Ultimately, long-run economic growth is the most important aspect of how the economy performs. Material standards of living and levels of economic productivity in the United States today are about four times what they are today, in say, Mexico because of favorable initial conditions and successful growth-promoting economic policies over the past two centuries. Material standards of living and levels of economic productivity in the United States today are at least five times what they were at the end of the nineteenth century and more than ten times what they were at the founding of the republic. --Brad DeLong
(This lesson draws heavily on Brad DeLong's Macroeconomics textbook, particularly Chapter 5.)
Economic growth is defined as the change in output per capita. To measure output, we take the total value of the goods and services produced by an economy in a year, called Gross Domestic Product (GDP). Then we divide by population to get the average standard of living. Alternatively, we can divide output by the size of the working population in order to measure labor productivity. We use either of these measures of output per capita to compare economic performance across time or across countries.Historical Perspective
Here is a table (taken from DeLong) showing estimates of the growth in world population and average output per person from ancient times to the present.
|GDP per person|
in year-2000 dollars
A few remarks about the table:
Measuring the value of output historically is very tricky. There were goods that were very important at some points in time (such as covered wagons) which did not exist in earlier times and which are obsolete today.
Through 1800, average output per worker was less than $1 a day in today's terms. Nearly everyone lived in what we would call a state of poverty. The middle class is a very recent phenomenon.
Most of the growth in the average standard of living has taken place in the past 100 to 150 years. Other evidence that corroborates this GDP-based perpective includes the following:
According to Ward Nicholson, around the time of Christ, the average height of males was 171.9 centimeters and the average lifespan was 41.9 years. In 1400-1800, these figures were 172.2 centimeters and 33.9 years, respectively. Even by 1900, longevity had not reached 50 years. Today, the figures are 174.2 centimeters and 71.0 years, respectively.
According to DeLong (p. 440-441), around the time of Christ, at least 90 percent of the populace had to be employed in agriculture in order to produce enough food. By 1800, this proportion still was over 50 percent. In the United States today, the proportion stands at around 2 percent.
According to Niall Ferguson (The Cash Nexus, p. 34), "between the seventeenth and twentieth century, the capacity of war to kill rose by roughly a factor of 800."
According to data cited in this paper by DeLong, the conversion from steam engines to electric motors helped to increase the total mechanical power in the United States by a factor of 40 in the seventy years from 1869 to 1939.
In the article cited above, DeLong notes that the exponential increase in the instructions performed per second by a computer chip, along with the growth in the number of computers, implies a million-fold increase in total computational power in the last forty years.
Projecting this trend into the future, Ray Kurzweil makes this astonishing claim (The Age of Spiritual Machines, p.3):
our most advanced computers are still simpler than the human brain--currently about a million times simpler (give or take two orders of magnitude depending on the assumptions used). But...Computers...are now doubling in speed every twelve months. This trend will continue, with computers achieving the memory capacity and computing speed of the human brain around the year 2020.
These quantitative indicators of cumulative exponential growth are significant. However, it may be easier to grasp the dramatic nature of growth by comparing the life of a particular rich man one hundred years ago to our lives today.
High atop Anacostia Park, a rundown, working "poor" section of Washington, DC, sits the mansion of Frederick Douglass, the great nineteenth century orator and agitator for the rights of women and African Americans. Douglass, although born a slave, became a wealthy newspaper publisher. He came to Washington late in his life, as a U.S. Marshall in 1879. His 21-room mansion was on a 15-acre site and employed three servants. A reasonable guess is that he was in the top one or two percent of the wealth distribution at that time.
The Douglass mansion has been preserved today as a museum in its condition as of 1895, when he died. Below is a partial list of the appliances that can be found there, compared with their modern equivalents.
|Item in the Douglass mansion, 1895||Modern equivalent|
|Rug beater||Vacuum cleaner|
|Chamber pots||Flush toilets|
|Ice box (one cubic foot)||Refigerator/freezer (16 cubic feet)|
Today's residents of Anacostia Park, although many would be considered poor by today's statistical measures, have all of the modern conveniences on the right hand side of the table. In addition, they can drive to work, while Frederick Douglass had to walk five miles to his job in the Capitol building. They have radios, televisions, and many other goods that the wealthy Douglass never possessed.
Since 1500, economic growth has accelerated. The main elements of this acceleration have been:
The "demographic transition," toward fewer children, so that population growth places less pressure on the food supply.
Modern science and technology, which has vastly improved our ability to grow food, use machinery in place of human labor, and harness information to use resources efficiently.
Modern democratic states, which encourage individual freedom and promote economic growth.
All of these elements promise to contribute to economic growth in the future. The "demographic transition" has begun in the underdeveloped countries of the world. Science continues to open new frontiers in biotechnology and nanotechnology (manipulating matter at the molecular level), while innovation continues in computing and communications. Most economists believe that we can achieve growth of at least 1.5 percent per year.
To extrapolate the effect of economic growth, we can compute what the average income will be in fifty years based on a given rate of growth. For example, if average income in the U.S. today is $30,000 per year, and income grows at 1.5 percent per year, what will income be in fifty years? To answer this, we multiply ($30,000)(1.015)50, which gives $63,157. Average income will more than double if real growth is just 1.5 percent per year. This is an example of the power of compounding, or exponential growth.
What this sort of economic growth means is that in fifty years the average person will have an income that today would be considered upper middle class. Although some people will have less income than others, absolute poverty is something that can be eliminated by economic growth and policies that assist those who are mentally and physically disabled.
A difference in growth rates that might seem small--say, 2 percent vs. 1 percent--is one that economists would deem to be very important, because of the cumulative effect over many years. We would argue that such a difference is large enough to affect the outlook for many major social concerns, including:
Ten years from now, the outlook for these issues will be brighter if economic growth averages over 2 percent than if economic growth averages less than 1 percent. If we have more growth, then the poor will enjoy a higher standard of living, social security will be solvent, and our ability to maintain clean air and water will be greater.
More Growth Arithmetic
Suppose that we look at average income at two points in time, and we want to compute the average rate of economic growth over that span. We take the ratio of the two levels of income, and then compute the nth root, where n is the number of years. Then we subtract one to get the growth rate. For example, the table above says that from 1500 to 1800 average per capita GDP grew from $175 to $250. The average rate of growth was
($250/$175)(1/300) - 1.0 = .00119, or 0.119 percent.
What will average income be in fifty years if growth averages 2 percent per year? What will it be if growth averages 1 percent per year?
If an upper-middle-class income today is $60,000 per year, what would that income be in 50 years, assuming 1.5 percent annual growth?
Using the data in the table above, compute the average annual growth rate from 1800 to 1900, from 1900 to 1950, from 1950 to 1975, and from 1975 to 2000. Which was the fastest period of economic growth?