Economic Growth - Improving our Lives

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the promo code ekon at checkout. It's time to think
like an economist. We're gonna tell you the tale of
two nations, both of which were pretty poor seventy five
years ago.
These two countries are right next to each other. They
share the same language and culture.
Seventy five years ago, most people got biased subsistence farmers,
meaning they only grew enough to feed themselves, and.
Then, in the space of just a few decades, their
fate diverged. One of the countries became one of the
most technologically advanced places in the world, while little has
changed in the other. The result is an average income
of forty four thousand dollars in the southern country and
of just seventeen hundred in the northern country.
Wait, is this a true story.
Yep, we're talking about North Korea and South Korea.
Yeah, that would fait.
What happened is that over these seventy five years, South
Korea invested a lot in capital goods. They're the tools
that workers can use to make more and better products.
It also became one of the most educated countries in
the world.
Investing in people and capital goods led to the enormous
economic growth. It means today South Korea is much wealthier
and technologically advanced compared to its neighbor in the North.
Economic growth is the subject of this week's Think Like
an Economist with me Betsy Stevenson and.
I'm just Amulphus. We're teaching you the supertools of economics
that will help transform your life and the world. And
Tabercotli fiers with us.
This example of North and South Korea is really interesting
as South Korea has transformed so much in the space
of several decades. But if we look at the longer
arc of human history, for most of that time people
were really poor.
That's right. For pretty much the last million years, people
were hunter gatherers, living a hand to mouth existence. The
main focus of life was finding enough food to eat.
Things got a little better when people started farming around
twelve thousand years ago. People went from spending most of
their time finding food to growing food to stay alive. Unfortunately,
though starvation was still common.
There were innovations, but they rarely led to sustained economic
change because political systems were designed to keep any extras
in the hands of an elite few.
This sounds really bleak.
Economists have actually tried to figure out GDP for this
period in our history. They estimate that in the hunter
gatherer period, average income was about two hundred dollars per
person per year in today's money, and it didn't grow
that much after the advent of agriculture. Things only really
started to move around the start of the eighteen hundreds,
when GDP was about four hundred dollars per person per year.
Around this time, in Western countries, there were some advances
in agriculture, such as the use of new machines and
new farming methods. By the eighteen fifties, only a quarter
of people in Western countries worked in agriculture.
You're talking about the industrial revolution in the West.
That's right, nas people started working factories. The greater output
that the Industrial revolution allowed meant that they could feed
themselves and still have time left over to spend doing
other things. The arts, science, and technology thrived. There were
tons of inventions and new products, which also let people
produce more and create even more gains.
Average income propersion worldwide doubled between the early eighteen hundreds
in the early nineteen hundreds, it doubled again by the
nineteen fifties, and doubled again by nineteen seventy five, and
then again by the early two thousands.
And why is that economic growth important? We tend to
assume it's a good thing, But why.
Well, when a country produces more, people have more to eat,
better shelter, more comfort and cleanliness, better healthcare, and more entertainment.
Even their jobs become more enjoyable.
People have resources to spend on things that matter for
the quality of life, and they can make investments in
education and machinery, stimulating further economic growth.
It sounds like we've come so far in the last
two hundred years.
Yeah, And this is because of a really striking mathematical fact,
which is that small differences in growth rates can really
compound over time and really matter. For example, if we
go back a couple of centuries ago, the average income
person in the United States was two thousand dollars, while
it was one thousand dollars in Latin America. But the
average annual growth rate in the US was one point
six percent over the next couple of centuries, and it
was a smitch lower at one point three percent in
Latin America.
And by this you mean that GDP in the US
has grown an average of one point six percent every year.
Yeah, and that growth rate over the ensuing two hundred years,
averaging comes in the US grew much more than in
Latin America.
In eighteen twenty, the US had twice the GDP per
person compared to Latin America, but two hundred years later
it was four times more. US GDP was around sixty
five thousand dollars per person, but in Latin America it
was approximately seventeen thousand dollars.
So you're saying that a small difference of zero point
three percent per year, year after year for two hundred years,
has a huge impact. So small differences in growth rates
have a big impact when compounded over time.
That's right.
So after thousands of years of little growth in parts
of the world, life has really transformed over the past
two centuries. But what exactly goes into growth?
When economists think about growth, we're thinking about two things,
using more of our resources and trying to do more
with what we've got. Growth is about people and machines
combining nohow to make goods and services.
Let's be a bit more formal. There are four main
ingredients that go into economic growth. Labor, human capital, physical capital,
and technological progress.
And let me guess labor is people working.
Right, So more people working means more can be produced.
More people means a bigger pie.
Of course, if we have more people because there's a
bigger population, this also means more people getting a slice
of that bigger pie.
You mean, Like how China's GDP is nearly ten times
that of Australia.
Yeah, Australia is a punic country with more sheep than people.
