a per capita basis.

A high savings rate is also linked to the standard of living. Increased saving will in the long run lead to a permanently higher output (income) per capita as capital accumulation per individual also increases.[citation needed]

Measuring economic growth

Economic growth is measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP). These two measures, which are calculated slightly differently, total the amounts paid for the goods and services that a country produced. As an example of measuring economic growth, a country which creates $9,000,000,000 in goods and services in 2010 and then creates $9,090,000,000 in 2011, has a nominal economic growth rate of 1% for 2011.

In order to compare per capita economic growth among countries, the total sales of the respected countries may be quoted in a single currency. This requires converting the value of currencies of various countries into a selected currency, for example U.S. dollars. One way to do this conversion is to rely on exchange rates among currencies, for example how many Mexican pesos buy a single U.S. dollar? Another approach is to use the purchasing power parity method. This method is based on how much consumers must pay for the same "basket of goods" in each country.

Inflation or deflation can make it difficult to measure economic growth. If GDP, for example, goes up in a country by 1% in a year, was this due solely to rising prices (inflation), or because more goods and services were produced and saved? To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.

For example, a table may show changes in GDP in the period from 1990 to 2000, as expressed in 1990 U.S. dollars. This means that the single currency being used is the U.S. dollar with the purchasing power it had in the U.S. in 1990. The table might mention that the figures are "inflation-adjusted" or real. If no adjustment were made for inflation, the table might make no mention of inflation-adjustment or might mention that the prices are nominal.

The power of annual growth

Over long periods of time, even small rates of growth, like a 2% annual increase, will have large effects. For example, the United Kingdom experienced a 1.97% average annual increase in its inflation-adjusted GDP between 1830 and 2008.[21] In 1830, the GDP was 41,373 million pounds. It grew to 1,330,088 million pounds by 2008. (Figures are adjusted for inflation and stated in 2005 values for the pound.) A growth rate which 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 compounding (also see exponential growth). A growth rate of 2.5% per annum leads to a doubling of the GDP within 29 years, whilst a growth rate of 8% per annum (an average exceeded by China between 2000 and 2010) leads to a doubling of GDP within 10 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.

Theories of economic growth

Classical growth theory

Adam Smith wrote The Wealth of Nations

The modern conception of economic growth began with the critique of Mercantilism, especially by the physiocrats and with the Scottish Enlightenment thinkers such as David Hume and Adam Smith, and the foundation of the discipline of modern political economy.

David Ricardo argued that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "comparative advantage" would be the central basis for arguments in favor of free trade as an essential component of growth.[22]

The neoclassical growth model

The notion of growth as increased stocks of capital goods (means of production) was codified as the Solow-Swan Growth Model, which involved a series of equations which showed the relationship between labor-time, capital goods, output, and investment. According to this view, the role of technological change became crucial, even more important than the accumulation of capital. This model, developed by Robert Solow[23] and Trevor Swan[24] in the 1950s, was the first attempt to model long-run growth analytically. This model assumes that countries use their resources efficiently and that there are diminishing returns to capital and labor increases. From these two premises, the neoclassical model makes three important predictions. First, increasing capital relative to labor creates economic growth, since people can be more productive given more capital. Second, poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital. Third, because of diminishing returns to capital, economies will eventually reach a point at which any increase in capital will no longer create economic growth. This point is called a "steady state".

The model also notes that countries can overcome this steady state and continue growing by inventing new technology. In the long run, output per capital depends on the rate of saving, but the rate of output growth should be equal for any saving rate. In this model, the process by which countries continue growing despite the diminishing returns is "exogenous" and represents the creation of new technology that allows production with fewer resources. Technology improves, the steady state level of capital increases, and the country invests and grows. The data does not support some of this model's predictions, in particular, that all countries grow at the same rate in the long run, or that poorer countries should grow faster until they reach their steady state. Also, the data suggests the world has slowly increased its rate of growth.

However, modern economic research shows that the baseline version of the neoclassical model of economic growth is not supported by the evidence. [citation needed]

Salter cycle

According to the Salter cycle, economic growth is enabled by increases in productivity, which lowers the inputs (labour, capital, material, energy, etc.) for a given amount of product (output).[25] Lowered cost increases demand for goods and services, which also results in capital investment to increase capacity. New capacity is more efficient because of new technology, improved methods and economies of scale. This leads to further price reductions, which further increases demand, until markets become saturated due to diminishing marginal utility.[26][27]

Endogenous growth theory

Main article: Endogenous growth theory
World map of the 2008–2009 Global Competitiveness Index.

