Economic Growth Common Idea Economic growth is the most important study in economics today. The first book on economics was by Adam Smith The Wealth of Nations the full title was the Inquire Into The Nature And Sources Of The Wealth Of Nations. Economic growth determines a countries future, and economic growth in the past determines a countries present as far as its material values are concerned. (Buechner Recording) So every material value of the modern world is a result economic growth in the past, or your standard of living is the result of economic growth in the past. Economic growth in the future will determine whether or not there is rising or falling economic wealth, and coordinated with that whether or not the standard of living in the future continues to rise or fall. For example: In 1870 England was the leading industrial power of the globe, and as a consequence it also was the leading political power of the globe. According to M.
Northrup Buechner the real wage rate in England is estimated to have been about 50% higher than the real wage rate in other European countries at that time. (Recording) It was about 1870 because of the rise of statist policies and ideologies that rate of growth in England started to lag behind that of the other European Countries. It didnt lag a lot Buechner states the statistical estimate was less than one percent a year, however for a period of 10 or 20 years thatll make a difference hardly anybody would notice. Yes maybe so, but if you compound that interest rate over 100 years what you get is what you see today. England is essentially a third rate economic power, and the real wage rate in England today is estimated to be about 33% less than the real wage rate in other European countries.
(Buechner Recording) In 1870 the United States in 1870 was an economically backward, internationally insignificant, and unimportant country in the world with respect to matters regarding foreign affairs. According to Buechner it was about 1870 when the United States embarked on a growth rate of over 5% percent a year, which was sustained for a period of over 40 years. (Recording) No country in the history of the world matched that record. At the end of that period about the time of World War I the United States took Britains place as the leading industrial power of the globe. Introduction Here is the subject, and the direction on which I would like to approach my thesis.
In the 19th century the United States rate of growth was over 5% a year. According to Wayne D. Angel et al., chief economist for Bear, Stearns & CO. its estimated the best we can do is estimated at somewhere between 2 or 3 % a year. (Online) The long term expected growth rate in the United States has been cut in half.
What has happened? As a student of economics I have an economic answer. Im going to be looking at this from the perspective of the material, physical, and economic means of economic growth. That is the economic causes of economic growth or decline. Im not talking about philosophy here Im just looking at basic mechanics. What has to be done in reality? Well it is no surprise that the fundamental answer that question is thought; then, there is action that has to been taken based on the thought.
What specific actions are required? I dont want to be accused of ignoring philosophy so let me just state briefly the philosophical preconditions of economic growth because these are really fundamental. Any Rand, the infamous author of Atlas Shrugged states the belief in the reality of this earth, and the world we see around us is real, not just an imperfect reflection of a higher reality. Also the belief in the power of reason to grasp the world, to know the world, to grasp reality in order to deal with the facts, and that the mind is competent to guide life. Some sanction on the pursuit of personal happiness is also a precondition. Some belief apart from the idea of that to be selfish is irredeemably evil; you cant believe that and have economic progress.
(1075-84) There has to be some degree of economic freedom, men must be able to act to some extent within some significant range. The underlying assumption for everything that I am going to write that follows is a free or at least semi-free country. If you want to push me when all is said, and done I would say if you get the philosophical preconditions you will get economic growth; not without effort but probably without any additional abstract knowledge. Increasing Economic Growth When you get it how do you get? So lets begin with a definition economic growth Im defining economic growth as an increase in the total productive capacity of an economy. (Buechner Recording) Now what is productive capacity? Well its the capacity to produce output, goods, and services. (Buechner Recording) What does productive capacity consist of? According to Buechner these are the primary components of an economies productive capacity? Here are the components: 1.
Knowledge and skills 2. Machinery and tools 3. Plants and structures 4. Raw materials 5. Parts, materials, ingredients, intermediate goods (Recording) Productive capacity consists of the knowledge and skills of the population; this of course is the fundamental productive capacity, or in more objective terms mans mind is the fundamental productive capacity. (Rand 1075-84) Everything else in this paper depends on knowledge, and knowledge depends on thought.
Those are the fundamentals of all productive capacity. Numbers 2-5 fall under the general heading of capital goods or producer goods. Machinery and tools economists usually put this under a triumberant of machinery tools and equipment. Plants and structures of the economy are a big category, and includes factories, office buildings, damns, highways, bridges, power lines, telephone lines, pipe lines, railroad tracks, airports etcetera. Sources of raw materials include mines, cleared land, oil wells, lumber, fisheries, and things of that nature are what economists call intermediary goods.
Intermediary goods are the parts, the materials the ingredients that are passed from stage to stage through the productive process, and are used to produce the things that come out at the other end of the factory. Economic growth means that the total quantity of these things increases, and when the total quantity of these things increases more can be produced. Now there are two essentially different ways, which they can potentially increase. We can produce more of the same thing or we can have more of the same machines, tools, and factories of the same kind producing the same output, more raw materials of the same kind etcetera. More of the same would mean economic growth signifying that the total productive capacity of the economy had increased.
But historically, and this is a crucial point historically there has been no economic growth with out better machines and tools, better factories, better products, better goods, better sources of raw materials. (Buechner Recording) I am going to take that as a basic fact. Economic growth fundamentally, and essentially takes the form of better goods and services of all kinds. Im now going to assume that the marginal product of capital does not decrease(Hazlitt 40) the assumption that it does I think is clearly contrary to fact. That makes a huge difference in the theory of economic growth.
Where do we start with better? We start with better know how in the means of new ideas, technological discoveries, and inventions. These ideas have to be put into a concrete material form of better machinery, plants, structures, and tools that can be classified under the general heading technological progress. According to Hazlitt if you get that, and you get total productive capacity increasing faster than the population grows you get a rising standard of living. (90) How do we get these things? How do we get more and better? Of all of these components I have a very simple minded answer; they have to be produced. I am going to use a circle to represent the economies total productive capacity.
Table 1 In order to have an increase in productive capacity you have to use productive capacity to produce more capacity. Now this starts with one-man alone thinking a new idea, a new product, he or she; then, communicates this to others. They have to figure out how the idea or product can be produced, and at the same time raise capital in order to hire the labor, buy the tools, and erect the plant. Once the structure has been created all those involved need go to work, and produce it; thus using the existing productive capacity to produce more capacity. This process becomes a reality by using your existing labor force to train, and communicate skill to other portions of the labor force; therefore utilizing men, old machines, and old factories to produce new factories, new tools, and new sources of raw materials.
This is very simple, and at every stage in this processes your using your existing productive capacity to produce more capacity. Well what else can you do with productive capacity? The alternative is to use productive capacity to produce consumer goods and services. According to Buechner for the purposes of economic growth these are the only two alternatives uses of an economies productive capacity-you can use your existing capacity to produce more capacity, or you can use your existing productive capacity to produce consumer goods and services. (Recording) So economic growth involves a trade off here is the trade off.