Economics 375

American Economic HistoryEconomic Growth

Readings.

1. Passel and Attack, Chapter 1-American Economic Growth: A Long Run Perspective.

2. Carlos M. Cipolla, The Economic History of World Population (website and RBR)

Putting U.S. Economic Performance and Growth in Perspective: The wider context.

Why is the United States a special place? U.S. contains 4.23% of the world’s population and 7% of the land.

About 1 in 20 people in the world are Americans. U.S. produces 24% of the world’s goods and services.

1/20th of the world people produce 1/4th of the world’s goods and services. The average American has an income 7.15 times more income than the

average person in the rest of the world. Only 9.1% of the world’s population has a per capita income above

$10,000 ($5 per hour). 2000 hours per year * $5/hr-=$10,000 $200 per week.

What is the material condition of the majority of the world’s population today?

Look at poor areas of the world.—can you survive on $5 or 6 dollars week?

MRE U.S. Military-Meal Ready to Eat. $20 per day.

Requires less than $2 to provide a completely nutritious diet. Diet consisting of some type of staple grain (rice, potatoes, wheat), cheap

vegetables, and occasional animal protein can provide the RDA of all nutrients.

What are the long term effects on health due to a subsistence diet—modern medicine vs. Nutrition?

RATE OF GROWTH (percent)

Population per sq. mile

POPULATION (1,000's) 1980- 1990-COUNTRY OR AREA 1980 1990 1994 1990 2000 1994World 4,456,531 5,294,294 5,643,290 1.7 1.5 112

United States 227,726 249,924 260,714 0.9 1 74

China: Mainland 984,736 1,136,626 1,190,431 1.4 1 331India 692,394 852,656 919,903 2.1 1.8 801Indonesia 154,936 187,728 200,410 1.9 1.6 284Brazil 122,830 150,062 158,739 2 1.2 49Russia 139,045 148,124 149,609 0.6 0.2 23Pakistan 85,219 114,842 128,856 3 2.6 429Bangladesh 88,077 114,023 125,149 2.6 2.3 2,421Japan 116,807 123,540 125,107 0.6 0.3 821Mexico 68,686 85,121 92,202 2.1 1.9 124Germany 78,298 79,357 81,088 0.1 0.4 600Vietnam 54,234 67,718 73,104 2.2 1.7 582Philippines 50,864 64,405 69,809 2.4 1.9 606United Kingdom 56,314 57,418 58,135 0.2 0.3 623France 53,870 56,720 57,840 0.5 0.5 275

Source: Except as noted, U.S. Bureau of the Census, World Population Profile: 1994.

WORLD POPULATION

Gross National Product by Country, Exchange Rate Adjusted

GNP GNP per capitaCONSTANT DOLLARS (1991) CONSTANT DOLLARS (1991)

COUNTRY Population 1985 1990 1991 1985 1990 1991United States 260,714 5,057 5,765 5,695 21,140 23,020 22,550

World 5,643,290 13,228 15,308 15,183 2,344 2,713 2,690

Japan 125,107 2,584 3,242 3,386 21,400 26,240 27,300Canada 28,114 501 571 563 19,890 21,450 20,840Germany \2 81,088 1,313 1,531 1,586 21,510 24,260 19,830United Kingdom 58,135 887 1,025 1,002 15,660 17,850 17,400Israel 46 57 62 11,680 13,290 13,590

U.S. in 1960 11,100U.S. in 1945 10,450Taiwan 114 175 187 5,903 8,551 9,068Soviet Union 2,642 2,767 2,531 9,475 9,509 8,639South Korea 155 259 281 3,797 5,997 6,430

U.S. in 1929 6,150Poland 180 170 160 4,841 4,456 4,185Argentina 119 120 130 3,920 3,742 3,984Mexico 243 264 276 3,079 2,988 3,051

U.S. in 1880 2,650Brazil 358 399 404 2,596 2,618 2,601Iran 96 92 100 2,067 1,619 1,689Thailand 53 86 92 1,028 1,531 1,618Cuba 37 35 27 3,652 3,314 1,584

U.S. in 1840 1,350Mainland China 965 1,424 1,528 920 1,256 1,327Colombia 31 39 40 1,038 1,173 1,187North Korea 33 31 23 1,674 1,443 1,068

U.S. in 1775 750Iraq 41 26 13 2,617 1,400 705Philippines 35 46 46 615 709 694Indonesia 76 104 111 442 550 577

U.S. in 1710 550Egypt 25 29 30 533 544 543India 195 261 263 253 306 303Bangladesh 18 22 23 177 192 195Uganda 2 3 3 150 158 157Ethiopia 6 7 7 130 129 124Mozambique 1 1 1 68 73 74

Consider the performance of the United States to other rich parts of the world, i.e. OECD countries.

•Use purchasing power parity adjustment (PPP).•Compares the cost of a basket of goods in the U.S. and other countries and adjusts the price of goods so that $100 in U.S. dollars converted to currency of the other country and would be able to purchase the same basket of goods in both countries. •More suitable to comparisons between countries relatively close in income.

•U.S. has a higher per capita income than any other industrialized country when a PPP adjustment is made.

•Example cost of housing and gas in Europe, Japan, and the U.S.