Growth theory advanced again with theories of economist Paul Romer and Robert Lucas, Jr. in the late 1980s and early 1990s.

Unsatisfied with Solow's explanation, economists worked to "endogenize" technology in the 1980s. They developed the endogenous growth theory that includes a mathematical explanation of technological advancement.[28][29] This model also incorporated a new concept of human capital, the skills and knowledge that make workers productive. Unlike physical capital, human capital has increasing rates of return. Therefore, overall there are constant returns to capital, and economies never reach a steady state. Growth does not slow as capital accumulates, but the rate of growth depends on the types of capital a country invests in. Research done in this area has focused on what increases human capital (e.g. education) or technological change (e.g. innovation).[30]

Energy and energy efficiency theories

The importance of energy to economic growth was emphasized by William Stanley Jevons in The Coal Question in which he described the rebound effect based on the observation that increasing energy efficiency resulted in more use of energy. (See: Jevons paradox) In the 1980s, the economists Daniel Khazzoom and Leonard Brookes independently put forward ideas about energy consumption and behavior that argue that increased energy efficiency paradoxically tends to lead to increased energy consumption. In 1992, the US economist Harry Saunders dubbed this hypothesis the Khazzoom–Brookes postulate, and showed that it was true under neo-classical growth theory over a wide range of assumptions.[31]

The importance of electricity to economic growth has been recognized by economists, prominent businessmen,[32] economic historians[33] and various engineering, technical and science organizations[34] and government agencies. Conclusions of a report prepared for Los Alamos National Laboratory for the United States Department of Energy and the National Academy of Sciences stated:

"Electricity use and gross national product have been, and probably will be, strongly correlated".[35]

The report's conclusion went on to say that the energy intensity of the U.S. economy (electricity consumed per dollar of GDP) had been declining for a number of years.

All approaches to the inclusion energy into the theory of production are known as the energy theory of value, which, nevertheless, does not have an accurate and complete formulation. For example, Ayres and Warr have presented a model that aims to address deficiencies in the neo-classical and endogenous growth models. It claims that physical and chemical work performed by energy, or more correctly exergy, has historically been a very important driver of economic growth.[12] [36] Key support for this theory is a mathematical model showing that the efficiency of a composite indicator using electrical generation and other energy efficiencies is a good proxy for the Solow residual, or technological progress, that is, the portion of economic growth that is not attributable to capital or labor.[37][38] The proper role of energy in production processes was elucidated by technological theory of social production.

Energy growth theory economists have criticized orthodox economics for neglecting the role of energy and natural resources. Ayres and Warr's model relates the slowing of economic growth to energy conversion efficiencies approaching thermodynamic limits, and cautions that declining resource quality could bring an end to economic growth in a few decades.[39] Hall et al. 2001 state: "Although the first and second laws of thermodynamics are the most thoroughly tested and validated laws of nature [..] the basic neoclassical economic model is a perpetual motion machine, with no required inputs or limits."[40]

Unified growth theory

Unified growth theory was developed by Oded Galor 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. Endogenous growth theory was satisfied with accounting for empirical regularities in the growth process of developed economies over the last hundred years. As a consequence, it was not able to explain the qualitatively different empirical regularities that characterized the growth process over longer time horizons in both developed and less developed economies. Unified growth theories are endogenous growth theories that are consistent with the entire process of development, and in particular the transition from the epoch of Malthusian stagnation that had characterized most of the process of development to the contemporary era of sustained economic growth.[41]

The big push

In theories of economic growth, the mechanisms that let it take place and its main determinants are abundant. One popular theory in the 1940s, for example, was that of the "Big Push" 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.[42]

Schumpeterian Growth

Schumpeterian growth is an economic theory named after the 20th century Austrian economist Joseph Schumpeter. Unlike other economic growth theories, his approach explains growth by innovation as a process of creative destruction, which 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 is the destruction[disambiguation needed] referred to by Schumpeter, that could also be referred to as the annulment of previous technologies which makes them obsolete, and "which destroys the rents generated by previous innovations" (Aghion 855).[43] A major model that illustrates Schumpeterian growth is the Aghion-Howitt model.[44]

