10/28/11

Brief history of world economic growth, and new growth theory summarized


Economic growth over time:
From around 1,000,000 BC to 1300 AD economic growth average 0%.
From 1300-1800 growth averaged about 0.2%.
From 1800-1900 growth averaged about 1.3%.
From 1900-2000 growth averaged about 2.3%.

Why the increase in growth rates over time?  The reason has to do with labor productivity and the factors that increase it.  It also has to do with developing proper economic incentives to stimulate the factors that increase labor productivity.

Industrial revolution:

The big turning point in world history for economic growth rates occurred in England during the Industrial revolution.  It was at this point that we began using capital intensively in the good and service production process.  By substituting capital for labor, each worker was able to produce more goods and services then they were able to in the past.  The reason firms and individuals sought to invest in capital is because England had a stable, democratic, and relatively uncorrupt government.  Entrepreneurs could invest in capital and technology, and could be confident that their returns on investment would not be stolen, or taxed unfairly.

New Growth Theory:
Some economists argue that economic growth depends on governments and institutions setting up proper incentives for technology, and thus economic growth to progress.  These types of policies include protecting intellectual rights, and private property.  Without protection for your inventions or investments, there is little incentive for developing new products.

Subsidizing education and research is another method.  By making the marginal cost of acquiring an education, or performing research, more individuals are likely to explore these routes.  More educated people means a higher amount of human capital, and more research results in more technological advances.  Both of these will result in better technology and a higher production function.




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