Gross Domestic Product, Purchase Power Parity Adjusted

GDP ($bil) GROSS DOMESTIC PRODUCT PER CAPITACOUNTRY (DOLLARS)

1991 1970 1975 1980 1985 1989United States 5,611 4,933 7,351 11,891 16,786 20,920

OECD 15,003 3,505 5,410 8,927 12,689 16,180OECD Europe 6,180 2,907 4,537 7,475 10,359 13,247European Union 5,393 3,111 4,879 8,133 11,346 14,651

Switzerland 149 5,088 7,257 11,527 15,884 19,911Luxembourg 8 3,772 5,770 9,274 13,703 18,657Canada 518 3,571 6,046 10,082 14,632 18,629Germany 1,249 3,678 5,623 9,660 13,535 17,020France 1,040 3,499 5,552 9,247 12,785 16,310Sweden 144 3,788 5,915 9,073 13,008 16,188Japan 2,368 2,798 4,521 7,871 12,035 16,130Iceland 5 2,621 4,684 9,040 12,628 16,035Finland 80 2,873 4,803 7,993 11,835 15,853Denmark 91 3,499 5,260 8,563 12,868 15,636Austria 135 3,004 5,023 8,664 12,156 15,401Australia 279 3,468 5,417 8,597 12,326 15,261Belgium 172 3,140 5,134 8,637 11,805 15,194United Kingdom 902 3,256 4,979 7,935 11,473 15,177Norway 72 2,686 4,566 8,259 12,610 15,152Italy 976 2,962 4,603 8,317 11,585 15,046Netherlands 249 3,534 5,526 8,847 11,949 14,821New Zealand 47 3,443 5,418 7,790 11,477 13,175Spain 496 2,239 3,851 5,814 7,953 10,880Ireland 41 1,741 2,877 4,892 7,014 9,489Portugal 90 1,465 2,450 4,289 5,674 7,694Greece 80 1,442 2,509 4,247 5,797 7,176Turkey 201 597 1,058 1,595 2,340 3,017

[The goods and services produced in different countries should be valued consistently if the differences observed are meant to reflect real differences in the volumes of goods and services produced. The use of

The World We Live in---U.S. vs. Communist Countries, and the Pacific Rim.

Compared to Communist Countries, the U.S. is rich. How did U.S. win the cold war?

The genius of Ronald Reagan. Look at the size, population, and per capita income of Russia. The U.S economy is 2.74 times larger than the Soviet Union. Ronald Reagan figured out that if we spent 5% OF GNP on national defense. The USSR would have to spend 14%

of GNP to match.Compared to Pacific Rim Countries (except Japan), the U.S. is rich.

The theory pushed in the popular press prior to the Asian crisis, that the Pacific Rim countries were going to overtake the U.S. not supported by GNP numbers.

COUNTRYPopulation (1,000's)

1995 GNP ( bil. Dol.)

1995 Per Capita GNP

Life Expectancy at Birth

United States 260,714 6,955 $26,438 76.0World 5,851,551 23,723 $4,054

Germany 85,684 1,674 $20,497 76.3France 59,079 1,159 $19,939 78.2Japan 126,582 2,737 $21,795 79.3United Kingdom 58,135 1,042 $17,776 76.8Spain 39,303 558 $14,226 77.7

Russia 148,081 2,531 $4,478 63.8Cuba 10,999 27 $2,068 75.2Mainland China 1,253,438 1,528 $2,303 70.0North Korea 25,491 $894 70.6

South Korea 47,351 425 $9,437 73.6Taiwan 264 $12,390 75.3Philippines 76,104 77 $1,052 66.1Indonesia 209,774 177 $931 62.1Malaysia 20,376 81 $4,134 70.0Thailand 59,451 1,310 $2,806 68.8

Other First World Countries

Communist Countries

Pacific Rim Countries

The world we live in --The U.S. over time.

U.S. has always been rich The U.S. has experienced continuous steady economic growth. Most communist countries have not achieved the GNP per capita enjoyed by the

average American living in 1930. Many 3rd world countries have not achieved the standard of living enjoyed by the

average American in 1710.

COUNTRYPopulation (1,000's)

1995 GNP ( bil. Dol.)

1995 Per Capita GNP

Life Expectancy at Birth

United States 260,714 6,955 $26,438 76.0Spain 39,303 558 $14,226 77.7Taiwan 264 $12,390 75.3U.S. in 1960 $11,100U.S. in 1945 $10,450U.S. in 1929 $6,150Russia 148,081 2,531 $4,478 63.8U.S. in 1880 $2,650Mexico 97,563 261 $2,521 74.0Mainland China 1,253,438 1,528 $2,303 70.0U.S. in 1840 $1,350Indonesia 209,774 177 $931 62.1U.S. in 1775 $750U.S. in 1710 $550India 967,613 326 $348 60.2

Look at 2nd Primary Measure of Well Being: :Life Expectancy

Life Expectancy at birth in U.S. 75.9 years. What are the two most dangerous periods of a

person’s life? First year and adolescence.

Childhood diseases and driving. Life Expectancy at 40 in U.S. is 84 years.

Practical Value of this knowledge?How does the U.S. compare to other developed countries?

Why do people in Japan and Hong Kong live longer than in U.S.

U.S. in the middle of developed countries mainly because we are too rich, i.e. too many fatty foods (red meat) and cigarettes and lack of exercise.