Institutions and growth

According to Acemoğlu, 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 geo-political boundaries (set by the colonizers) that are not properly placed regarding the geographical locations of different ethnic groups, creating internal disputes and conflicts which in turn 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.[45]

Human capital and growth

One ubiquitous element of both theoretical and empirical analyses of economic growth is the role of human capital. The skills of the population enter into both neoclassical and endogenous growth models.[46] The most commonly used measure of human capital is the level of school attainment in a country, building upon the data development of Robert Barro and Jong-Wha Lee.[47] This measure of human capital, however, requires the strong assumption that what is learned in a year of schooling is the same across all countries. It 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. In order to measure human capital more accurately, Eric Hanushek and Dennis Kimko introduced measures of mathematics and science skills from international assessments into growth analysis.[48] They found that quality of human capital was very significantly related to economic growth. This approach has been extended by a variety of authors, and the evidence indicates that economic growth is very closely related to the cognitive skills of the population.[49]

Inequality and economic growth

A 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. Percentage changes in GDP growth spell length are shown as each factor moves from 50th to 60th percentile and all other factors are held constant. Income distribution is measured by the Gini coefficient.[50]

Initial[when?] theories incorrectly stated that inequality had a positive effect on economic development. The marginal propensity to save was thought[who?] to increase with wealth and inequality increases savings and capital accumulation.[51] However, it was[who?] determined much later[when?] that the analysis based on comparing yearly equality figures to yearly growth rates was flawed and misleading because it takes several years for the effects of equality changes to manifest in economic growth changes.[52]

The credit market imperfection approach, developed by Galor and Zeira (1993), demonstrates that inequality in the presence of credit market imperfections has a long lasting detrimental effect on human capital formation and economic development.[53]

The political economy approach, developed by Alesian and Rodrik (1994) and Persson and Tabellini (1994), argues that inequality is harmful for economic development because inequality generates a pressure to adopt redistributive policies that have an adverse effect on investment and economic growth.[54]

Evidence

A study by Perotti (1996) examines of the channels through which inequality may affect economic growth. He shows that in accordance with the credit market imperfection approach, 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 refutes the political economy mechanism. He demonstrates that inequality is associated with lower levels of taxation, while lower levels of taxation, contrary to the theories, are associated with lower level of economic growth[55]

A 2011 note for the International Monetary Fund by Andrew G. Berg and Jonathan D. Ostry found a strong association between lower levels of inequality in developing countries and sustained periods of economic growth. Developing countries with high inequality have "succeeded in initiating growth at high rates for a few years" but "longer growth spells are robustly associated with more equality in the income distribution."[56]

Disputing the claim of a Washington Post editorialist that "Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth," journalist Timothy Noah, points out that redistribution policies in Europe do not seem to be correlated to economic problems of the late twenty-oughts. With the exception of Ireland, the countries at risk of default in 2011 (Greece, Italy, Spain, Portugal) were notable for their high Gini-measured levels of income inequality compared to other European countries. As measured by the Gini index, Greece as of 2008 had more income inequality than the economically healthy Germany.[57]

Quality of life

Happiness has been shown to increase with a higher GDP per capita, at least up to a level of $15,000 per person.[58]

Economic growth has the indirect potential to alleviate poverty, as a result of a simultaneous increase in employment opportunities and increase labour productivity.[59] A study by researchers at the Overseas Development Institute (ODI) of 24 countries that experienced growth found that in 18 cases, poverty was alleviated.[59] However, employment is no guarantee of escaping poverty, the International Labour Organisation (ILO) estimates that as many as 40% of workers as poor, not earning enough to keep their families above the $2 a day poverty line.[59] For instance, in India most of the chronically poor are wage earners in formal employment, because their jobs are insecure and low paid and offer no chance to accumulate wealth to avoid risks.[59] This appears to be the result of a negative relationship between employment creation and increased productivity, when a simultaneous positive increase is required to reduced poverty. According to the UNRISD, increasing labour productivity appears to have a negative impact on job creation: in the 1960s, a 1% increase in output per worker was associated with a reduction in employment growth of 0.07%, by the first decade of this century the same productivity increase implies reduced employment growth by 0.54%.[59]

