20.1 The Relatively Recent Arrival of Economic Growth
3 min read•june 24, 2024
doesn't happen by accident. It's fueled by a mix of technological advances, resource availability, and smart policies. The kicked things off with game-changing inventions and agricultural improvements.
But it's not just about machines and crops. Strong , fair laws, and smart government policies create an environment where businesses can thrive. Investing in education, infrastructure, and stable economic conditions sets the stage for long-term growth and prosperity.
Factors Enabling Economic Growth
Industrial Revolution Enablers
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Top images from around the web for Industrial Revolution Enablers
The Industrial Revolution | Boundless US History View original
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Industrial Revolution - Wikipedia View original
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- Technological advancements enabled mechanization of production, spinning jenny and power loom revolutionized textile industry leading to mass production
- Agricultural increases through crop rotation to maintain soil fertility, selective breeding to improve crop yields and livestock, enclosure movement consolidated small landholdings into larger, more efficient farms
- Abundant natural resources like coal powered steam engines and iron ore used to manufacture machinery and infrastructure
- Expansion of international trade driven by mercantilism (belief that nations should maximize exports and minimize imports to accumulate wealth) and colonial empires that provided raw materials and markets for finished goods
- Accumulation of capital through rise of banking and finance institutions that mobilized savings and provided credit for investment, investment in infrastructure such as canals and railways facilitated trade and economic activity
- Demographic changes including population growth that provided labor force for factories and urbanization as people migrated from rural areas to cities in search of employment
Institutional and Policy Factors
Property Rights and Legal Systems
- Secure property rights encourage investment by providing assurance that individuals and businesses can reap the rewards of their efforts, promote entrepreneurship by allowing individuals to capitalize on their ideas and innovations
- Contract enforcement facilitates transactions by ensuring that parties honor their agreements, reduces transaction costs associated with monitoring and enforcing contracts
- provides stability and predictability in economic interactions, limits arbitrary government actions that can disrupt economic activity
- Intellectual property protection (patents, copyrights, trademarks) incentivizes innovation by granting exclusive rights to inventors and creators, encourages research and development by allowing firms to recoup their investments
Public Policies
- Investment in through education improves workforce skills and productivity, healthcare promotes a healthy and productive labor force
- Infrastructure development (transportation networks, communication systems) reduces costs of trade and facilitates economic activity
- characterized by low and stable inflation provides a predictable environment for economic decision-making, sustainable fiscal policies (balanced budgets, manageable debt levels) ensure long-term economic stability
- Trade policies that promote openness to international trade (free trade agreements) and reduction of trade barriers (tariffs, quotas) can stimulate economic growth by expanding markets and encouraging specialization
- Regulatory environment that makes it easy to start and operate businesses (streamlined procedures, minimal red tape) and promotes competitive markets can foster entrepreneurship and innovation
- Taxation policies that provide incentives for work and investment (low marginal tax rates) while generating sufficient revenue to fund public goods and services can support long-run economic growth
Key Terms to Review (24)
Capital Accumulation: Capital accumulation refers to the process of increasing the stock of capital goods, such as machinery, equipment, and infrastructure, in an economy over time. It is a crucial driver of economic growth and development, as it enhances the productive capacity of an economy by expanding the means of production.
Convergence Theory: Convergence theory is a concept in economics that suggests less developed countries will eventually catch up to more developed countries in terms of economic growth and standard of living. It proposes that as countries develop, their per capita incomes and productivity levels will converge towards those of the most advanced economies.
East Asian Miracle: The East Asian Miracle refers to the rapid economic growth and development experienced by several East Asian countries, including Japan, South Korea, Taiwan, Hong Kong, and Singapore, in the latter half of the 20th century. This remarkable economic transformation is often considered a model for other developing countries to emulate.
Economic Growth: Economic growth refers to the sustained increase in the productive capacity of an economy over time, resulting in a rise in the real gross domestic product (GDP) per capita. It is a fundamental concept in macroeconomics that encompasses the expansion of a country's output, employment, and standard of living.
Economic Institutions: Economic institutions are the formal and informal rules, norms, and structures that govern economic activities and interactions within a society. They play a crucial role in shaping the economic growth and development of a country, as they influence the incentives, constraints, and opportunities faced by individuals and organizations.
Export-Oriented Industrialization: Export-oriented industrialization is an economic development strategy that focuses on producing goods and services primarily for export markets, rather than for domestic consumption. This approach aims to drive economic growth and improve a country's standard of living by leveraging international demand and trade opportunities.