Life Expectancy in U.S. around 1776 less than 39 years. Tremendous increase in life expectancy. Causes and control?

Modern Medicine or Nutrition?

COUNTRY OR AREACRUDE BIRTH

RATECRUDE

DEATH RATEEXPECTATION OF

LIFE AT BIRTH

INFANT MORTALITY

RATE

TOTAL FERTILITY

RATEUnited States 15.2 8.7 75.9 8.1 2.06

Hong Kong 12.2 5.9 80.1 5.8 1.37Japan 10.5 7.3 79.3 4.3 1.55France 13.1 9.3 78.2 6.6 1.8Canada 14.1 7.4 78.1 6.9 1.84North Korea 23.8 5.5 69.8 27.7 2.37Honduras 35 6.2 67.6 45.3 4.71Philippines 27.3 6.9 65.4 50.8 3.35Vietnam 27.1 7.8 65.4 45.5 3.33India 28.5 10.3 58.6 78.4 3.48Bangladesh 35 11.7 55.1 106.9 4.47Somalia 46 13.5 54.8 125.8 7.25Madagascar 45.2 13.4 54 89 6.68Kenya 42.4 11.7 53.2 74.1 5.91Ethiopia 45 13.9 52.7 106.4 6.81Laos 43.2 14.7 51.7 101.8 6.07Cambodia 45.1 16.4 49.3 110.6 5.81Mozambique 45 16.3 48.5 128.7 6.25Angola 45.4 18.6 45.8 145.4 6.48Haiti 39.7 18.8 45.1 108.5 5.94Central African Republi 42.3 20.7 42.5 137.2 5.42Uganda 48.8 23.7 37.5 112.2 6.77

2. Number of deaths during 1 year per 1,000 persons (based on midyear population)3. Number of deaths of children under 1 year of age per 1,000 live births in a calendar year.

Source: U.S. Bureau of the Census, International Data Base.

VITAL STATISTICS, (1994)

1. Number of births during 1 year per 1,000 persons (based on midyear population).

4. Average number of children that would be born if all women lived to the end of their childbearing years and, at each year of age, they experienced the birth rates occurring in the specified year.

Related Measures:Relationship Life Expectancy, crude birth rate (CBR), crude death rate (CDR), and infant mortality.

Interaction of CBR, CDR, ad infant mortality at each age determines life expectancy and population growth.

The demographic characteristics of the U.S. The poorer the country the higher the CBR.

Babies as an inferior good? Economic growth—the world’s greatest method of birth control?

Modern contraception in 3rd world countries. China’s one baby policy.

The poorer the country the higher the CDR and infant mortality rate. Death as an inferior good? Modern Medicine vs. Nutrition?

Allocation of scarce resources. With a limited amount of money, what is the most efficient way of

increasing life expectancy in poor countries?Look at U.S. Fertility Rate.

U.S. 2 children per woman, In 1800-8 children. Look at 3rd world countries. Cause of the reduction in fertility? Modern birth control?

The U.S. as a special place.

We are rich, have been rich, and are getting richer compared to the rest of the world.Not only are we rich, been rich, and getting richer but we are living longer to enjoy our riches.

Carlo Cipolla. Prehistory to the Industrial Revolution.

World has developed through 3 stages.Hunter/Gatherer Stage

People basically walked around and ate whatever they happened to come across.

Example of survivor training in air force. Survival school is a 3 week course where the ultimate test is considered dropping a pilot into the wilderness and seeing if they can survive for one week with only a knife.

Minor technological advances-like stone knife, clothing, fire. dog.Life Expectancy around 20 yrs. Energy Budget probably around 4000 calories.

Required almost 100% of a persons time and energy merely to acquire basic food, clothing and shelter.

With the exception of the dog, relied on human muscle for powerWorld Population around 5-10 million around 10,000 B.C.

Population of southern California-25 million.

Agricultural Revolution-begun around 10,000 B.C.

Second stage of human development-The Agricultural Revolution. Began to control the environment to produce animals and vegetables-sheep, goat, new plants, irrigation, wind (1-3.5 hp.) and water power.

Huge advance because instead of searching the forest to find food and shelter, you could produce it. Concentrate the most desirable plants and animals in one place.

Reliance on animal converters of energy. Horse, Mule, Oxen.-very inefficient converters of energy.

10 to 1 rule conversion rule. Harness and horseshoe.

Energy at most 10-1500 kcal/day--probably less than 10,000 in practice.

Simple surplus allowed the development of culture, literature, art, science, etc. World Population-1750-750 million, 1850-1200 million, 1950 2485 million.

Art, literature, culture, religion of the caveman?

Industrial RevolutionIndustrial Revolution

Began around 1750 in Northern Europe.

European Economic History.

Rather than relying on animate converters of energy, man began to harness inanimate sources of energy.

Reliance on alternative sources of energy.

Water Power-Steam Turbine.

Steam engine-Coal.

Electricity-Water Power, Coal, Oil, Nuclear power.

Vast expansion in the energy available to men.

Enter the U.S. Look at how U.S. has improved over the last 250 years.

Per Capita Income 1710-550, 1775-750, 1840-2,650, 1945-10,450, 1960-11,100, 1991-22,550

Putting the U.S. growth experience in historical perspective.

Insert Graph.

The U.S. Growth Experience: Some Preliminaries.

