Due today William R. Allen is an American economist, professor and author.  He is known for his authorship of economic literature and has been a nationally syndicated radio commentator, a newspaper co

Determinants of Economic Growth The Midnight Economist

Most agree that producing more of what we want most is a good thing; but they can see that growth is complex in prerequisite and process and hard to sustain in a stingy world.

What are the immediate determinants of economic growth? Many things. Some analysts—including economist Arnold Harberger in a publication of the Institute for Contemporary Studies—have tried to classify them.

Economic growth entails production, and production entails combining productive inputs into commodity outputs. Given climate and endowments of nature, aggregate output depends on the quantity, the quality, and the efficiency of use of scarce labor and capital. What, in turn, determines the quantity, quality, and efficiency of labor and capital?

The quantity of labor is a function not only of the size of population but also of the proportion of the population in the labor force and of the proportion of the labor force which is employed. The amount of capital stems from net rates of saving and investing, not only domestically but also by world financial partners.

Questions of quality are more subtle. The quality of labor services is affected by health and age composition and occupational distribution, by education and technological knowledge and general cultural attributes, by on-the-job training and work experience and managerial direction. The quality of capital is intertwined with the quality of some kinds of labor. It reflects at any given time the state of the industrial arts—the level of production knowledge applied from the accumulation of knowledge available. And over time, in global competition, just to stay in the same place, a community must run fast through improvement in designs and technical innovation.

For growth, resources of substantial amount and of high quality still must be used efficiently.

Somehow—through processes of acquiring information and of applying optimal decision rules—we are to shift workers and capital from lower-productivity to higher-productivity activities, developing appropriate specialization and division of labor, exploiting economies of scale, and innovating new products.

More than two centuries ago, Adam Smith concluded that the quality of resources and the efficiency of their use are more important than their quantity. The poorest nations, he noted, have the largest working proportions of population. What primarily determines how well we live is, as Smith put it, "the skill, dexterity and judgment with which [our] labor is generally applied." That is still true.

Questions for Thought and Discussion:

1. Why isn't there a single "correct" recipe for economic growth?

2. Does increasing investment necessarily increase economic growth?

3. Which of the determinants of economic growth are not a function of property rights?

4. What is the most important factor for sustained economic growth? Why?

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