Sunday, January 30, 2011

Some Thoughts on Growth

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.


  1. I haven't read the book, but my quick critique judging from the title is;
    1: There will be more technological advances. I think the development of an alternative to petroleum based products is near. I hear this from engineers, but from having worked in the biotech field I also see people developing alternative technologies to replace petrol chemicals in agriculture, clothing, cosmetics and the other everyday products we use.
    2: The American economy's use of education is completely disfunctional and inefficient. There would be huge productivity gains from streamlining education and promoting even these "worthless" high-level liberal arts Phds if there were logic to the system.

  2. The argument isn't that technological change will halt, only that it won't gain the kind of efficiency increases that we saw from mid 19th to mid 20th century. There's never been a point in recorded history that hasn't seen significant technological change, often technological diffusion and lack of institutional supports were a problem but there were always significant advances being made somewhere, the idea of an unchanging world before modernity is a myth taught by bad high school history texts and perpetuated by the media. There was just nothing comparable to the century leading up to the mid 20th.

    To expand on Cowen slightly, I think there's two parts to this. First, for a long time we were advancing off a complex of inventions stemming from the steam engine and electricity, with a number of other large innovations that were still huge, but not like those two, including refrigeration, wireless communications, metallurgy advances (steel in particular), chemistry advances, turbines, and some huge medical advances like anesthesia and immunization. While the computer was an advance probably on par with the steam engine or electricity, we don't have two areas of advance like this and we're seeing less of the second kind of big advance that is still huge but not comparable to the steam engine, electricity, or computers.

    The second issue is that additional advances are building off of very efficient existing advances. I had an engineer friend who was telling me about how the turbines GE makes were already close to 99% efficient and that all the design work was for a tiny fraction of a percent additional. Where 100 years ago it was easy to double efficiency, now we're talking about tiny fractional increases.

    So we're going to be seeing advances like the ones you mentioned, replacing petrol would make us better off through freeing us from resource constraints and reducing externalities but it's not going to create huge efficiency gains, previously inconceivable goods, or create vastly more employment than the existing petro-chemical industry. Also, with petroleum, we already have two workable alternatives, oil shale and coal gasification, which for all their many, many flaws, will put a ceiling on petrol prices as it is. Developing an alternative will make the world a better places, but not in the same way railroads and steam ships did.

    I agree completely with everything you said about education.

  3. Those turbines may have been 95% efficient now that I'm thinking about it, that was nagging at me. It's from a conversation a while back and stuck with me, my memory is never as good for stuff I hear instead of read though.

  4. I don't buy it. We are looking towards a future where we will have unlimited storage space for digital data, nearly unlimited energy sources (obtaining petrol is a waste of human capital like using a large percentage of your workforce to farm), very "smart" robots, genetic based cures for modern diseases like cancer (which I think is really what is going to save our health care systems-we treat illness that we can't yet cure. That's very expensive.) and even likely teleportation (the Chinese can now teleport data).

  5. Right, I agree that technological advances will probably hit diminishing marginal returns for the foreseeable future (the foreseeable future being defined as from now until the next radical innovation or invent.)

    I don't know how much the quantity and quality of land has to do with potential growth, though. I think it's more of a minimum threshold (enough to feed your people using modern technology) rather than something a trend will follow.

  6. High level genetics developments are as far fetched into the future as controlled fusion, since we have not a very good understanding yet about how genes work together and the statistical methods used to ascertain that have recently receive a slap on the hand (see the discussions on the lack of reliability on determining your ancestry...).

    But assuming we can very efficiently, sustainably, and ethically produce food using new approaches (meat farms that grow muscles rather than animals, etc...) and energy can be obtained through fusion, and efficiencies in transporting this energy are achieved, the thing that remains is that automation (and information gathering) will remain at the core of it, because all these improvements are done usually working on things at a scale that goes under our evolutionary radar.

    The main problems that we are going to face in developed countries for now (and in not a very distant future in the developing countries - luckily for them, they don't have to spend much on heating costs) is one of a distributive nature and in finding an appropriate balance, not derived from an ideological perspective, but empirical one, of how the governments can do that, so that they encourage what is called growth, but for which we will need a new term in a couple of generations, when population will start dropping and when people will probably want to repopulate the oceans with all the decimated stocks, reintroduce buffaloes and grizzlies in the preeries, clean the past pollution, etc. Of course, this is the optimistic future, not well written about because to reach it would imply a breaking with the current structures. Dystopian futures might come closer to mind and given the way things are, have a greater chance of development. The increase level of empathy in our society, at an individual level will be the linchpin that can help the phoenix bird to be reborn, but then the stomach has always precedence...