Possible Reasons for Economic Growth. Increase in Factors of Production---more

people, land, and machinery. Increase in Productivity-Technology

How do we determine what proportion of growth is due to increase in factors of production and increases in productivity?

Economic Growth after 1840

For economic historians, 1840 is the dividing year. First year for which enough data exists to compute reliable GNP

numbers. Population, Agricultural and Manufacturing Census. Manuscript vs. published volumes of the Census.

Over 120 years, from 1840 from 1960. Small incremental increases accumulating over time. U.S. economic growth the story of the small steady annual

changes compounding over time. The numbers

Population grew 2% per year 10.5X growth 1840-1960.

Labor Force at 2.2%-implies increasing age of population 13X growth. If the labor force is growing faster than the population the age

distribution of the population must be changing. GNP at 3.6% Per Capita Product at 1.6%

6 X increase in productivity Product per Worker at 1.4%

5X increase.

Rates of Growth: Gross National Product, Population, Labor Force In the U.S., 1840-1960

Product Population Labor ForceProduct per

CapitaProduct per

WorkerSuccessive Decades 4.24 3.11 3.57 1.1 0.641839-49 4.95 3.09 3.18 1.8 1.711849-59 1.99 2.39 2.07 -0.39 -0.081859-69 4.95 2.33 3.01 2.56 1.881869-79

Longer Periods1840-80 4.03 2.73 2.96 1.26 1.041880-1920 3.52 1.88 2.23 1.61 1.261920-60 3.15 1.31 1.28 1.81 1.841840-1960 3.56 1.97 2.15 1.56 1.38

Abosolute Values1959-61 509 179.9 69.9 2829 72821959-61 as a multiple of 1840 66.7 10.4 12.9 6.4 5.2

1840 7.63 17.7 5.42 446 1408

Source: Kuznets, Notes on the Pattern of U.S. Economic Growth, in S. Engerman and R. Fogel,The Reinterpretation of American Economic History

How does this compare to other countries or how did the U.S. become a super power, i.e. large GNP.

Annual growth rate of population in U.S. much higher. Immigration vs. Natural Increase.

Annual rates of growth of per capita income for US and for large European countries fall within a narrow range.

1.9% for Russia, 1.2% for UK, 1.5%-1.6% for US, Japanese rate distinctly higher.

Not much difference between U.S. and other industrialized countries.

U.S. not exceptional in the growth rate of per capita income. Higher growth of population and roughly the same rate

of growth in per capita income caused a much higher growth in GNP. Thus the rate of rise in GNP in the US was from a

1/5th to twice as high as other developed European countries.

The importance of population increase. Natural increase vs. immigration.

How did the U.S. achieve high levels of per capita income?

High level of per capita income in the U.S was the result of an already high per capita income in 1840.

Importance of data issues.Growth rate not exceptional compared to other countries, U.S. is exceptional only in that economic growth has occurred continuously over a much longer period.Summary Statement: High US standard of living is the result of a long steady continuous growth in per capita output. It is not the result of any particular invention or government policy.

Depiction of economic growth in High School wrong. The invention or revolution theory.

Example: cotton gin, light bulb telephone, etc. or govt. programs such as TVA or interstate highway system.

Population Growth

High rate of population growth due primarily to the power of this country to attract immigrants.

From 1840 to 1930, the population of the native stock grew from 14.2 mil to 82.7 mil.-6X increase.

The foreign born and native born of foreign or mixed heritage grew from 3 mil. to 40 mil.-a 13x increase.

In 1930, 1/3rd of the total pop. was of foreign stock.

Rate of Growth and Per Capita Income for Selected Countries for Long Periods.

Duration of Period Product Population

Product per Captia

Great BritainTotal 1841-1957-59 117 2.07 0.86 1.2

FranceTotal, 1841-50-1958-60 103.5 1.8 0.24 1.55

Germany1913 BoundariesTotal, 1913-1958-60 46 2.25 0.97 1.28Total, 1851-55-1958-60 106 2.45 1.01 1.43

SwedenTotal, 1861-65-1958-60 96 3.13 0.64 2.47

European RussiaTotal, 1913-58 45 3.1 0.63 2.45Total, 1860-1958 98 2.87 0.99 1.86

Japan1878-82-1918-22 40 4.14 1.05 3.051918-22-1958-60 39 3.97 1.36 2.57Total, 1878-82-1958-60 79 4.05 1.21 2.81

Source: Kuznets, Notes.. in Engerman and Fogel, Reinterpretations.

Production Functions and Components of Economic Growth

If we want to understand how economic growth occurred, we can divide possible explanations into categories.

More inputs to the production process. Better technology.

How do we decompose economic growth and make a statement about the relative contribution of more productive inputs and better technology?

For instance, how can we make a statement such as 80% of U.S. economics growth was due to better technology and 20% was due to more inputs.

Economic Historians frequently wish to measure differences in output that cannot be explained by differences in the quantity of productive inputs employed. We solve this problem using a productivity index.

Productivity Indexes

If only one factor of production is used the notion of a factor productivity index is conceptually simple.Thus if output W grown with only one input land R an index of land productivity can be constructed by comparing the output to input ratio.Land that produces twice as much output is twice as productive. Consider person who has a 1 acre farm and produces 1 bushel of corn. If 10 years later, he produces 2 bushels of corn on the same acre, then he is twice as productive.