Increases in employment without increases in productivity leads to a rise in the number of "working poor", which is why some experts are now promoting the creation of "quality" and not "quantity" in labour market policies.[59] This approach does highlight how higher productivity has helped reduce poverty in East Asia, but the negative impact is beginning to show.[59] In Vietnam, for example, employment growth has slowed while productivity growth has continued.[59] Furthermore, productivity increases do not always lead to increased wages, as can be seen in the United States, where the gap between productivity and wages has been rising since the 1980s.[59] The ODI study showed that other sectors were just as important in reducing unemployment, as manufacturing.[59] The services sector is most effective at translating productivity growth into employment growth. Agriculture provides a safety net for jobs and economic buffer when other sectors are struggling.[59] This study suggests a more nuanced understanding of economic growth and quality of life and poverty alleviation.

Negative effects of economic growth

A number of arguments have been raised against economic growth.[60]

It may be that economic growth improves the quality of life up to a point, after which it doesn't improve the quality of life, but rather obstructs sustainable living.[61]

Resource depletion

Many earlier predictions of resource depletion, such as Thomas Malthus' 1798 predictions about approaching famines in Europe, The Population Bomb (1968),[62][63][64] Limits to Growth (1972),[62][63][64] and the Simon–Ehrlich wager (1980) [65] did not materialize, nor has diminished production of most resources occurred so far, one reason being that advancements in technology and science have allowed some previously unavailable resources to be produced.[65] 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 and chemical fertilizers, especially the Haber process for ammonia synthesis.[66][67]

M. King Hubbert's prediction of world petroleum production rates. Virtually all economic sectors rely heavily on petroleum.

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.[68] An example is natural gas from shale and other low permeability rock, which can be developed with much higher inputs of energy, capital, and materials than conventional gas in previous decades. Another example is offshore oil and gas, which has exponentially increasing cost as water depth increases.

Some "Malthusians", such as William R. Catton, Jr., author of the 1980 book "Overshoot," are skeptical of these various advancements in technology which make available previously inaccessible or lower grade resources. The counter-argument is that such advances as well as increases in efficiency merely accelerate the drawing down of finite resources. Catton has referred to the contemporary increases in rates of resource extraction as "stealing ravenously from the future."[69] The apparent and temporary "increase" of resource extraction with the use of new technology leads to the popular perception that resources are infinite or can be substituted without limit, but this perception fails to consider that ultimately, even lower quality resources are finite and become uneconomic to extract when the ore quality is too low. Because of cultural lag, the perception of infinite resources and substitutes may linger on for generations, and may not change, since the inevitable resource bankruptcy is passed on to posterity. Catton has called the faith in technology a form of "cargoism," which takes its meaning from various "Cargo Cults" in Melanesia and Micronesia. Furthermore, Joseph Tainter, anthropologist, historian and author of the book "The Collapse of Complex Societies," has pointed out that each new addition of complexity to technology can only be sustained if there is a good enough return to justify the technology, and that over time, increases in complexity have improved productivity at an ever decreasing rate. As an example, in the early 20th century when much of the world's oil was untapped, it was sufficient to drill a few metres into the ground and install inexpensive rigs to extract oil at rapid rates. At the beginning of the 21st century, in order to achieve the same flowrates or less, oilfields must be drilled much deeper and managed with sophisticated techniques and equipment costing many hundreds of millions of dollars. If such trends continue, there may arrive a time when it becomes uneconomic to increase complexity in order to access lower grade resources with no net improvement in productivity.

Environmental impact

Forest in Indonesia being cut for palm oil plantation.

Some critics[who?] 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.[70] Other critics draw on archaeology to cite examples of cultures they claim have disappeared because they grew beyond the ability of their ecosystems to support them.[71] Concerns about possible negative effects of growth on the environment and society led some to advocate lower levels of growth, from which comes the ideas of uneconomic growth and de-growth, and Green parties which argue that economies are part of a global society and a global ecology and cannot outstrip their natural growth without damaging them.