    A very systematic approach on what are you studying is taken by the FERNAND BRAUDEL CENTER
    for the Study of Economies, Historical Systems, and Civilizations ( and one of their publications, The Journal of World-Systems Research (

    Immanuel Wallerstein has a nice bi-monthly posting on the current events, and I am looking with interest on his comments on the Tunisian/Egyptian affairs.

  7. Hmm, a few responses.


    You'll have to read Cowen's book for some hard data, he cites a lot of it that I'd have to spend time looking up specific references for. Part of my pessimism comes from having been so optimistic about this stuff in high school, then getting a biology degree and realizing how minor most of our advances are. Virtually none of the material sciences, nanotech, alternative fuel, or biotech stuff has made significant advances in between me being in high school, getting a bio degree, working for a few years, and getting my masters. They're still talking about yet more catalysts for cheap hydrogen or algal biofuels (and when there's still oil wells producing at $4 a barrel and even our more expensive ones produce at somewhere are $40 this is really tough to beat), fuel cells have made only tiny advancements, our wonderful composite passenger jet is over a year behind schedule and only shows incremental fuel economies, nanotech hasn't done much more than incrementally increase efficiency in obscure industrial applications and make stain proof pants, genetic sequencing hasn't done much more than produce a couple of very specialized drugs and taught us how important epigenetic factors are (which when I was studying it were mentioned but played down, not so today), etc. I've become a sceptic. Even when automation replaces truckers with automated vehicles, there still isn't an increase in efficiency comparable to railroads, too much of the cost is already in the capital equipment and fuel for the wage costs to be that significant. Sure, this stuff matters, but it isn't the same as when a railroad gave market access to millions of people that previously were reliant mostly on local production. It's incremental, not transformative.

    To some extent computer technology still will be, I disagree with Cowen on this, but compared to the number of different transformative technologies we used to have this is minor.

  8. Doug,

    That's a good point, but I want something that could cover longer range timeframes and land used to be very important. Still, there does need to be a factor that I can use to explain the income divergence between Norway and Sweden and part of the success of the US is due to its unusually strong endowment of natural resources. Also, land does matter to some extent, compare the US to Canada. This would be a very complicated factor however to put into any kind of quantitative analysis, it might only be useful for qualitative.

  9. Cornell,

    Thanks for mentioning those resources, I've been meaning to read more Wallerstein and hadn't known he blogged. I love Braudel as well so may have to follow up on that. An issue that I have with world systems theory though is that the more history I read the more capital accumulation seems to an effect rather than a cause (though there's a certain degree of simultaneity confusing matters), and I'm sceptical of the core-semiperiphery-periphery as a general model, though it does work for some situations. I'm increasingly coming to think that if you get the political system right, the social system is right, culture is adaptive, and there's a sound institutional basis the rest will follow pretty naturally. The whole capitalist world system bit they do is a bit of a turn off, I think there are other forces at work more important than the economic ones, with the exception of the 19th to mid-20th century when economic forces dominated.

  10. Tzi,

    I do have a problem myself with the world system theory , but there are nuggets to be found there. I do agree that how the polis function is very important (a la John Raulston Saul) and has the potential to hinder or unleash development. A good political system is like life inventing how to store energy in the ATP molecule (see Life Ascending); once you have that set right, sky is the limit.

    What the future has in store for us? SF is not very useful in describing socio-economical organizations; it is probably a detail that many prefer to devolve it into advanced technological feudal systems. But you can see that the corporations are small feuds...

    The leap of imagination cannot go from what we have now towards participatory democracy. If technology would allow us to have that, tradition on one side, and lack of trust in our neighbor (see Putnam's work) on the other, would not permit it. At least not in the US. A more homogeneous and small country (Iceland maybe) can show the way, and the way the behaved with the crisis is a start. Plus, if the votes would really count, voting would be banned.

  11. Cornel,

    I agree with that. There's a lot of pieces of world system theory I liked, Abu-Lughod I found especially interesting, but their semantics always turn me off with their use of Marxist categories. It still does reveal some interesting relationships however.

    I'd agree that participatory democracy is unlikely to happen here. I do think that some degree of continual evolution to provide better representation and information to the central government is necessary for a better functioning state. I'm afraid that where we are at now in the US is likely to lead to a slow decline in government effectiveness, representation, and efficiency rather than an improvement in these three factors.

  12. @ onefastchic2121: "[...] and even likely teleportation (the Chinese can now teleport data)."

    As a quantum physicist, I regret to inform you that quantum teleportation (which was to what you were likely referring) is nothing at all like the physical teleportation you are envisioning. The word "teleport" just means that the data is being moved from one place to another rather than being copied from one place to another --- which is the best that one can do because it turns out that quantum information (unlike classical information) cannot be copied.