0

10

0 111

2

RWR

WF t

Two Input Productivity Index

The construction of a productivity index becomes more complicated when there are multiple inputs to the production process. Suppose however that two inputs are used Land-(R) and Labor (L) are used to cultivate carrots. Intuitively one wants to measure productivity by comparing carrot output with some combined measure or index (I) of the two factors of production.The Index (I) presents a conceptual problem----I must be a single number which summarizes the changes in more than one input.

0ICI

CF t

Two Input Productivity Index (2)

This still leaves the problem of how to choose a way to combine the two factors into the index of factors. By definition the index must make it possible to compare disproportionate bundles of factors-say 7 units of land and 3 units of labor with 6 units of land and 4 units of labor. If for example in a given year, 7 units of land and 3 units of labor produce 25% more carrots than 6 units of land and 4 units of labor the index value (I) should be 25 % greater than the index value of 6 land plus 4 labor.

Two Input Productivity Index (3)

Hence, I is constructed from reasonable assumptions about the way factor inputs combine under standard production conditions to make output.

where a and b are geometric weights (add up to 1)This provides a mathematical structure for the index but it doesn’t provide much help about the specific numerical weights a and b.It turns out that factor shares in total output serve as proxies for a and b.

A factors share is defined as the proportion of the total cost of production is attributable to a single factor.

For instance, if laborers receive 70% of the carrots as their wages and landowners receive 30% as rent, a=.3 and b=.7.

I R La b

Two Input Productivity Index (3)

An index based on geometric weights is particularly easy to manipulate mathematically since:

It follows that:

             

Where * indicates percentage change.Thus the percentage change in total factor productivity simply equals the observed change in output minus the percent change in factors multiplied times their respective factor shares.

FC

R La b

F C aR bL* * * *

Total Factor Productivity Exercise. Suppose the data from the Year 1 and Year 2 census is given below. How much of the increase in output is due to increased productivity and how much is due to more inputs?

Year 1 Year 2Output $12,500 $19,000Amount of Land 100 80Amount of Labor 100 150Price of Land $25 $50Price of Labor $100 $100Factor Share of Land 0.200 0.211Factor Share of Labor 0.800 0.789

TFP Exercise (2)Index of Factors 100 131.842

Factor Share of Land (average of factor share

in year 1 and year 2)0.205 a

Factor Share of Labor (average of factor share

in year 1 and year 2)0.795 b

Percent Change in Output

0.520

Percent Change in Land

-0.200

Percent Change in Labor

0.500

Change in Total Factor Productivity

0.164

I R La b

C*

R*

L*

F C aR bL* * * *

Total Factor Productivity Exercise.

1850 1950OutputAmount of Land 100 500Amount of Labor 100 2000Price of Land $5 $15Price of Labor $15 $25

Factor Share of LandFactor Share of Labor

Suppose the data from the 1850 and 1950 census is given below. How much of the increase in output is due to increased productivity and how much is due to more inputs?

Total Factor Productivity Exercise. Suppose the data from the 1850 and 1950 census is given below. How much of the increase in output is due to increased productivity and how much is due to more inputs?

1850 1950Output $2,000 $57,500

Amount of Land 100 500Amount of Labor 100 2000

Price of Land $5 $15Price of Labor $15 $25

Factor Share of Land 0.250 0.130

Factor Share of Labor 0.750 0.870

TFP Exercise (2)Index of Factors 100 1536.412

Factor Share of Land (average of factor share in

year 1 and year 2)0.190 a

Factor Share of Labor (average of factor share in

year 1 and year 2)0.810 b

Percent Change in Output 27.75

Percent Change in Land 4.00

Percent Change in Labor 19.00

Change in Total Factor Productivity

11.603

I R La b

C*

R *

L *

F C aR bL* * * *

There was a 15x increase in inputs from 1850 to 1950.

Increase in labor weighted more heavily because labor costs constitute a greater proportion of total costs than land costs.

Output increased 27X, inputs increased 15x, productivity was responsible for a 11x increase in output.

Productivity increases were responsible for 11/27th of the increase in output or 40% of the increase in output.

American Economic Growth: 1840-1960

Increase in factors of production. Population Grew over 10 times-leading to increase in economic growth-but output

grew by more than 60 times. Labor force grew from 5.5 mil. in 1840 to 49 mil. in 1930 to 79 mil. in

1960 Increase in quality of labor-immigration.

Capital 27 bil in 1869 to 306 bil. to 1929, 442 bil. in 1955 to per capita increase from $700 to $2500 to $2700 per worker increase from $2000 to $6330 to $6740

Output per unit of labor input increased faster than output per unit of capital input i.e. capital intensity of production was increasing.

Indexes of Population, Labor, Land, Capital and Net National Product, 1840-1960.

Year Population Labor Land CapitalNet National

Product1840 100 100 100 100 1001870 235 228 240 512 3241900 447 514 566 2343 10371930 724 863 1085 6575 29521960 1061 1308 1165 10531 5994

Source Peter George, The Emergence of Industrial America p. 5

Sources of Economic Growth; 1840-1960

Productivity has grown at a steady and increasing rate since the beginning of the 19th century.

Productivity increased by a factor of 4X from 1869 to 1959.

