Economic Growth Research Paper

Economic growth is an increase in the total value of goods and services produced by a given society. There is little common agreement, however, on how best to measure this value. Many distortions are possible even in societies where most goods and services are provided by specialists and exchanged for money—so that prices provide some standard of measure of the relative value people assign, for instance, to a sack of rice, an hour of child care, an automobile, or a concert ticket. Measuring economic growth is still more difficult where economic activity is carried on outside the market, and thus not given a price that makes it comparable to other products. (For example, if hired cooks are paid enough each hour to buy five square meters of cloth, then we know something about how to add cooking and cloth making together in an index of total value produced; but if all families cook for themselves, it becomes much harder to know how to do that addition.)

Definitions of Economic Growth

Despite these difficulties, it is widely agreed in principle that one can arrive at a total value for a society’s economic production, and that an increase in this number—economic growth—indicates an increase in material abundance in that society. Therefore, economic growth can have a significant influence on human welfare, though it does not automatically indicate material betterment; growth that is mostly directed toward building weapons, for instance, or growth that is so unevenly distributed that the number of very poor people is increasing would not do much to improve overall material welfare. Still, there is enough correspondence between economic growth and the capacity to meet material goals, whatever they may be, that in the twentieth century, measures of economic growth probably became the most widely used indicator for trends in aggregate human material welfare, both in the present and the past. Even those who are very skeptical of equating output with welfare usually agree that something important about a society is being measured when we measure the level and rate of change of its economic output.

Economic growth is usually further divided into extensive and intensive economic growth. This distinction is clear in theory but messy in practice. Extensive growth refers to an increase in economic production that results from mobilizing more of the three basic factors of production: land, labor, and capital. If a farmer who used to work 50 days a year sowing 20 pounds of seed on 10 acres of land begins to work 100 days a year and sow 40 pounds of seed on 20 acres, thereby doubling his crop, this is pure extensive growth. Intensive growth, on the other hand, refers to growth that does not require more factor inputs, but results from using these inputs more efficiently; this could result from new technology, a more efficient social organization of production, or increases in knowledge that make workers more efficient. If two people who used to each need a week to build a shelter start working together so they can build three shelters in that time—increasing their output without using any more materials or labor time—that is intensive growth.

Extensive growth comes with obvious costs and is presumably finite; on the other hand it is extremely common in world history, since it is an option open to any society with unused land, free labor hours, and so on. By contrast intensive growth can be nearly free, (though not entirely so, since considerable resources for research and development might be invested in figuring out how to do things better); in principle it is also infinite, since it requires no additional material resources. On the other hand, it is not obvious that every society at every time can experience very much intensive growth. Consequently economic historians have devoted considerable attention to trying to identify which times and places have seen important bursts or sustained periods of intensive growth, and social and economic theorists have devoted just as much attention to trying to extract from these cases a general set of conditions conducive to intensive growth.

In practice intensive and extensive growth often occur together. If a new kind of plow makes it possible to grow grain on land that would not previously support it, the innovation represents intensive growth; but the extra labor, seed, tools, and so on needed to maximize the benefit of the innovation represents an extensive component. Many technical or social changes also result in a switch from using one kind of input to another (from horses and hay to cars and oil, or from 50 hours of labor and a very cheap spinning wheel to a few minutes of labor and a huge machine); this may cause large changes in the relative value of these inputs. An hour of a handloom weaver’s labor bought three or four days worth of food in parts of eighteenth-century China; today that labor is worth very little. It can be very hard, therefore, to decide how much of a given episode of growth to assign to the intensive or extensive category. Still any understanding of the changing material life of humans requires trying to sort this out.

Three Eras of Growth

Though it is hard to prove, most growth prior to the nineteenth century is regarded as having been extensive, resulting from more people expending labor on more of the Earth and its products. On the other hand, most growth in the nineteenth and twentieth centuries has been intensive. Systematic science has increased the speed with which new ways of doing things are discovered and disseminated, and supposedly more-efficient forms of economic organization have diffused around the world under the increased competitive pressure wrought by improved transportation and increased trade.