GDP per capita: GDP per capita is a measure of a country's economic output divided by its population, providing an average representation of the standard of living within that country. It is a widely used indicator for comparing the economic performance and development of different nations.
Globalization: Globalization refers to the increasing interconnectedness and interdependence of economies, societies, and cultures around the world. It involves the integration of national economies, the expansion of international trade, the movement of people and ideas across borders, and the sharing of knowledge and technology on a global scale.
Growth Accounting: Growth accounting is a methodology used to analyze the sources and drivers of economic growth. It seeks to quantify the relative contributions of different factors, such as labor, capital, and technological progress, to the overall growth of an economy over time.
Human Capital: Human capital refers to the knowledge, skills, and abilities that individuals possess, which contribute to their productivity and economic value. It encompasses the investments made in education, training, and health that enhance a person's capacity to work and earn. This concept is central to understanding labor markets, economic growth, and inequality across countries and individuals.
Industrial Revolution: The Industrial Revolution was a period of rapid industrialization and technological advancements that transformed the economies and societies of Europe and North America during the 18th and 19th centuries. This fundamental shift from an agrarian to an industrial-based economy had far-reaching implications for economic growth, the standard of living, and the measurement of societal well-being.
Labor Productivity: Labor productivity refers to the efficiency and output of workers in an economy or organization. It measures the amount of goods and services produced per unit of labor input, such as per hour worked or per employee. Labor productivity is a crucial factor in determining economic growth, competitiveness, and living standards.
Living Standards: Living standards refer to the level of wealth, comfort, material goods, and necessities available to a certain socioeconomic class or geographic area. It is a measure of the quality of life enjoyed by individuals or populations, encompassing factors such as income, employment, housing, education, health, and access to goods and services.
Long-Term Growth Trends: Long-term growth trends refer to the sustained, gradual increase in economic output and productivity over an extended period, typically measured in decades or longer. These trends capture the overall trajectory of a country's or region's economic development, reflecting the cumulative impact of various factors that drive economic growth over the long run.
Lost Decade: The 'lost decade' refers to a prolonged period of economic stagnation or decline experienced by a country or region, characterized by slow or negative growth, high unemployment, and limited progress in improving living standards. This term is particularly relevant in the context of economic growth and inflation.
Macroeconomic Stability: Macroeconomic stability refers to the ability of an economy to maintain a steady and balanced state, with low inflation, full employment, and sustainable economic growth. It is a crucial factor in ensuring the overall health and resilience of a national economy.
Malthusian Trap: The Malthusian trap refers to the idea that population growth will inevitably outstrip food supply, leading to famine, disease, and other catastrophic events that limit population growth. This concept is central to understanding the relatively recent arrival of sustained economic growth in human history.
Physical Capital: Physical capital refers to the tangible assets, such as buildings, machinery, equipment, and infrastructure, that are used in the production of goods and services. It is a crucial component of economic growth and productivity, as it enables the transformation of raw materials and labor into valuable outputs.
Productivity: Productivity is a measure of the efficiency with which resources, such as labor, capital, and technology, are used to produce goods and services. It is a crucial concept in economics that relates to the output generated per unit of input, and it is a key driver of economic growth and living standards.
Property Rights: Property rights refer to the legal and social recognition of an individual's or entity's exclusive claim to the ownership, use, and disposal of a specific asset or piece of property. These rights are fundamental to the functioning of market economies, as they provide individuals with the incentive to invest, produce, and exchange goods and services.
Rule of Law: The rule of law is a principle of governance in which all persons, institutions, and entities, public and private, including the state itself, are accountable to laws that are publicly promulgated, equally enforced, and independently adjudicated. It is a key concept in understanding the relatively recent arrival of economic growth.
Steam Engine: A steam engine is a heat engine that converts the heat energy of steam into mechanical energy. It was a crucial technological advancement that played a pivotal role in the onset of the Industrial Revolution and the relatively recent arrival of sustained economic growth.
Technological Innovation: Technological innovation refers to the development and application of new or improved technologies, processes, or products that enhance productivity, efficiency, and economic growth. It is a crucial driver of economic progress and improved standards of living.
Telegraph: The telegraph was an early electronic communication device that allowed for the rapid transmission of messages over long distances. It revolutionized communication and played a crucial role in the relatively recent arrival of economic growth.