In the 20th century productivity growth has accelerated. to 1855, TFP grew by .3%. to 1905, TFP grew by .5% to 1927, TFP grew by 1.5% to 1960, TFP grew by 1.9%

National Economy: Output and Productivity Ratios, 1869-1959

YearOutput (Real Net

Product)Output per Unit of

labor inputOutput per unit of

capital InputTotal Factor Productivity

1869 7.8 35 67.7 421879 15.7 54 90.2 62.51889 21.8 50.2 85.5 58.31899 33.9 61.2 87.6 67.81303 51.3 69.8 92.1 75.61919 70.3 79.3 91.7 82.61929 100 100 100 1001939 104.8 117.2 111.5 115.91949 159.7 138.7 130.5 136.41959 233.5 179.8 134.4 169.1

Source: Peter George p. 12

The Role of Productivity

Increase in Productive factors.Labor increased 13 times and resource input increased 11.5 times. Capital input grew the most-almost a 100 times.Increase in productivity comprised roughly 1/3rd the increase in output. The other 2/3rds came from increases in the quantities of labor and capital used.Existence of Speedup after 1930.

Period Labor Capital Land NNP

1840-60 3.42 6.57 3.73 4.75

1870-1930 2.24 4.35 2.55 3.75

1940-1990 1.56 3.14 .34 3.22

Percent of Growth Attributable to: Productivity

1840-60 .49 .26 .10 .15

1870-1930 .43 .27 .04 .27

1940-1990 .41 .14 0 .45

Lessons from U.S. Economic Growth Experience

Growth in the United States is the result of a combination of factors. A political system which attracts high quality inputs (labor) from

other parts of the world. A political system which has brought more land under it's purview. A legal and political system encourages the accumulation of capital

and the accretion of new knowledge and the discovery and implementation of improved methods of production.

Strong Private Property Rights. Read parts 5 and 6 in Paul Johnson.

Quantitative analysis of U.S. shows that the increase in inputs was paramount in the early stages of economic growth. Simple increase in people, land, and capital were the primary factors creating growth until 1930.

More people with more land and capital to work with produced more output per person.

After 1930, increase in productivity became important. In a sense, there was nothing magical about U.S. economic growth. It is the

simple story of a system or market exchange and private property rights harnessing the forces of self interest over a long period of time. There is no magic bullet.

Foreign Aid and lessons for the World.

U.S. history suggests the way to create economic growth is to have a stable political and economic system which protects private property rights and to not interfere with the operation of the market.

Debilitating effect of warfare that disrupts voluntary exchange—most areas of the world that experience mass starvation are areas where voluntary exchange or the operation of the market has been disrupted.

Higher population and population density does not preclude economic growth and may, in fact, be a prerequisite or enabler of modern economic growth.

Economies of scale and the benefits of specialization according to comparative advantage.

Adopt the correct economic system and allow market forces to operate. During most of U.S. history there was no central planning or central direction to the economy. The market was simply allowed to operate.

All modern economies that have experienced significant economic growth have adopted U.S/Western European style capitalist economic systems.

The sorry history of U.S. international aid efforts.In the post World War II era, i.e. the Kennedy administration, the U.S. and to a lesser extent Western Europe got into the business of “helping 3rd World countries to develop.”

Income redistribution from U.S. taxpayers to foreign governments. Unfortunately instead of practicing good science, i.e. studying the U.S. growth experience and trying to recreate it in other parts of the world, Kennedy hired "The Best and the Brightest."

McNamara, the Vietnam War, Eisenhower and French Indochina, etc. Recreational Reading: The Best and the Brightest by David Halberstam. Also read, Johnson Part Eight.

Take-off Theories of Economic Growth and the U.S. experience before 1840. Looking for justification for spending U.S. taxpayer money, the "Best and the

Brightest" hooked onto the "Take Off Theory of Economic Growth.“ Harvard professor-Walt Rostow.

In retrospect, it was just another example of a "stage theory of economic growth" aka Marxism. -Feudal, Capitalist, Communist.

Idea was that prior to 1840, U.S. per capita income had vacillated up and down with no clear trend. Somehow in the 1840's U.S. per capita income increased above some magic line and then took off.

Basic idea was that at low levels of per capita income, e.g. those experienced in India, Bangladesh, Central Africa, etc., people were stuck in the mud. Too poor to begin accumulating land, capital, etc.

There was mythical level of income above which people would enter a path of self sustaining economic growth would occur.

The sorry history of U.S. international aid efforts (2).

Problem with the take off theories of economic growth was that there was no evidence that a take-off had ever occurred in the U.S. or any other country.

Data problems with the census had precluded computing reliable GNP numbers prior to 1840.

Billions were spent without testing the basic underlying premise. Parallel with famine alleviation efforts.

Effect of flooding market with free food on incentives to produce food locally.

Creation of a permanent state of dependence on U.N. aka U.S. charity.

Conspiracy theories.

Economic Growth before 1840.

In 1790, the U.S. was a relatively prosperous but fundamentally underdeveloped economy supporting a population of under 4 mil. confined to a few hundred mile band of farmland from ME to GA.

Everyone worked the land or provided processing and commercial services to those who did.

By 1860, 70 years later Population was 31 million. Experienced a far higher standard of living, Settlement extended for over a thousand miles, well past the

Mississippi river. Agriculture supplemented by a booming manufacturing

sector.Economic historians have been preoccupied with the US before 1840 because they want to know the preconditions for sustained economic growth.Can we explain the pace and pattern of this economic growth?