As a very rough approximation, this is probably correct, but any full story would be much more complicated. A fuller analysis shows that three critical eras account for most of the economic growth in human history, and that the combination of intensive and extensive growth is different in each case.

Neolithic Revolution

Through the millennia during which people were hunter-gatherers, there were many examples of unrecorded intensive growth: gradual improvements in hunting techniques, expanding knowledge of what plants were edible and how to find them, and so on. Studies indicate, however, that these did not lead to substantial increases in per-capita income, because people who were often on the move had no incentive to accumulate possessions, unless these possessions could walk, and the only animal that seems to have been widely domesticated well in advance of the emergence of settled farming was the dog (used in hunting). Thus whatever economic growth there was in the long period from the first emergence of humans until about ten thousand years ago was mostly reflected in population growth, as people spread out of Africa and gradually covered all the habitable portions of the Earth, probably by roughly thirty thousand years ago.

The efficiency gains from learning to do things better also enabled particular bands of humans to feed themselves with fewer hours of labor—an important improvement in human welfare, but one that does not show up as economic growth. Studies of modern hunter-gatherers suggest that they eat reasonably well with a work week of fewer than thirty hours per adult. Thousands of years ago, before agricultural and industrial societies pushed them onto marginal lands, these people could probably feed themselves with less work.

The first concentrated burst of intensive and extensive growth, then, was probably the so-called Neolithic revolution: our name for a cluster of innovations that includes settled farming, the domestication of animals, and the construction of permanent settlements. Controversy continues about how and why this process occurred—and it seems to have occurred independently in at least six places in the world. In the short run, these developments did not make life easier for individuals. Early farmers lived no longer than their nomadic ancestors, and they almost certainly worked much harder. Skeletal remains suggest they were shorter (which usually means less well nourished) and suffered more injuries of various sorts. They certainly suffered more from contagious diseases, as people occupied large-enough settlements for various diseases to become endemic, and as they stayed for long periods in proximity to their own waste, and to animals that hosted diseases.

On the other hand, settled societies could achieve far-higher population densities, because each acre of land in settled areas was now devoted only to plants useful to humans, and human activity—such as weeding and watering—increased the yields of these favored species. Staying in one place also made it easier for women to have more children, since children did not need to be carried as much as they did in migratory bands. For the same reason, settling down also facilitated the accumulation of material possessions. The overall result was substantial economic growth: more people and more output per person resulted from both an increase in inputs (more laborers, each working more hours on average) and eventually from greater efficiency. Permanent settlement also facilitated the storage of food and thus the feeding of people who themselves might not produce food. This made greater occupational specialization possible, which in turn facilitated the discovery and diffusion of knowledge, manifested in the rise of advanced construction, metalworking, cloth making, and many other skills.

Thus intensive growth encouraged extensive growth, and vice versa. Within a few thousand years of the first agricultural settlements there grew cities, governments, and writing—as well as far greater human inequality, which both reflected the accumulation of goods and served as a spur to further accumulation. While no good numbers for economic growth exist for this period, estimates of human energy consumption are a useful (though very inexact) proxy. A very rough estimate is that in the era of hunter-gatherers, perhaps 6 million humans each directly or indirectly used about 5,000 calories per day, for a total of 30 billion calories per day worldwide; by 5,000 years ago, perhaps 50 million people burned an average of 12,000 calories per day, for a total of 600 billion calories. Including improvements in the efficiency with which energy inputs were turned into output of human goods, economic growth in this period exceeds 2,000 percent; but since this was achieved over perhaps 5,000 years, the annual growth rate was still minuscule.

From perhaps 5,000 years ago to roughly 500 years ago, economic growth was primarily a matter of slow extensive growth—mostly clearing forest or jungle to create more farmland and accompanying population growth. The global population reached perhaps 500 million by 1500 CE, for a growth rate of less than 0.1 percent per year. Technical and institutional innovations also continued, but slowly. Not only was the rate of invention slow compared to the last century or two, but the rate at which new techniques spread across the world was very slow, due to limited communications. Iron plows, paper, and other very useful innovations took centuries to spread from China, where they were invented, to the other end of Eurasia, not to mention to the Americas or Australia; the manufacture of paper, for instance, is noted in China in about 100 CE but not in Europe until after 1200. Productivity-enhancing institutional innovations, such as the growth of markets in land and labor, were often even slower to spread, since they threatened the vested interests of those who controlled these resources by force. It was also probably common for useful innovations to be lost periodically, since small societies were easily disrupted and much of their knowledge was never written down.

