While responding to some blog posts on Cowen's "The Great Stagnation" I mentioned my thoughts on growth in a few comments. While these ideas are still preliminary I'd like to expand a bit on these ideas and in particular the essential role of government in promoting growth. (for the names of various types of growth I'm borrowing from Mokyr's Lever of Riches)
My basic thoughts on growth is that every society has a certain per capita GDP ceiling that can only be increased by changes in technology and institutions. Both technical innovation and government reforms, policies, and infrastructure investments can increase this ceiling. Private sector investment is necessary to actually reach this ceiling as well as a potential source of technical innovation. It is also possible to have non-government institutions that are capable of raising this ceiling through broad based policies, which, while common in the pre-modern world, have since become rare beasts so I won't directly address them beyond this note.
The basic determinants of a society's growth potential is its land area and quality (including soil fertility and other natural resource endowments) and population demographics (not just raw population but also age structure and other demographic characteristics) which is directly modified by domestic market size and internal cultural and political integration (closely related to marketization, which I am hesitantly separating out into government), all modified by the current level of technical development.
Government policies then set a maximum growth threshold. Government policies affecting this include the level of physical infrastructure provided, institutions supporting marketization,* investments in human capital, the level of integration among political bodies and jurisdictions, and government support for technical innovation.
Government spending occurs in competition with private spending. Private investment serves mostly to support growth up to the maximum possible social growth potential, as modified by government policies. In addition to this, it can expand the growth potential through technical innovation, both that of scientific technical advancement and by organizational change within the private sector (Mokyr's Scumpterian growth). These innovations can be very significant, but speaking generally, private investment is rarely (though not never) capable of the level of expenditure of the state or the long time horizon necessary for many of the most far reaching technical advances.
The basic set up is that countries with a larger, better endowed territory, and a larger population with better demographics (these two factors are related, the quality and size of the territory determines the maximum size of the population supportable at a given technical level beyond which growth will slow) will naturally grow more quickly, all else being equal (extensive growth). The degree of political and market integration directly affects this, since barriers to integration reduce the potential for economies of scale and specialization (Mokyr's Smithian growth). Private investment (Solovian growth) will increase the growth rate, up to a ceiling determined by an array of government programs. Once this ceiling is reached, growth will slow, potentially greatly, unless government spending then increases to allow a higher level of per capita GDP to be reached. Government growth cannot, of course, proceed without check because private investment is necessary to grow towards the new ceiling and excessive government expenditure competes with this. There is thus a ratchet effect, with a set optimal level of government spending increasing each time per capita GDP growth begins to slow down. Historically, this level increased only very slowly. If Cowen is correct, and I concur, after a period of this occurring very rapidly we have reached something of a plateau where periods between each ratchet up have slowed. Of course, if government spending is too low than per capita GDP will hit a ceiling which will increase only very slowly with technical advancements, leaving all of the potential growth from government involvement on the table.
For a very basic summary of existing growth models see (I'm using Wikipedia for its ease of use and universal accessibility):
My main critique is that I don't think either of these models go back far enough to seriously grapple with longer run issues. This goes back into a critique I make rather frequently, I think too much focus is given to European history, particularly the period of the 17th to mid-20th century (though much of this is based on the convergence of underdeveloped societies which are borrowing from European models, though they differ in which components are borrowed and their sequencing). It would take another long post to fully explore this, but I believe there were several social forces which temporarily converged to make this period an outlier. In particular, a number of novel technological and social (the modern nation state) changes temporarily created both a relative uniformity in political convergence and a massive shift outward in potential growth that temporarily greatly expanded the importance of private investment relative to other factors leading to growth. Cowen's The Great Stagnation describes a large part of this slowdown. I believe that part of what this slowdown has done is allow historical forces of that run throughout history, though recently ones of less power, to re-emerge as significant factors determining the relative success, or lack of success, of various countries. Ignoring these factors and focusing instead on factors that were decisive for the period of initial industrialization will lead to relative decline as advances that a society can potentially grasp are left unpicked in favor of trying to eke a bit more out of the decisive factors of an earlier, now past, era since other societies will choose, consciously or not, to take advantage of the possibilities available through greater integration and through maximizing the potential of their population.
The major component that I'd like to add back in is that I think that society's supply of labor on the market is something that is highly sensitive to a government's policies and something that must be taken into account of to explain growth. I will admit to a caveat again, I am not fully familiar with this subject. My ideas are something based on more general research I've been doing, I intend to read more deeply into it, and have a current list to follow up on, when I complete a few other projects. As far as the growth literature goes, I am familiar only with a few classic studies, I admit to not knowing the full breadth of modern research on the subject. All that said, once I finish this research and enhance my skills in a few areas I do intend to follow up on this and see if it might be possible to tighten (by tighten I mean reduce the terms into something simpler and easier to quantify, or at least make comparisons among cases in a rigorous fashion, this is currently far from that point) these ideas and to operationalize a theory that could be applied to broader stretches of time than just post-industrial revolution countries and that might explain developments, in particular divergences, among the fully industrialized countries better than current models.
*Marketization deserves some special attention. I believe there are three distinct features to marketization. The first is simplest, a given society's openness to foreign trade. This is obvious enough and doesn't need further mention. The second is an expanding domestic market. This involves standardizing policies across jurisdictions within the state as well as cultural integration across the territory that the state claims sovereignty of. It includes everything from a common language, reigning in local officials, standardized measurement, legal tender, standardized business practices and legal regimes, etc. These things allow more people to participate more fully in the market through having fewer decision points and other possible blockages that can restrict competition.
The third involves the evolution of the household. In societies with weak markets, a wide range of goods are supplied within the household or within the traditional community. These sorts of networks break down the further marketization proceeds, with more marketized societies having a lower frequency of everything from subsistence plots to less people and time to take care of the kids and the elderly. This is one of the primary changes that get in the way of growth. Without the supports previously supplied outside the markets a significant number of these tasks simply don't get done, especially if there are cultural changes which valorize market interactions relative to household duties. Since many of these functions are essential to the promotion of human capital it is essential that some entity, generally the government, step in to see to it that these functions are fulfilled rather than simply imposed as a cost on society.
Also, there tends to be limitations on society's ability to absorb new market norms. Once this has slowed it is often necessary for the state to step in to instill market values and cultural habits into people that haven't historically benefited from market institutions. To make full use of the population available to a society, it is necessary to step in and educate people in market behavior and expectations as well as to provide the kind of social and economic supports that were previously supplied by the household and community. An essential element of these traditional supports was their security and reliability, these supports must be both easy to access and reliable. If significant search costs are imposed or the flow of benefits fluctuates, as with private charity, these supports are unable to fulfill the role previously filled by the household or community leading to a loss in labor utilization in the market.