Those more optimistic about the environmental impacts of growth believe that, although localized environmental effects may occur, large-scale ecological effects are minor. The argument as stated by commentators Julian Lincoln Simon states that if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them.[72]

Equitable growth

While acknowledging the central role economic growth can potentially play in human development, poverty reduction and the achievement of the Millennium Development Goals, 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.[73] 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.[74] In the words of the Secretary General of the United Nations Ban Ki-Moon:

While economic growth is necessary, it is not sufficient for progress on reducing poverty.[73]

Researchers at the Overseas Development Institute compares situations such as in Uganda, where during a period of annual growth of 2.5% between 2000 and 2003, the percentage of people living in poverty actually increased by 3.8%.[73] The ODI thus emphasises the need to ensure social protection is extended to allow universal access and that policies are introduced to encourage the private sector to create new jobs as the economy grows (as opposed to jobless growth) and seek to employ people from disadvantaged groups.[73]

Implications of global warming

see Economics of global warming

Up to the present there are close correlations of economic growth with carbon dioxide emissions across nations, although there is also a considerable divergence in carbon intensity (carbon emissions per GDP).[75] The Stern Review notes that the prediction that "under business as usual, global emissions will be sufficient to propel greenhouse gas concentrations to over 550ppm CO2e by 2050 and over 650–700ppm 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.[76]

As a consequence, growth-oriented environmental economists propose massive government intervention into switching sources of energy production, favouring wind, solar, hydroelectric, and 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 technology can be cost-effective and reliable.[77] The Stern Review, 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 is 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.

On the other hand, Nigel Lawson claimed that people in a hundred years' time would be "seven times as well off as we are today", therefore it is not reasonable to impose sacrifices on the "much poorer present generation".[78]