Data Problems. Economic historians searching for evidence on growth rates before 1840 are forced to play archeologist. After that date, reliable estimates of national and regional output can be assembled. But evidence from earlier years is so scanty, reliable estimates cannot be assembled.Before 1967, the conventional wisdom went, “ After 1790, the American economy prospered mightily as a result of the trade boom of the Napoleonic war era. Then the withdrawal of the US from world trade due to president Jefferson’s decision to suspend commerce produced a sharp drop in per capita income after 1807.

A early study by Robert Martin, suggested per capita income continued to decline for almost three decades, bottoming out in the 1830’s and then commencing a period of sustained rapid growth.

His methodology was questioned by Simon Kuznets, William Parker, and Frank Whartenby. but noone totally bought Kuznets speculation that per capita income might actually have risen during the period.

Marvin Towne and Wayne Rasmussen argue that rapid agricultural expansion represented a serious drag on labor productivity in the dominant sector of the economy. The country grew due to rapid population growth, but farmers facing depleted soils were barely able to maintain their standard of living.Douglas North argued that the collapse of trade due to the Napoleonic War decreased the standard of living.

Data Problems (2)

All of these researchers agree that the puzzle of US economic Growth is the sharp discontinuity in the growth process in the 1830’s and 40’sRostow’s Theory: A long period of ups and downs without clear progress gave way to another developmental stage: sustained growth that more than doubled per capita income in 60 years and six fold in 120 years.The great puzzle for a generation of developmental economists was: what happened to in the 1830’s and 1840’s that precipitated the leap to modern growth.

Paul David’s Research Rather than measure per capita output directly from inadequate data, David makes use of simple arithmetic identities as a frame work for careful conjectures. David makes use of the simple accounting identity:

production alagricultur-non in per workeroutput P

eagricultur in per workerOutput = P

eagricultur-non in forcelabor of fraction)S-(1

eagricultur in forcelabor theof fractionS

forcelabor thein population theof fraction =

outputcapita per V

:

)1(

n

a

a

a

r

where

PSPSrV naaa

Paul David’s Research (2)

If the value of each parameter were known for each date. it would be easy to calculate output per capita (V), or an index of per capita output for each date (t). However, Pn is not known for dates before 1840. The census did not record output outside of agriculture before 1840.Hence David assumes that the ratio of output per capita in the two sectors (Z) remained constant during the entire 1880/1840 period. If the non-agricultural sector is small throughout the period, changes in Pn will have little overall effect on the per capita output measures.

1840

a

nP

PZ

Paul David’s Research (2)Note that if Z is constant for all periods, the index of output per worker in each of the two sectors must be equal.

0000

t

00000

t

n

0000

t

0000

t

00

)1(

)1(

V

V

V

V

1800) and 1840 in (sameconstant P

=Z Assuming

V

V

)1(

)1(

V

V

:ngsubstituti

ZSZ

ZSZ

P

P

r

r

PZSPZPS

PZSPZPS

r

r

P

PSPPS

PSPPS

r

r

PSPS

PSPS

r

r

P

P

P

P

a

ta

a

tat

aaaaa

taatataat

a

nanaa

tnantaat

naaa

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n

tn

a

ta

Paul David’s Research (2)

The Productivity index thus depends only on the values of the index of labor force participation (rt/ro), the agricultural productivity index (Pa/Pa) , the value in each period of Sa (the fraction of the labor force in agriculture), and the parameter of relative labor productivity (Z).

0000

t

)1(

)1(

V

V

ZSZ

ZSZ

P

P

r

r

a

ta

a

tat

Paul David’s ResultsV alue o f C om ponent Ind ic ies

Y ear Z1800 1.957 0.826 0.764 0.966 0.6441810 1.957 0.837 0.739 0.97 0 .6191820 1.957 0.79 0 .766 0.987 0.6761830 1.957 0.707 0.9 0 .976 0.841840 1.957 0.634 1 1 11850 1.957 0.548 1 1.065 1.131860 1.957 0.532 1.215 1.065 1.38

S a P Pa t a 0r rt 1 8 4 0 V Vt 1 8 4 0

Note: Z is assumed constant from 1800 to 1860

Paul David’s Results. The decade averages show no particular break in the 1840’s. Progress is far from uniform-per output declined from 1800 to 1810- but the first forty years of the century are clearly years of substantial growth.Three separate episodes of growth from 1790 to 1860.

Per year growth in per capita income stopped by the trade embargo of 1812.

mid 1820’s to mid 1830’s-2.5% per year in per capita growth.

to 1860- 2.1 % per year. Overall increase of about 50% from 1800

to 1840.Leaves Rostow without much to support take off theories.

No support for stage theories of economic growth-Marxism.

The periods before and after 1840 are similar. In both periods, the U.S. experienced steady growth in per capita income.There was no take-off.

Indices of Economic Growth, 1800-1860

Per Capita Output Index

Annual Per Capita Growth

1800 64.41810 61.9 -0.41820 67.6 0.91830 84 2.21840 100 1.81850 110.4 11860 137 2.2

Source: Paul David, "The Growth of Real Product in the U.S. before 1840: New

Evidence , Controlled Conjectures, JEH 27 (June 1967)

What caused growth before 1840?

