Monday, January 14, 2013

Long-run Economic Growth

              In an earlier post, I talked about economic growth but did not do it justice.  Growth is not an economic issue, it is the economic issue.  It is economic growth that determines our standard of living.  Given the experience of the last couple of centuries, it may seem that economic growth is the normal state of affairs for human society.  Surprisingly, that view is completely erroneous.

              The chart below presents estimates of the rate of growth in the world economy (measured as expenditure per capita) over the last 500,000 years.  Over the vast majority of that period there has been virtually no economic growth whatsoever.  At first blush, you may think the chart is ridiculous.  How could anyone determine how fast the economy was growing 500,000 years ago?  Actually the calculation is quite simple.  Compare the standard of living of ancient hunter gathers (approximately 500,000 years ago) with the condition of humanity just before the adoption of agriculture about 10,000 BC.  For the sake of argument, let’s assume that by 10,000 BC the standard of living had improved tenfold.  What rate of compound growth produces a tenfold improvement in the standard of living over the course of 500,000 years?  The answer is an imperceptible sliver above zero.

              Furthermore, it is not as if the adoption of agriculture set off a burst of growth.  Growth remained anemic until almost 1800 when humanity finally began translating its burgeoning scientific knowledge into practical technology.  From there forward, growth has been dramatic.  Between 1800 and 2010, the standard of living improved more than it had in the previous 500,000 years!  The bottom line is that growth is not something characteristic of human society.  The process of incorporating scientific breakthroughs into practical innovations and then actually putting those innovations to use is a story of the last few centuries.  It is a wonderful narrative I think of every time I go to the restroom (a 19th century innovation), but it is not something to take for granted.

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