Hey, I think you're confusing Australia with New Zealand. But
this is why it makes more sense to scale GDP
by the number of people in the population. Australia has
a GDP per person or average income of nearly sixty
thousand dollars. Well, China's is less than ten thousand dollars,
but China has a lot more people.
So when we talk about economic growth, we really should
be focusing on how things change on a per person basis.
GDP per person can file people start working less, like
if a lot of people decide to retire early or
live longer without working.
And it can rise if more people decide to work,
like when more women started working out of the home.
So there was a real revolution in the nineteen seventies
with more women entering the labor force and working outside
the home. A lot of people want to know what
did that mean for the US economy. I've done some calculations.
What I found is that today's GDP is roughly fifteen
percent larger than it would have been if we hadn't
had all those changes. You know, if women today still
work roughly the same number of hours outside the home
as they did in nineteen seventy. That's one reason I've
been so worried about how a lack of childcare in
the United States led so many women to leave the
labor force in twenty twenty. We need those women to
come back if we want to be able to produce
as much as we were prior to the pandemic.
Childcare workers count when it comes to GDP, but oddly
enough of parents staying home to care for their kids doesn't.
In our last episode, we said that GDP may be
a hopeful measure of well being, but it doesn't take
into account how we value our time not working or
even how we produce things at home.
So we want to be a little careful here. We
don't want all women to think that they have to
work because of GDP. What this is really about is
comparative advantage. Remember that taught us that it makes more
sense for a parent to do what they do best
and to allow a teacher to focus on educating the kids.
Focusing on comparative advantage is how we really maximize our
standard of living. When parents stay home, those games from
trade are lost.
And what about the kids. Don't they learn more from teachers?
Well, I think they do. We do know that a
good education helps kids grow up to be more productive
as adults, who will then earn more. So a solid
childhood education helps future economic growth. This takes us to
our second ingredient, which is human capital. This is about
how skilled workers are, and it is also about education.
When workers have more skills such as through more or
better education and training, they put use more. We all
know what it means to be more productive individually, but
that productivity also matters for economic growth. One way we
get economic growth is through increasing labor productivity, that is,
increasing the quantity of goods or services each of us
producers per hour.
This makes it sound like everyone should go to university,
but surely that can't be right. There are a lot
of jobs where you don't need a university degree.
Oh nas. If it were one hundred years ago, you'd
be saying the same thing, but you'd have been saying
it about high school rather than college. Oh. Not only
these people need a high school degree.
To take advantage of technological change, you need people with education.
In the twentieth century, the faster economic growth of the
United States was partly made possible by educating more people
than any other country. People with more education can focus
on more advanced production techniques.
We've looked at people and skills, and you've mentioned technology,
So I'm guessing the next ingredient is physical capital like machines.
Yeah, economists talk about the total quantity physical capital used
in the production of goods and services, and we call
it the capital stock. It includes machines and tools and factories,
as well as infrastructure, which is usually provided by the government,
so we're talking about things like electricity, networks, and telecommunications
and roads.
Physical capital helps labor, or rather it complements labor, because
people can produce more when they have tools and infrastructure
to help them.
Yes, and businesses and government need to invest in these
tools and pieces of equipment. They do that by saving
some of their profits and then using this money to
invest in their capital stock. In fact, this is such
an important topic we're going to have a whole episode
coming up about investment in saving.
Investments and machines and human capital is just not going
to be enough to get sustained economic growth. To do that,
we're going to need our fourth ingredient, technological progress. It
may be better to think of technological progress has new
recipes that combine the other three ingredients.
So technological progress is coming out with new ways of
doing things or even a brand new idea. So let's
explore this by looking at the story of sand. The
thousands of years people used sand to sharpen their tools.
Then around sixteen hundred BC, people in Mesopotamia started using
sand to make glass. That's an example of technological progress.
People innovated and figured out a way to use this
input of sand to make something entirely new and more valuable. Now,
fast forward to the nineteen sixties and the silicon from
sand was first used in computer chips, and as a result,
silicon or sand has been a key part of the
technological revolution of the past fifty years. As Silicon Valley
has improved computer chips year after year, each of us
has become even more productive.
Yeah, this is a really strong example of technological progress
and how it's led to such dramatic economic growth over
the past few centuries.
Food is another example of technological progress. Today, only a
small fraction of the world population works in agriculture, but
they produce more food than when most people were farmers.
Now millions of people can work in science, the arts
and invent new ideas that will lead to even more progress.
These days, we constantly talk about innovation as a way
to increase economic growth. Is there something special about technological
progress compared to the other three ingredients?
The beauty of technological progress is that growth can be limitless.
Think about it. When economic growth comes from working hard,
there's a limit because we each only have twenty four
hours in a day, and with economic growth that comes
from increasing investment in new machines. The problem is that
equipment eventually breaks down and will cost money to replace.
But ideas ideas don't break down and you don't need
to replace them, and so it's possible for ideas to
keep generating more economic growth forever.
