Economic growth occurs whenever people take resources and rearrange
them in ways that are more valuable. To create valuable final products,
we mix inexpensive ingredients together according to a plan .The production
one can do is limited by the supply of ingredients, and most production
in the economy creates undesirable side effects. If economic growth
could be achieved only by producing more and more of the same kind of
goods, we would eventually run out of raw materials and suffer from
unacceptable levels of pollution and nuisance. Economic growth springs
from better plans, not just from more production.
Sustained economic growth is a relatively recent phenomenon. By AD 1000
the Chinese had learned to harness the great rivers of China for use
in growing rice. The development of Chinese technology depended on the
support and encouragement of the Chinese government. Because of China's
peculiar "hydraulic economy," the economy had for centuries
been centrally directed. But when the emperors of the Ming and Manchu
dynasties lost interest in technology, the government withdrew its support.
The loss of interest may have resulted from a desire to maintain social
stability. As China began a slow decline into economic stagnation, the
pace of economic growth quickened in Europe . Competition enhances economic
efficiency. States that wished to be European powers had to promote
economic growth. In the wake of the Renaissance and the Protestant Reformation,
a new dedication to scientific discovery and a new ethic of personal
responsibility arose. Both contributed to the increasing pace of technological
innovation and business creation. These were termed as "Microinventions"
- improvements and adaptations of ideas discovered previously. More
individual freedom existed there than anywhere else in the world. Individuals
had real possibilities in Europe, thanks to the growing respect for
human liberty. Freedom brought prosperity.
In a branch of physical chemistry known as exploratory synthesis, chemists
try mixing selected elements together at different temperatures and
pressures to see what comes out. The framework talked about here tries
to draw out the significance of three most important ingredients of
economic growth, namely physical capital, human capital and ideas.
Total Factor Productivity = Ideas {function
(physical capital, human capital)}
These
factors draw a reference from three economic growth patterns acknowledged
and accepted worldwide.
Solovian Growth: Economic growth brought about by investment, meaning
increases in the capital stock. However, investment-driven growth has
one serious drawback: diminishing marginal productivity. The principle
of diminishing marginal productivity states that increasing one input
while holding other inputs constant will eventually result in smaller
and smaller output gains from additional units of investment.
Smithian Growth: Focus on division of labor and economies of scale.
Schumpeterian Growth: Driven by increases in knowledge. These increases
in knowledge include technological innovations proper and changes in
institutions that revolutionize the ways goods are produced or marketed.
The invention of the microchip created whole new industries. Not only
do we have a flourishing computer industry, but our houses are filled
with all sorts of electronic devices that use microchips as the "brains"
to perform various tasks. The invention of the microchip completely
destroyed the vacuum tube industry over the course of a few years. This
was an example of what Schumpeter termed "creative destruction."
The creation of a new product led to the elimination of another industry.
Hence it would not be wrong to term technological innovations as the
most important factor in economic growth. Ideas can be shared. Ideas
are "non-rivalrous goods," in the jargon of economics. Because
many people can use an idea at once, a really good idea can have immense
effects on output per worker. Just as a lever increases the force a
person can apply to an object, improved technology increases the effectiveness
of factor inputs ("things") in producing outputs.
But the discovery does not end here. Growth with al its tangible and
intangible equations of factor inputs and outputs has still few mysteries
to unravel, few turns to be taken. Only a failure of imagination, the
same one that leads the man on the street to suppose that everything
has already been invented, leads us to believe that all of the relevant
institutions have been designed and that all of the policy levers have
been found. For social scientists, every bit as much as for physical
scientists, there are vast regions to explore and wonderful surprises
to discover.
Economic
Growth 