Innovations occasionally came in clusters, as in Song China (960–1279), when breakthroughs in water control, rice growing, silk reeling and weaving, navigation, and time keeping were all invented in a relatively short time. Whether coincidentally or otherwise, Song China also saw a marked institutional shift away from self-reliant estates that made heavy use of compulsory labor; instead people at all levels of society began to rely more on markets and to specialize in a few goods or services they could sell in exchange for others. The growth of markets was certainly not new or unique to Song China, but that appears to be where it first reached the critical level at which the process became self-sustaining. This pattern of commercialization spread outward from China and a few other centers, though the degree to which it prevailed in any particular society remains controversial among historians.

Migrations and conquests could also suddenly spread a great many innovations all at once. Muslim conquerors spread rice, sugar, oranges, cotton, and other crops westward, having earlier obtained these plants via trade with India; they also played a very important role in spreading Persian irrigation techniques and medical techniques derived from India, the ancient Mediterranean, and the Arab world. But more often, centuries separated major inventions, and they spread rather slowly. By Roman times, agricultural yields in parts of Italy had reached levels that would not be exceeded until 1800 (though the number of places in Europe achieving those yields increased as efficient practices slowly spread). The same was true of the most productive farms in eastern China, which by 1200 (at the latest) had reached yields not reliably exceeded until well into the twentieth century. Even within the small space of England, the top wheat yields on medieval manors set a standard that did not become common until roughly 1800. Every piece of land is subtly different from others in soil chemistry, drainage, sun and shade, and so on, and before the advent of modern chemistry, adopting what worked on somebody else’s farm was a laborious trial-andrror exercise for even the best-informed and most diligent farmers.

By the fifteenth century, however, a new phase of growth was beginning to appear in various parts of the world, composed of three loosely related elements: more rapid population growth and land clearance (extensive growth); an “industrious revolution,” in which people began to work longer and harder (extensive growth) but also more efficiently (intensive growth); and technological change, which increased slowly before accelerating sharply in the Industrial Revolution of the nineteenth century.

The Industrious Revolution

Populations across Eurasia recovered from the fourteenth-century plague during the following century, eventually reaching previous peak levels; but this time, they didn’t stop: for reasons that are unclear, world population had reached almost 1 billion by 1800, roughly twice its previous peak. Land under cultivation also increased, though not as fast as population: frontiers were pushed back in eastern Europe, southwest China, the interior of India, the Americas, and many other places. In many cases, the advance of cultivation went along with small but significant technical improvements: new seeds better suited to harsh conditions, better water pumps for irrigation, improved knowledge of crop rotation. At the same time, yields per acre rose, though often painfully slowly. For instance, the practice of double-cropping—squeezing in a second crop on the same piece of land in one year—became much more common, especially in east and south Asia. This helped support more people, but the second crop often yielded less output for each day of work than the primary crop. In nonagricultural occupations as well, output rose, but hours worked seem to have risen even faster.

In Europe, where the best data exists, the number of hours of work required to earn a day’s food soared during the fifteenth and early sixteenth centuries, and then took a very long time (in some cases into the 1930s) to return to early fifteenth-century levels. Consequently, families worked more hours per year to make ends meet: men worked longer, more women worked for pay, and more children worked as well. One study suggests that the average work year for adult males rose over 20 percent in England just between 1760 and 1800. Though evidence elsewhere is spottier, a similar “industrious revolution” appears to have occurred in other parts of Europe, China, Japan, colonial North America, and perhaps parts of India. Meanwhile, slaves in the New World, particularly on sugar plantations, were being worked as hard as any labor force in history.

The slaves had no choice, but why did so many free or semi-free people begin to work much harder? Some of them had no choice either: as birth rates rose there were more mouths to feed, and the availability of more laborers also tended to drive down workers’ earnings per day. But a cultural shift was at work, too.