Also, the beauty of ideas is we can share them.
If I share my carpentry tool with you, then you
can use it to make something, but I can't. But
if I share an idea with you, we can both
use it at the same time too.
These ideas about ideas a really big deal, and ideas
can also help create other ideas. The invention of glass
allowed people to create all sorts of things, from windows
and cups to telescopes and microscopes. These have all allowed
people to become more productive.
So you're saying there's only so much that labor can
contribute to economic growth, but ideas are limitless.
Yes, we can't just work more hours using more tools indefinitely.
Eventually we humans have to rest and it just isn't
worth working more hours, and we can only manage to
use a limited number of tools at a time.
And you can't just keep investing in physical capital to
get more growth. An important economist named Bob Solo pointed
out that the more physical capital per person you have,
the less you'll increase output over time. We call this
the law of diminishing returns.
We do need to keep investing in physical capital, but
it's not because we want more and more tools per person.
It's that the capital stock wears down and needs repairing
or replacing. We call this depreciation. At some point, we
have all the tools we need, and investment in capital
is just about replacing the ones that break.
At that point, your only option is to invest in
ideas to further economic growth.
So far, you haven't mentioned government. Now is government good
or bad for economic growth?
Great question, It can be either. Strong institutions are really
important for economic growth.
Imagine if a factory and your rival can just come
into the factory and steal all your products and sell
them because no one's going to enforce the law.
It sounds like propercy rights are important.
That's right. If there are clear rules about who owns something,
then that gives you the incentive to invest in work
hard and property rates aren't just about physical ownership. They're
about who has the right to do something like who
has the right to use an idea or dissolve a contract.
Without property rates, people are reluctant to invest and to
innovate as someone can just take the fruits of your
labor from you and no one really knows what the
rules are.
Government stability is also really important. Political turmoil can make
people nervous about investing their money in a country is
you don't know who's going to be in charge tomorrow
and if they're going to change things around or maybe
even steal resources. Take Argentina, which used to be one
of the richest countries in the world, but political unrest
slowed growth dramatically over the last hundred years. Are you
going to invest your money somewhere if you feel nervous
that everything could change in a few days or weeks
and you could lose your investment. Probably not.
And how about regulation? It seems like people are always
complaining about government regulation.
You know, regulation is a double edged sword. You actually
need regulation, but for strong economic growth, you need that
regulation to be efficient. For example, a key measure is
how easy it is to start a business. The US
is one of the fastest countries in the world to
start a business. On average, it takes just six days
to follow the rules and regulations needed. In Argentina it
takes twenty five days.
So you mean to say that if starting a business
is such a hassle, you may just not bother.
Exactly, but regulations can also help business and society. Rules
can ensure that businesses don't lie to their customers, cheat
their workers, and pollute the environment. Smart regulation puts businesses
on a level playing field with the standards that people
in society want.
Government can also help to encourage innovation. This is back
to ideas again. For example, government can fund research, which
can then be used in ways that help economic growth.
You mean like scientific research that's used to develop vaccines,
for example, like covid or malaria.
Seems pretty important, doesn't it.
And remember how we said the beauty of ideas is
that we can freely share them. Well, this can be
a problem. What's the point in doing all this expensive
research is someone else can use your ideas to make money.
Laws and rules like patents and copyrights mean that other
people can't use your idea, which gives you more of
an incentive to work on trying to come up with
the new ideas.
To wrap up, we've talked about how economic growth has
released humanity from thousands of years of grinding poverty, and
why some countries are just so much richer than others
impart due to economic growth.
You know, economic growth is often measured by GDP, but
don't let that confuse you. Growth is really about how
much happiness will enjoy, how much hunger will avoid, and
how many babies will grow up to thrive.
As we try to think about the process that generates
economic growth, it can be useful to think about the
economy as being like a bakery. It uses a recipe
to combine the key ingredients of machines, people and their skills,
and it uses that recipe to produce stuff. Ultimately, it's
new recipes that drive growth. Innovation and new ideas that
can key to driving ongoing economic growth. If we want
more growth, we have to create the right set of
incentives for people to develop new ideas. An important way
to do that is to have strong government institutions that
help faster the production and use of new ideas.
And what do you want our listeners to think about
over the next few days.
In everything you do over the next few days, think
about how much more productive you are than your great
great grandparents were. Then try to figure out why is
it because of the amount of effort you put in,
the number of machines you get to work with, or
the effectiveness of those machines through the extraordinary new technologies
that you work with.
Answer Betty's question and you'll see how economic growth has
improved the lives of your family over the past few generations.
Betsy, justin, thank you. I'm going to go ponder where
we may be in the next twenty or thirty years.
Now, that's an interesting question. As and today you've learned
one big idea. It's that ideas are superpower.
And so that idea, which is an idea about ideas,
might be the most powerful idea of all.
So meta, justin, so Mada, thanks for listening.
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