Prominent growth economists

See also

References

  1. ^ Statistics on the Growth of the Global Gross Domestic Product (GDP) from 2003 to 2013, IMF, October 2012.
  2. ^ "Profits and Business Investment" Paul Krugman, New York Times", February 9, 2013
  3. ^ "Still Say’s Law After All These Years" Paul Krugman, New York Times, February 10, 2013
  4. ^ "Aggregate Demand, Instability and Growth" Review of Keynesian Economics, January, 2013 (see also this review of the paper)
  5. ^ Lucas, R. E. 1988. "On the mechanics of economic development," Journal of monetary economics, 22(1), 3-42.
  6. ^ Ayres, Robert (1989). "Technological Transformations and Long Waves" (PDF): 9. {{cite journal}}: Cite journal requires |journal= (help)
  7. ^ Clark, Gregory (2007). A Farewell to Alms: A Brief Economic History of the World. Princeton University Press. ISBN 978-0-691-12135-2<Part I: The Malthusian Trap> {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)CS1 maint: postscript (link)
  8. ^ Clark 2007, pp. Part 2: The Industrial Revolution
  9. ^ Kendrick, J. W. 1961 "Productivity trends in the United States," Princeton University Press
  10. ^ a b Landes, David. S. (1969). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, New York: Press Syndicate of the University of Cambridge. ISBN 0-521-09418-6. {{cite book}}: Check |authorlink= value (help); Cite has empty unknown parameter: |coauthors= (help); External link in |authorlink= (help)
  11. ^ a b Hounshell, David A. (1984), From the American System to Mass Production, 1800–1932: The Development of Manufacturing Technology in the United States, Baltimore, Maryland: Johns Hopkins University Press, ISBN 978-0-8018-2975-8, LCCN 83016269, OCLC 1104810110
  12. ^ a b Ayres, Robert U.; Warr, Benjamin (2004). "Accounting for Growth: The Role of Physical Work" (PDF). {{cite journal}}: Cite journal requires |journal= (help)
  13. ^ Grubler, Arnulf (1990). The Rise and Fall of Infrastructures (PDF).
  14. ^ Taylor, George Rogers. The Transportation Revolution, 1815-1860. ISBN 978-0873321013. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  15. ^ a b Wells, David A. (1890). Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society. New York: D. Appleton and Co. ISBN 0543724743. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  16. ^ Atack, Jeremy; Passell, Peter (1994). A New Economic View of American History. New York: W.W. Norton and Co. ISBN 0-393-96315-2. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  17. ^ Beaudreau, Bernard C. (1996). Mass Production, the Stock Market Crash and the Great Depression. New York, Lincoln, Shanghi: Authors Choice Press. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  18. ^ Moore, Stephen; Simon, Julian (December 15, 1999). "The Greatest Century That Ever Was: 25 Miraculous Trends of the last 100 Years, The Cato Institute: Policy Analysis, No. 364" (PDF). {{cite journal}}: Cite journal requires |journal= (help)Diffusion curves for various innovations start at Fig. 14
  19. ^ Leading article: Africa has to spend carefully. The Independent. July 13, 2006.
  20. ^ Data refer to the year 2008. $26,341 GDP for Korea, $1513 for Ghana. World Economic Outlook Database-October 2008. International Monetary Fund.
  21. ^ Lawrence H. Officer, "What Was the U.K. GDP Then?" MeasuringWorth, 2011. URL:http://www.measuringworth.com/ukgdp/
  22. ^ The Theory of Comparative Advantage http://internationalecon.com/Trade/Tch40/T40-0.php
  23. ^ Robert M. Solow (1956), "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics, 70(1), p p. 65-94.
  24. ^ Trevor W. Swan (1956). "Economic Growth and Capital Accumulation', Economic Record, 32, pp. 334–61.
  25. ^ Kendrick, John W. (1961). Productivity Trends in the United States. Princeton University Press for NBER. p. 111. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  26. ^ Ayres, Robert U. (1998). Turning Point: an End to the Growth Paradigm. London: Earthscan Publications. pp. 193–4.
  27. ^ Two Paradigms of Production and Growth Robert Ayres & Benjamin Warr
  28. ^ Romer, 1986
  29. ^ Lucas, 1988
  30. ^ Elhanah Helpman, The Mystery of Economic Growth, Havard University Press, 2004.
  31. ^ Harry D. Saunders, "The Khazzoom-Brookes postulate and neoclassical growth", The Energy Journal, October 1, 1992.
  32. ^ Ford, Henry; Crowther, Samuel (1930). Edison as I Know Him (PDF). Cosmopolitan Book Company. p. 15 (on line edition). {{cite book}}: Text "New York" ignored (help)
  33. ^ Landes, David. S. (1969). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, New York: Press Syndicate of the University of Cambridge. pp. 289, 293. ISBN 0-521-09418-6. {{cite book}}: Check |authorlink= value (help); Cite has empty unknown parameter: |coauthors= (help); External link in |authorlink= (help)
  34. ^ Constable, George (2003). A Century of Innovation: Twenty Engineering Achievements That Transformed Our Lives. Washington, DC: Joseph Henry Press. ISBN 0-309-08908-5. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)<Sponsored by the National Academy of Engineering>
  35. ^ Committee on Electricity in Economic Growth Energy Engineering Board Commission on Engineering and Technical Systems National Research Council (1986). Electricity in Economic Growth. Washington, DC: National Academy Press. pp. 16, 40. ISBN 0-309-03677-1<Available as free .pdf download> {{cite book}}: line feed character in |last1= at position 44 (help)CS1 maint: postscript (link)
  36. ^ Ayres, Robert U.; Warr, Benjamin (2006). "Economic growth, technological progress and energy use in the U.S. over the last century: Identifying common trends and structural change in macroeconomic time series, INSEAD" (PDF). {{cite journal}}: Cite journal requires |journal= (help)
  37. ^ Ayres, R. U.; Ayres, L. W.; Warr, B. (2002). "Exergy, Power and Work in the U. S. Economy 1900-1998, Insead's Center For the Management of Environmental Resources, 2002/52/EPS/CMER" (PDF). {{cite journal}}: Cite journal requires |journal= (help)
  38. ^ Ayres, Robert; Warr, Banjamin. The Economic Growth Engine: How Energy and Work Drive Material Prosperity (The International Institute for Applied Systems Analysis). Edward Elgar Publishing; Reprint edition (October 31, 2010). ISBN 1-84980-435-4. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  39. ^ Robert U. Ayres and Benjamin Warr, The Economic Growth Engine: How useful work creates material prosperity, 2009. ISBN 978-1-84844-182-8
