EXPLAINING U.S. GROWTH TO DATE

The Sources of Growth

What have been the main sources of economic growth in the United States? Table 16-1 gives one courageous expert’s estimates of the quantitative importance of the big forces at work during this century. Although he doesn’t pretend that these are more than crude approximations, TABLE 16-1 they provide an interesting introduction to the rest of this chapter.

* Edward IDenison, The Sources of Economic Growth in the

United States (Committee for Economic Development, 1962).

** Adjusted for decreasing number of working hours per
year.

***Mainly due to increased economies of large-scale pro-
duction with growing total size of the market.

Note the significant differences between the pre- and post-1929 periods. The increasing quantity of labor and capital goods dominates the pre-1929 picture. Since 1929, improvements in the quality of labor and capital (technical advance incorporated in both real capital and human beings) have accounted for over half of our total growth according to these estimates. And if we eliminate growth in the labor force (population) because it doesn’t significantly raise output per capita, these improvements in quality accounted for over two-thirds of the total increase. An interesting question: How much growth in the capital stock do we need merely to permit introduction of technical advance, even though mere duplication of existing capital goods may not produce rapid growth? Don’t underrate capital accumulation, even if Denison’s estimates are right.

Now let us use the basic theoretical model of Chapter 15, which also lies behind Denison’s table, as a framework for looking at the actual forces underlying U.S. economic growth over the past century.  

NATURAL RESOURCES

Natural resources—land, minerals, power resources, and the like—are the foundation that nature gave us for economic growth. They are substantially fixed in amount; note that for that reason Table 16-1 gives them no credit for our growth since 1909. We may use part or all of them, but we cannot increase their quantity. To be sure, by using fertilizers and irrigation we can improve the crop-bearing ability of land, but this is really capital investment. Through im proved technology we may use natural resources that have previously been useless; solar power may run the factories of tomorrow. But it was the fixed supply of natural resources (especially productive land) that underlay Malthus’ worries. Today we have broadened the category of land to include all natural resources, but they are still fixed in supply.

Strikingly, the law of diminishing returns has never seemed to drag seriously on U.S. ceonomic growth, even though population has grown rapidly. When the first settlers arrived in the New World they found a wealth of fertile land, plenty of vegetation and timber, and a temperate climate. Until nearly 1900 the steady westward movement of the frontier revealed ever more bountiful resources. Thus, in effect we could increase our natural resources—by moving west. But even today our natural resources are so vast, and the ratio of people to natural resources so low here compared to most of the rest of the world, that few observers worry greatly that the law of diminishing returns on natural resources will exert a major drag on our progress.

* Based on estimates of J. F. Dewhurst and Associates, America’s Needs and Resources (Twentieth Century Fund, 1955).

One reason many observers don’t worry is our ingenuity in developing new ways to use the resources we have. Table 16-2 shows the revolutionary replacement of human beings and animals by inanimate energy sources.

FIG. 16-3 Petroleum and natural gas have increased steadily as major sources of energy for the modern economy. Will nuclear and solar power soon take over? (Source: Notional Industrial Conference Board.)

Figure 16-3 shows another way the economy has adjusted to the need for new and larger power sources. The old concept of a fixed stock of land requires a new look in the light of our ever-growing abilities to use existing resources more flexibly and efficiently. Accumulation of capital goods, technical progress, and education have swamped the law of diminishing returns over a period of three centuries. They are our hope for the future.