Where growth comes from

This year’s Nobelists argue that countries grow only when their policies embrace pragmatism and their cultures seek progress

- MIHIR S SHARMA

What is economic growth, and from what does it emerge? Is it simply an accumulation of more material, more inputs, more natural resources, and more labour and capital? Is it a product basically of technological progress, or is there something even more subtle at work?

That should be a core question for the discipline of economics, but surprisingly few Nobel Prizes have been awarded to those who ask it. When Joel Mokyr, Philippe Aghion, and Peter Howitt were given the prize this year, they joined a very short list. Only Simon Kuznets in 1971 and Robert Solow in 1987 have been explicitly rewarded for their work on the theory and accounting of growth.

Kuznets is remembered most for his observation that inequality within an economy initially increases with growth, and then decreases — the “inverted-U” curve that bears his name. But this observation is actually a subset of his broader insight that growth is never simple, but contains within it an enormous restructuring of the productive relations within any economy undergoing it. And, as head of the United States’ National Bureau of Economic Research’s project on national income accounting, he advanced more than anyone the concept of a “gross domestic product” (GDP) that is so ubiquitous today.

Solow, meanwhile, created the relatively simple model that underlies how all GDP growth today is measured and analysed. GDP is created by combinations of inputs — capital and labour, primarily. If you chose to save and invest, you grew faster. When put together with labour-enhancing technological progress, the Solow model shows the growth rate of output per worker is determined essentially by the rate of technological change.