Changes in the three variables (r,Pa,Sa) represent three potential sources for increased output per capita:

Share in agriculture(Sa) portion of population in Labor Force (r) increased productivity in Agriculture (Pa)

We can isolate the effect of changes in one variable by changing the value of one variable and keeping the value of the other variables constant.

0000

t

)1(

)1(

V

V

ZSZ

ZSZ

P

P

r

r

a

ta

a

tat

Methodology: Example of figuring the importance of changes in one variable.

552.1

)1(

)1(

V

V

1800

1840

1800

1840

1800

1840

1800

1840

ZSZ

ZSZ

P

P

r

r

a

a

a

a

Plugging in numbers for 1840 and 1800, per capita output was 1.552 times higher in 1840 compared to 1800.

What proportion of the increase in per capita output was due to increase agricultural productivity?

Compute using the following formula: 305.1

)1(

)1(

V

V

1800

1800

1800

1840

1800

1800

1800

1800

ZSZ

ZSZ

P

P

r

r

a

a

a

a

Changing only the value for agricultural productivity to its’ 1840 value and keeping other variables at their 1800 values, we answer the question, “If everything stayed the same from 1800 to 1840 except agricultural productivity improved to its’ 1840 value what would have happened to output?”

The answer is that instead of increasing 55.2% , output would have only increased 30.5%, I.e. only about 55% of the actual increase would have occurred if labor force participation, r, and the share of the labor force in agriculture (Sa) had stayed the same.

Changes in Labor Force Participation (r)

Increased labor force participation (r’s). Labor force participation increased by about 10% but 2/3rds of

the increase occurred in the last 2 decades. The major sources of change in LFP are

percentage of slaves in the population. Proportion of slave in pop. fell from 16.9% to 14.5%. Since

slave LFP is high this reduced overall LFP. Rate of immigration and birth rate among white Americans.

Shift to immigration as a source for pop. growth increased labor force participation.

Overall increases in labor force participation raised per capita output by just 3.5% before 1840 and 6.5 % from 1840 to 1860.

V alue o f C om ponent Ind ic ies

Y ear Z1800 1.957 0 .826 0 .764 0 .966 0 .6441810 1.957 0 .837 0 .739 0 .97 0 .6191820 1.957 0 .79 0 .766 0 .987 0 .6761830 1.957 0 .707 0 .9 0 .976 0 .841840 1.957 0 .634 1 1 11850 1.957 0 .548 1 1.065 1 .131860 1.957 0 .532 1 .215 1 .065 1 .38

S a P Pa t a 0r rt 1 8 4 0 V Vt 1 8 4 0

Changes in Distribution of Labor Force between Sectors (s) and Agricultural Productivity (Pa)

Shift to Non agricultural Jobs. Non agricultural jobs increased from 17% to 37%. This increased per capita output because agricultural workers

produced .399 to .551 as much as non-agricultural workers.Shift from agricultural to non-agricultural production increased output 19% to 27%.Change Agricultural Productivity

David estimates agricultural productivity increased by 37%.

V alue o f C om ponent Ind ic ies

Y ear Z1800 1.957 0 .826 0 .764 0 .966 0 .6441810 1.957 0 .837 0 .739 0 .97 0 .6191820 1.957 0 .79 0 .766 0 .987 0 .6761830 1.957 0 .707 0 .9 0 .976 0 .841840 1.957 0 .634 1 1 11850 1.957 0 .548 1 1.065 1 .131860 1.957 0 .532 1 .215 1 .065 1 .38

S a P Pa t a 0r rt 1 8 4 0 V Vt 1 8 4 0

ResultsSources of Change in Per Capita Output, 1800-1860

DecadeLabor Force Participation

Shift out of Agriculture

Increased Agricultural Productivity

1800 0.30 -1.00 -3.901810 1.90 3.90 9.201820 -1.20 6.60 24.301830 2.50 5.50 19.001840 6.50 6.10 13.001850 0.00 1.10 22.10

1800-40 3.50 15.80 55.301840-60 6.50 7.20 38.00

Based on Variant II in 1840 prices.

Lessons from the U.S. In the U.S., capital and productive resources were allowed to flow freely in response to market incentives.

Investment flowed to sectors of the economy where investment was judged by private parties likely to yield the highest returns, i.e.. the greatest increases in output and productivity.

Factors of production flowed to industries where there returns were judged to be highest by the owners of those factors.

In the U.S. in the early stages of economic development (1710-$550, 1840-$1350), it was improvements on the farm or agricultural productivity that were responsible for the majority of per capita income growth.

The sectoral distribution of labor and demographic changes played lesser roles. The lessons of the U.S. are, by and large, not followed by countries trying to develop today.

The wisdom of government bureaucrats vs. individuals investing their own money and deploying resources to their most highly valued uses.

Leading sector theories of economic growth. Rather than letting the market allocate capital according to comparative

advantage, many poor countries rely on central control of capital markets to route investment to a “leading” sector.

Examples: Japan-MITI, Korean Chaebols, and most communist countries. Excuse for government corruption. Contribution of U.S. taxpayers.

Sector chosen as the lead does not follow U.S. example. In the early stages of economic growth the “leading” sector in the U.S. was

agriculture not manufacturing. Agriculture never chosen as lead sector.