  40. ^ Hall, Charles; Lindenberger, Dietmar; Kümmel, Reiner; Kroeger, Timm; Eichhorn, Wolfgang (2001). "The Need to Reintegrate the Natural Sciences with Economics". BioScience. 51 (8): 663–673.
  41. ^ Galor O., 2005, From Stagnation to Growth: Unified Growth Theory. Handbook of Economic Growth, Elsevier
  42. ^ Paul Rosenstein-Rodan [specify]
  43. ^ • Quote from Philippe Aghion, 2002, Schumpeterian Growth Theory and the Dynamics of Income Inequality, Econometrica, 70(3), 855–882.
       • Also see Wendy Carlin and David Soskice, 2006, Macroeconomics: Imperfections, Institutions & Policies, specifically chapter 14.
  44. ^ • Philippe Aghion and Peter Howitt, 1992, A Model of Growth Through Creative Destruction, Econometrica, 60(2), 323-351.
       • Philippe Aghion, 2002, Schumpeterian Growth Theory and the Dynamics of Income Inequality, Econometrica, 70(3), 855–882.
  45. ^ Daron Acemoğlu, Simon Johnson and James A. Robinson.The Colonial Origins of Comparative Development: An Empirical Investigation. American Economic Review 91(5): 1369–401. 2001.
  46. ^ • Mankiw, N. Gregory, David Romer, and David Weil. 1992. "A contribution to the empirics of economic growth." Quarterly Journal of Economics 107, no. 2 (May): 407-437
       • Sala-i-Martin, Xavier, Gernot Doppelhofer, and Ronald I. Miller. 2004. "Determinants of long-term growth: A Bayesian Averaging of Classical Estimates (BACE) approach." American Economic Review 94, no. 4 (September): 813–835.
       • LudRomer, Paul. 1990. "Human capital and growth: Theory and evidence." Carnegie-Rochester Conference Series on Public Policy 32: 251–286.
  47. ^ Barro, Robert J., and Jong-Wha Lee. 2001. "International data on educational attainment: Updates and implications." Oxford Economic Papers 53, no. 3 (July): 541–563.
  48. ^ Hanushek, Eric A., and Dennis D. Kimko. 2000. "Schooling, labor force quality, and the growth of nations." American Economic Review 90, no. 5 (December): 1184–1208 [1]
  49. ^ • Hanushek, Eric A., and Ludger Woessmann. 2008. "The role of cognitive skills in economic development." Journal of Economic Literature 46, no. 3 (September): 607–668 [2].
       • Hanushek, Eric A., and Ludger Woessmann. 2011. "How much do educational outcomes matter in OECD countries?" Economic Policy, 26, no. 67: 427–491.[3]
  50. ^ Berg, Andrew G.; Ostry, Jonathan D. (2011). "Equality and Efficiency". Finance and Development. 48 (3). International Monetary Fund. Retrieved September 10, 2012.
  51. ^ Kaldor, Nicoals, 1955, Alternative Theories of Distribution,” Review of Economic Studies, 23(2), 83-100.
  52. ^ Berg, Andrew G.; Ostry, Jonathan D. (2011). "Equality and Efficiency". Finance and Development. 48 (3). International Monetary Fund. Retrieved September 10, 2012.
  53. ^ Galor, Oded and Joseph Zeira, 1993, "Income Distribution and Macroeconomics," Review of Economic Studies, 60(1), 35-52.
  54. ^ Alesina, Alberto and Dani Rodrik, 1994. "Distributive Politics and Economic Growth," Quarterly Journal of Economics, 109(2), 65-90; Persson, Torsten and Guido Tabellini, 1994, “Is Inequality Harmful for Growth?” American Economic Review 84(3), 600-621.
  55. ^ Perotti, Roberto, 1996, “Growth, Income Distribution, and Democracy: What the Data Say” Journal of Economic Growth, 1(2), 149-187.
  56. ^ Inequality and Unsustainable Growth: Two Sides of the Same Coin? Andrew G. Berg and Jonathan D. Ostry| IMF STAFF DISCUSSION NOTE | April 8, 2011
  57. ^ "Is Inequality Necessary?" by Timothy Noah, The New Republic December 20, 2011
  58. ^ In Pursuit of Happiness Research. Is It Reliable? What Does It Imply for Policy? The Cato institute. April 11, 2007
  59. ^ a b c d e f g h i j k 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
  60. ^ Case, K.E., and Fair, R.C. 2006. Principles of Macroeconomics. Prentice Hall. ISBN 0-13-222645-6, ISBN 978-0-13-222645-5.
  61. ^ Attention: This template ({{cite pmid}}) is deprecated. To cite the publication identified by PMID 19240221, please use {{cite journal}} with |pmid=19240221 instead.
  62. ^ a b "Chapter 17: Growth and Productivity-The Long-Run Possibilities". Oswego.edu. 1999-06-10. Retrieved 2010-12-22.
  63. ^ a b Ronald Bailey (2004-02-04). "Science and Public Policy - Reason Magazine". Reason.com. Retrieved 2010-12-22. {{cite web}}: Unknown parameter |unused_data= ignored (help)
  64. ^ a b Hayward, Steven F. "That Old Time Religion". AEI. Retrieved 2010-12-22.
  65. ^ a b Regis, Ed. Wired http://www.wired.com/wired/archive/5.02/ffsimon_pr.html. {{cite news}}: Missing or empty |title= (help)
  66. ^ Wells, David A. (1891). Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society. New York: D. Appleton and Co. ISBN 0-543-72474-3. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)Opening line of the Preface.
  67. ^ Smil, Vaclav (2004). Enriching the Earth: Fritz Haber, Carl Bosch, and the Transformation of World Food Production. MIT Press. ISBN 0-262-69313-5. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  68. ^ Hall, Charles A.S.; Cleveland, Cutler J.; Kaufmann, Robert (1992). Energy and Resource Quality: The ecology of the Economic Process. Niwot, Colorado: University Press of Colorado. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
  69. ^ "Overshoot" by William Catton, p. 3 [1980]
  70. ^ • Donella H. Meadows, Jorgen Randers, Dennis L. Meadows. Limits to Growth: The 30-Year Update. White River Junction, Vermont : Chelsea Green, 2004.
       • Allan Schnaiberg. The Environment: From Surpus to Scarcity. New York: Oxford University Press.
  71. ^ Jared Diamond. Collapse: How Societies Choose to Fail or Succeed. Penguin, 2006.
  72. ^ The Ultimate Resource, Julian Simon
  73. ^ a b c d Claire Melamed, Kate Higgins and Andy Sumner (2010) http://www.odi.org.uk/resources/details.asp?id=4892&title=millennium-development-goals-equitable-growth-policy-brief Economic growth and the MDGs] Overseas Development Institute
  74. ^ Ravallion, M. (2007) Inequality is bad for the poor in S. Jenkins and J. Micklewright, (eds.) Inequality and Poverty Re-examined, Oxford University Press, Oxford.
  75. ^ Stern Review, Part III Stabilization. Table 7.1 p. 168
  76. ^ Stern Review Economics of Climate Change. Part III Stabilization p.183
  77. ^ Jaccard, M. 2005 Sustainable Fossil Fuels. Cambridge University Press.
  78. ^ "Examination of Witnesses (Questions 32–39)". 16 May 2007. Retrieved 2007-11-29.

