When technological progress is properly understood, the world has been on broadly the same path for centuries
Save time by listening to our audio articles as you multitaskA new paper suggests such disappointment is not warranted—because it stems from an equally huge misunderstanding of how economic progress happens. Thomas Philippon, a professor of finance at New York University, argues the post-war experience was unusual.
Most economists’ starting point for thinking about growth is Robert Solow’s 1956 paper, “A contribution to the theory of growth”. Mr Solow’s model forrelies on what he dubs the “production function”. It is a mathematical black box: on one side labour and capital go in; out the other come all the consumer goods and services that contribute to people’s standard of living. One way of growing is obvious: shove more labour and capital into the box. But that cannot deliver improvements for ever.
Instead long-term growth can only come from improving the black box—the way in which labour and capital are combined. The fancy name economists give to this is total factor productivity , though they sometimes refer to it with more intuitive labels, such as technology or knowledge. You might think of it as a recipe. On one side lie labour and capital, the ingredients. On the other is the finished dish: economic output.
This is not a counsel of despair. While the rate of growth in percentage terms may be slowing, Mr Philippon’s model predicts that the size of any increment is roughly constant. Societies do get richer—but just not as fast as generally thought.growth does temporarily accelerate and the annual increment gets higher. His paper plots one such moment in Britain between 1650 and 1700, and another around 1830, consistent with when historians date the first and second Industrial Revolutions.
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