Economic growth is the percentage annual increase in real GNP or per capita real GNP in
the long run. It is an imperfect measure of the rate of increase of economic well-being.
Measured GNP omits the value of leisure and of untraded goods and demerits that have an
impact on the quality of life. Differences in income distribution make per capita real GNP a
shaky basis for comparisons of the welfare of the typical individual in different countries.
Significant rates of growth of per capita GNP occurred only in the last two centuries in the
advanced economies. In other countries persistent growth is even more recent.
Potential output can be increased either by increasing the inputs of land, labour, capital and
raw materials, or by increasing the output obtained from given input quantities. Technical
advances are an important source of productivity gains.
An apparently fixed supply of a production input, such as a particular raw material, need not
make growth impossible in the long run. As the input becomes scarce, its price rises. This
makes producers substitute other inputs, increases incentives to discover new supplies and
encourages inventions that economize on the use of that resource.
The simplest theory of growth has a steady state in which capital, output and labour all
grow at the same rate. Whatever its initial level of capital, the economy converges on this
steady-state path. This theory can explain output growth but not productivity growth.
Labour-augmenting technical progress allows permanent growth of labour productivity and
enables the simple growth theory to fit many of the facts.
There is a tendency of economies to converge, both because capital-deepening is easier
when capital per worker is low and because of catch-up in technology. Implementing
technical change may depend on how well society is organized to buy off (or defeat) the
losers.
Thatcherism did induce an identifiable rise in the UK productivity growth, even after
controlling for factor accumulation and catch-up opportunities. It is difficult to be sure
whether Thatcherism changed the growth rate for ever.
Theories of endogenous growth are built on constant returns to accumulation. If aggregate
investment does not encounter diminishing returns to capital, choices about saving and
investment can affect the long-run growth rate of productivity. An externality on a giant scale
provides a powerful rationale for government intervention to encourage education, training
and physical capital formation.
Nevertheless, endogenous growth rests on the presence of constant returns to
accumulation. Nobody has yet explained why this should hold.