Further reading

  • Joseph Halevi, David Laibman and Edward J. Nell (eds.) (1992) Beyond the Steady State: Essays in the Revival of Growth Theory, edited with, London, UK:
  • Barro, Robert J. (1997) Determinants of Economic Growth: A Cross-Country Empirical Study. MIT Press: Cambridge, MA.
  • 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.
  • Galor, O. (2005) From Stagnation to Growth: Unified Growth Theory. Handbook of Economic Growth, Elsevier.
  • Jones, Charles I. (2002) Introduction to Economic Growth 2nd ed. W. W. Norton & Company: New York, N.Y.
  • Kirzner, Israel. (1973) Competition and Entrepreneurship
  • Puthenkalam, John Joseph, "Integrating Freedom, Democracy and Human Rights into Theories of Economic Growth", Manila, 1998.
  • Lucas, Robert E., Jr. (2003) The Industrial Revolution: Past and Future, Federal Reserve Bank of Minneapolis, Annual Report online edition
  • Mises, Ludwig E. (1949) Human Action 1998 reprint by the Mises Institute
  • Schumpeter, Jospeph A. (1912) The Theory of Economic Development 1982 reprint, Transaction Publishers
  • Weil, David N. (2008) Economic Growth 2nd ed. Addison Wesley.
  • Vladimir N. Pokrovskii (2011) Econodynamics. The Theory of Social Production, Springer, Berlin.
  • Paepke, C. Owen. The Evolution of Progress: The End of Economic Growth and the Beginning of Human Transformation. New York, Toronto: Random House. ISBN 0-679-41582-3.

Articles and lectures

Data

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