Innovation, Education, and Information

1. Innovation, Education, and Information

2. Growth Accounting • Economists have devised several ways to account for the sources of growth. • In the simplest terms, how much of the income growth (total or per capita) can be explained by: • Technology • Land • Labor • Capital

3. Q = Output = GDP • L = Labor • Q/L = labor productivity • Q/L = f(Land, Capital, Technology)

4. Growth Accounting

5. Growth Accounting

6. Physical Technology and Institutions • In the previous slides, technology represents our ignorance, what we can’t measure. • There are two kinds of technological change that lead to more productive economies: • Physical Technology • Institutions

7. So in rough terms, economic growth is a function of • Land • Labor (bodies and human capital) • Capital (physical and financial) • Physical Technology • Institutions (social technology) • Each of the next four lectures will be about these aspects of American economic growth.

8. Relationship between Economic Growth and Population Growth • The growth of output per capita is equal to the growth of output minus population growth Per Capita Output Population GrowthGrowthGrowth 1790-1840 1.00% 4.00% 3.00% 1840-1910 1.25% 3.75% 2.50% • So, population’s role in or share of economic growth has been declining over time.

9. Land, Labor, Capital, (and Education) • These are the factors we have to consider. • Land is relatively unimportant in the sources of growth, but it was enormously important in terms of the dynamic of the new nation in the 19th century.

11. One of the most important factors about land is that it was there. • The following map shows the geographic location of the center of population over time. • Westward Ho!

12. 1840 1790 1900

13. Labor and Education • The population grew rapidly, although at a steadily declining rate. • That is, the population grew every year, • But the additions to population as a percentage of the existing population were smaller over time. • Question, does a declining population growth rate mean that the absolute size of growth in the number of people is falling?

15. Fertility • The source of slowing population growth rates was declining fertility. • There are several possible reasons for this, but the most persuasive is rising income.

17. Immigration • In the 19th century, declining births were roughly offset by rising immigration. • Over the course of the century, the population grew at an average of about 3% per year. • Which implied a doubling of population roughly every 25 years.

19. Labor Productivity • Despite the rapid growth in population, labor productivity grew at a very steady rate. • We saw this earlier, Q/L! • The following graph is for the 20th century.

21. Hours of work dropped steadily, which implied an extra boost to per capita income that is not captured by GDP. • The value of increased leisure.

23. Education • There was also a significant and steady increase in the level of education.

25. Most of the improvement in the education of the average American came in better access and provision of elementary school in the 19th century. Only 20% of the population attended any high school in 1900. • The 20th century was the education century, and the work horse was high school. • Even in 2000, only 25% of the population completes college.

27. Capital Over the long term the American economy became increasingly capital intensive. The capital labor ratio can be measured by the total capital divided by total hours worked, Capital per hour worked grew at a long run average of .5% per year. .

28. The increasing capital intensity in the early years of the 19th century was primarily in land clearing, in the later 19th century it came in manufacturing. • As late as 1860 the primary industries were still in the processing of agricultural products. • Clothing and food processing were the two most important industries by far.

30. By 1910, that picture changed completely. • The dominant industries were now: • Machinery • Lumber • Printing and Publishing • Iron and Steel • Malt Liquors (Beer) • Men’s Clothing • Cotton goods • Tobacco products • Railroad Cars

32. Growth in the late 19th century • Between 1860 and 1910 there was a sharp shift of the economy out of agriculture, into manufacturing and services. • The following tables give 1910 values for many measures as a ratio of the same values for 1860. • I.e, the total labor force was 3.3 times bigger in 1910 than 1860.

36. The shift from agriculture to manufacturing • Between 1860 and 1910, the labor force increased by a factor of • Agriculture 1.9 • Manufacturing 6.7 • Between 1860 and 1910, output increased by a factor of • Agriculture 3.7 • Manufacturing 10.8 • Relative productivity of labor in agriculture and manufacturing hadn’t changed, indeed farm productivity had risen slightly faster, 3.7/1.9 = 2; 10.8/6.7 = 1.6

37. The shift from agriculture to manufacturing • Nonetheless, there was an enormous shift of resources out of agriculture at the end of the 19th and beginning of the 20th century. • It was a source of economic growth, but agriculture grew just as rapidly in output per worker as did manufacturing. • The American economy was growing because of technological change, capital accumulation, and education.

38. Sources • Most of the figures come from Atack and Passell, A New Economic View of American History, 2nd edition, Norton, 1994. • A few come from Hughes and Cain, American Economic History, Addison Wesley, 6th edition. • The labor force graphs come from Claudia Goldin, “Labor Markets in the Twentieth Century.” Cambridge Economic History of the United States, Gallman and Engerman, ed. Cambridge University Press, 2000. • The education graphs come from Claudia Goldin and Larry Katz, The Race between Technology and Education, University of Chicago Press, 2008.