With more days of work required just to earn the family’s food, people might have been expected to buy fewer nonessentials, or at least not more of them. But instead, ordinary people in various parts of the world appear to have purchased considerably more clothing, specialty and processed foods, and household goods and services in 1800 than in 1500. (Again, the evidence is most detailed for Western Europe, but it points the same way for various parts of East Asia, North America, and perhaps elsewhere.) In other words, people worked more hours for the market, not just to get essentials, but to acquire various little luxuries: sugar, tobacco, silver jewelry, tableware, and more. This was mostly a matter of extensive growth, but it also relied in part on improvements in technology (more efficient shipping that facilitated trade, for instance) and changes in social organization, especially greater labor specialization. For instance, many people gave up making their own candles and began buying them instead, while putting the hours saved into making more of whatever they in turn specialized in (say, cloth) and selling it.

The resulting gains in efficiency from increased interdependence, though hard to measure, were considerable. And once again, extensive growth (more land and labor inputs) and intensive growth (social and cultural changes that created more efficient marketplaces with more attractive goods available, perhaps acting as incentives for people to work harder to get them) were so sufficiently intertwined that they are hard to separate. In fact more efficient labor markets may even have helped create the population growth that increased the labor supply. The gradual freeing of people in various places from forced labor obligations and restrictions on migration, improvements in the availability in labor markets of information about opportunities elsewhere, and greater opportunities for commoners to acquire land all meant it was easier for young people to start their own lives and families without waiting for their parents to give them land, or a shop, or some other productive asset. The result frequently was earlier marriage and higher birth rates. At the same time, denser population increased the possibilities for specialization— only a community of a certain size will support a full-time carpenter or weaver—and set the stage for intensive growth.

The increased long-distance trade that resulted from advances in navigation and shipping also fueled growth during the industrious revolution. Exotic new goods, mostly from the tropics, proliferated, and they were often at least mildly addictive: sugar, cocoa, tea, coffee, and tobacco. These fueled the emerging consumerism of people in Europe, China, and elsewhere, and generally had to be obtained through the market: of the crops listed above, only tobacco could be grown in the temperate zones where the largest and wealthiest collections of consumers were found. Meanwhile, potatoes, corn, and other new crops made food production possible in places where no known crop had grown before, especially at high elevations. Enormous new fisheries off the North American coast provided cheap protein. And the knowledge of strange new worlds—which was collected above all in Europe—did more than just provide practical new ideas; it also shattered old systems of knowledge, intensifying the search for new ways to understand the natural world. The new thinking that emerged did not produce the modern sciences and science-based technologies until the nineteenth century; but when they did, they transformed almost every branch of economic activity.

This “industrious revolution,” however, could not go on forever, and it also did not yield vast increases in output per person. While global population doubled from 1500 to 1800, output perhaps tripled, so that output per person rose about 50 percent in three hundred years. The critical constraints were in the area of agroforestry and energy. Broadly speaking, all the basics of human life—food, construction materials, clothing fiber, and energy—came either from vegetative growth (grain, lumber, cotton or flax, firewood) or from plant-eating animals (meat, leather, animal locomotion), which meant from the combination of land, fresh water, and sun. Supplies of these could not be increased on demand, creating difficult trade-offs: more farmland, for instance, meant less forest, and thus less lumber and firewood. The result, in several of the most productive places in the world, was a serious energy shortage, which placed limits on economic growth.

The Industrial Revolution

The solution to this energy shortage was the development of fossil fuels: first coal (and to a lesser extent peat) and later oil and natural gas. While coal, in particular, had been used to some extent in many places over the centuries, Great Britain was the first society to use it on a truly massive scale for its everyday needs. A number of factors contributed to this. First of all, Britain had lots of coal, much of it very conveniently located. Second, it was badly deforested relatively early, making the switch to coal (and to stone for building) imperative. Third, technological developments, especially in metallurgy and precision boring, facilitated the development in England of the world’s first economically viable steam engines, which were essential to pumping water out of the coal mines. Without steam power, it has been estimated, British coal mining could not have expanded beyond its level in 1700; instead it multiplied sevenfold by 1815, and almost 100-fold by 1900. Coal mining elsewhere grew even faster in the late nineteenth century, albeit from a smaller base. And in the twentieth century, the increased use of oil and natural gas—fuels barely used at all before modern times—has made possible even more staggering increases. The average human uses ten to twenty times as much energy today as before the Industrial Revolution, and in rich countries, the figure is higher still.

