By Jessica and Reid
Economic growth is widely regarded as one of the most important goals for a country to aim towards. It creates jobs, increases wages, and creates more things to buy—so how do we go about making it happen, and what factors are most important in doing so? According to Blanchard, the sources of economic growth are capital accumulation and technological progress, with technological progress being the more key long-term factor (232). This is due to the nature of decreasing returns to capital. There comes a point where more capital simply does not have a significant effect. The first riding mower can make a large difference in the speed a golf course can be mowed, but the forty-first is unlikely to be much more important than the fortieth. Therefore, Blanchard continues by stating that “Sustained growth requires sustained technological progress…the economy’s rate of growth of output per person is eventually determined by its rate of technological progress” (232-233). More efficient tools allow workers to work more effectively, improving the rate at which things are accomplished without needing to buy a larger number of tools or hire a larger set of workers. There is no similar effect of diminishing returns as there is with capital since technological improvements improve tools for each worker rather than simply giving workers more tools that they might not need or want.
The idea that technology is key to economic growth is widely known, and the subject of much focus. An article for the Wall Street Journal exuberantly praises the transformative impact of technology, stating that “Not labor, not capital, but technology has been the single greatest driver of economic growth since the Industrial revolution…Nearly all wealth in the world has been created since the rise of industry” (Yu) This technological progress, however, is expected to come as a result of global turmoil and conflict. The article focuses heavily on the tech race—not mere incremental improvements, but direct efforts by countries to outpace each other in the field of technological progress, catapulting the world forward. Yu cites technological marvels such as putting a person on the moon and creating the internet as a result of the previous Cold War tech race, both of which had major positive impacts on the economy. She then wonders where the next tech race could take us. Despite Yu’s expectations for conflict-driven technological progress remaining in the future, for now, efforts to improve technology are certainly not stalled in the present. Automation provides an interesting field combining both capital and technological prowess by allowing the capital to work itself. In an article for the New York Times, Ben Cassleman notes that “The push towards automation goes far beyond the restaurant sector… 43 percent of businesses said they expected to reduce their workforces through new uses of technology.” This is an intense shift, both a swift motion of technological progress and heavy investment into new capital. Logically, economic growth will follow. However, it isn’t entirely good news for workers. Cassleman couches the bad news with a positive spin, stating that “Automation may harm specific workers, but if it makes the economy more productive, that could be good for workers as a whole.” Jobs that can be replaced by automation certainly result in increased efficiency, as the number of workers goes down but the product remains the same, but that is still increasing unemployment.
The above diagram illustrates the impact of new technological developments on economic growth (Marmer).
There are factors outside of technology and capital that are relevant to economic growth. Stephen Knack, in his essays, describes a broad range of influences such as life expectancy, property rights, and terms-of-trade shifts. The two he focuses on most, however, are a democracy—where he finds that an intermediate amount of civil liberties and political rights are most beneficial to growth—and inflation, where he finds that at levels higher than 20% growth is impaired. Inflation logically causes uncertainty about the value of money in the future that deters savings and investment, which will naturally hinder the growth of the economy. His findings on democracy are interesting, as they suggest that the harshest dictatorships need to allow more civil liberties to grow, yet the freest democracies lose some efficiency as well. Additionally, in direct news about the United States’ economic growth, the Biden administration and the Conference Board both predict around 3% growth in the coming year. This is heavily influenced by what both identify as another major factor towards economic growth—stability. Economic stability allows general access to essential life resources, including financial resources, housing, food, and secure jobs. In the case of the two aforementioned sources, the more immediate effects of the Ukraine crisis are examined, identifying instability as a source of higher inflation and a strain on energy prices and food. The CNBC article additionally notes spikes in oil prices, which can be a notable hindrance to the economy and its growth. As expressed by the aforementioned sources, some factors that determine the efficiency of economic growth include technological advancement, especially those that influence production, democracy in relation to civil and political rights, and macroeconomic stability.
Works Cited
Blanchard, Olivier. Macroeconomics. 7th ed., Pearson, 2016.
Casselman, Ben. “Pandemic Wave of Automation May Be Bad News for Workers.” The New York Times, The New York Times, 3 July 2021, https://www.nytimes.com/2021/07/03/business/economy/automation-workers-robots-pandemic.html.
Economic Forecast for the US Economy - The Conference Board. https://www.conference-board.org/research/us-forecast.
Franck, Thomas. “White House Sees Strong GDP Growth in 2022 despite Inflation Risks.” CNBC, CNBC, 21 Apr. 2022, https://www.cnbc.com/2022/04/21/white-house-sees-strong-gdp-growth-in-2022-despite-additional-economic-risks.html.
Knack, Stephen. "Determinants of Economic Growth." Southern Economic Journal, vol. 65, no. 1, July 1998, pp. 185+. Gale Academic OneFile, link.gale.com/apps/doc/A21034141/AONE?u=taco36403&sid=bookmark-AONE&xid=2dc86207. Accessed 27 Apr. 2022.
Marmer, Max. “A Look at How Technology Is Reshaping the Global Economy.” Medium, Medium, 13 Feb. 2018, https://maxmarmer.medium.com/a-look-at-how-technology-is-reshaping-the-global-economy-c716c4681e06.
Yu, Shirley. “Opinion | The World Is in Crisis, and That's Good for the Economy.” The Wall Street Journal, Dow Jones & Company, 22 Apr. 2022, https://www.wsj.com./articles/world-in-crisis-and-good-for-economy-growth-gdp-recession-inflation-technology-innovation-semiconductors-china-taiwan-ukraine-starlink-musk-11650634091
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