Understanding economic growth

Understanding Economic Growth
[Analysis] The crisis and opportunities
Alfredo Ascanio (askain)
Published 2009-04-13 12:46 (KST)

In 1966, Robert S. Schultz developed ideas to deal with economic growth.

The factors to achieve this growth are multiple but the most important are summarized in this way.

It is important here to distinguish between problems of recovery and problems of growth in order to avoid the tendency to regard any increase in output as economic growth. For example, today inadequate demand may keep output below its potential level; when an increase in demand from this low point results in an increase in output from this low point, it is not "economic growth" but simply "recovery", to restore demand to the potential level of output.

Implicitly, economic growth refers to an increase in the potential level of output. We think of economic growth as a continuing process. Our concern is with having potential output continue to increase, year by year, decade by decade. (always with the assumption that demand will also continue to increase to absorb the potential output).

Against this background, let us consider various ways to increase potential output at this time of crisis.

Increasing the availability of labor and modify institutions so that a greater proportion of potential labor is actually available to the labor force (663,000 jobs were lost in March, for a total of about 5.1 million since the slump began) and labor productivity.

Increasing productivity by increased investment, rationalization of operations, education and technological change; but only technological change remains as a factor promoting a continuous increase in potential output.


It is accepted as axiomatic that increased investment promotes economic growth, but capital accumulation does not of itself contribute to a continuous increase in productivity, in any case the important factor is the rationalization of operations refers to improvement in the use of existing methods and equipment so that operations can be carried on most efficiently.

Education is another most important factor in raising productivity. Nevertheless, there is a limit to the extent to which increased education can increase productivity in a given technology.

Capital accumulation, rationalization of operations and education, all are important in economic growth; yet none is able by itself to provide a continuous increase in productivity in a given area of technology.

Technological change includes three more-or-less separate categories : (1) new production processes for producing established products; (2) improvements in existing processes made possible by changes in associated lines; and (3) new products. Technological change is, therefore, the key to the rising output of goods and services which we designate "economic growth."