The staggering quantities of energy thus made available, combined with a wave of other technological innovations, ushered in by far the greatest surge of intensive growth in human history—one that has continued for roughly two hundred years thus far, gradually spreading from a few pockets in Britain and elsewhere in northwestern Europe to much (though not all) of the world. While global population has risen a bit over 500 percent since 1800, economic output has risen over 4,000 percent; industrial production may have risen 10,000 percent since 1750. About half of all economic growth in human history, as best as it can be measured, has occurred since 1950. Since that growth far exceeds the growth in land and labor inputs, most of it is a combination of additional capital inputs and intensive growth: technological and institutional changes that make labor, capital, and land use more efficient. It is very hard to measure the effects of capital apart from technology, since so much capital enters the economy in the form of new machines, but there is no doubt that much of this prodigious growth is intensive. The development of far more systematic natural sciences has led to a steady stream of new productivity-enhancing technologies. In earlier eras, by contrast, technological change usually came in the form of single innovations or small clusters, and exhausted itself when a boom in the innovative industry created a shortage of some particular material. (Improvements in metallurgy, for instance, often led to such massive deforestation that the metal works ran out of fuel.) And the advantages in military and political power that were conferred by industrialization were so great that governments everywhere tried to change their institutions to facilitate economic growth. Indeed, gross national product per person is probably the single most widely used index of the success or failure of societies in today’s world—even though this measurement was invented only in the twentieth century, and most economists would agree it is only a very rough measure of human welfare. The United Nations’ Human Development Index is an increasingly used alternative that seeks to measure human development factors beyond the realm of economics.

For all the diversity of technological changes involved, much of the story of post-1800 growth is that of the fossil fuel revolution in its many applications. It surfaces as transportation that has transformed the global division of labor (making it possible to a greater extent than ever before for people to depend on very distant places even for essentials), as chemical fertilizer and pesticides that have raised yields per acre to unheard-of levels (greatly reducing the extent to which the finite supply of land constrains production), as plastics and other new materials that substitute for other resources, and as machinery that substitutes for the muscles of billions of people and animals. Thus labor supply does not currently limit production very much, either; the problem, on the contrary, is a surplus of workers, or workers who are not in the places where they are most needed.

Economic Growth in the Contemporary World

While global wealth is very unequally distributed, and poverty remains a huge problem in much of the world, the modern economic era is unparalleled in at least two ways. First, the world economy has grown to the point where everybody could theoretically have more material goods than even the privileged had in most societies until quite recently. Second, the major constraints on even further growth are probably not so much the old ones of limited land, labor, and capital, as they are the environmental damage that may result from continued extension of our energy-intensive production methods. At the moment, the threat of global climate change from continued production of greenhouse gases (a by-product of all fossil-fuel burning) is probably the most widely discussed, but the long-term effects of making, burning, using, and dumping many other chemicals invented in the last two centuries—most of them, in one way or another, derivatives of coal or oil—pose a number of other poorly understood threats.

In the last few decades, major economies have become less fossil-fuel intensive, meaning they burn fewer fossil fuels per dollar of economic activity. Decreasing the energy intensity of the economy is also a high priority for China and India, two of the world’s largest developing economies. But because the total amount of economic activity continues to grow, so do worldwide fossil fuel consumption, global warming, and various other kinds of environmental damage. It remains to be seen whether less-damaging energy sources can become a significant part of the world’s power. None of this means we are likely to see an end to economic growth any time soon, but it does mean that how we think about growth and its costs may change. Even intensive growth may no longer be the “free lunch” it has sometimes seemed to be. In combination with the global economic and financial crises that emerged out of the United States in 2007 and severely impacted economic growth throughout much of the world, the effects of climate change, such as resource scarcity, have raised some serious questions about sustainability and the pursuit of economic growth at any cost.

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