What About Natural Resources?

In our discussion so far, we haven’t mentioned natural resources, which certainly have an effect on productivity. Other things equal, countries that are abundant in valuable natural resources, such as highly fertile land or rich mineral deposits, have higher real GDP per capita than less fortunate countries. The most obvious modern example is the Middle East, where enormous oil deposits have made a few sparsely populated countries very rich. For example, Kuwait has about the same level of real GDP per capita as Germany, but Kuwait’s wealth is based on oil, not manufacturing, the source of Germany’s high output per worker.

But other things are often not equal. In the modern world, natural resources are a much less important determinant of productivity than human or physical capital for the great majority of countries. For example, some nations with very high real GDP per capita, such as Japan, have very few natural resources. Some resource-rich nations, such as Nigeria (which has sizable oil deposits), are very poor.

Historically, natural resources played a much more prominent role in determining productivity. In the nineteenth century, the countries with the highest real GDP per capita were those abundant in rich farmland and mineral deposits: the United States, Canada, Argentina, and Australia. As a consequence, natural resources figured prominently in the development of economic thought.

In a famous book published in 1798, An Essay on the Principle of Population, the English economist Thomas Malthus made the fixed quantity of land in the world the basis of a pessimistic prediction about future productivity. As population grew, he pointed out, the amount of land per worker would decline. And this, other things equal, would cause productivity to fall.

His view, in fact, was that improvements in technology or increases in physical capital would lead only to temporary improvements in productivity because they would always be offset by the pressure of rising population and more workers on the supply of land. In the long run, he concluded, the great majority of people were condemned to living on the edge of starvation. Only then would death rates be high enough and birth rates low enough to prevent rapid population growth from outstripping productivity growth.

It hasn’t turned out that way, although many historians believe that Malthus’s prediction of falling or stagnant productivity was valid for much of human history. Population pressure probably did prevent large productivity increases until the eighteenth century. But in the time since Malthus wrote his book, any negative effects on productivity from population growth have been far outweighed by other, positive factors—advances in technology, increases in human and physical capital, and the opening up of enormous amounts of cultivable land in the New World.

It remains true, however, that we live on a finite planet, with limited supplies of resources such as oil and limited ability to absorb environmental damage. We address the concerns these limitations pose for economic growth in the final section of this chapter.

!worldview! ECONOMICS in Action: Is the End of Economic Growth in Sight?

Is the End of Economic Growth in Sight?

In 2012 Robert Gordon of Northwestern University, an influential macroeconomist and economic historian, created a stir with a paper suggesting that the best days of long-run economic growth are behind us. Technological innovation continues, of course. But Gordon made the case that the payoff from recent innovations will be limited, especially compared with the great innovations of the past.

Gordon made his case, in part, by contrasting recent innovations—which have mainly centered around information technology, from computers and smartphones to the internet—with the great innovations that took place in the late-nineteenth century. He argued that these late-nineteenth-century innovations, often described as the “Second Industrial Revolution,” continued to drive growth for most of the twentieth century. According to Gordon, there were five big innovations:

  1. Electricity

  2. The internal combustion engine

  3. Running water and central heating

  4. Modern chemistry

  5. Mass communication, movies, and telephones

How does the information technology revolution stack up against these changes? In Gordon’s account, it’s less important than any one of the five. As he likes to put it, which would you rather give up—the internet, or indoor plumbing?

Gordon also argues that the numbers bear him out. Figure 9-6 illustrates his argument. The blue and red lines show the historical rate of growth of real GDP per capita in the world’s “technological leaders”—Britain (red) before 1906, the United States (blue) thereafter. The green line shows a “smoothed” version of this history, which Gordon sees as a huge but temporary hump, and then extrapolates this pattern forward. As he says, growth rates got higher and higher until around the 1950s, but have fallen since then—and he argues that they will keep on falling, and that growth will eventually come to a virtual halt.

Is the End of Economic Growth Near? A Look at Growth of Real GDP per Capita, 1300–2100 Source: Data from Robert J. Gordon.

Is Gordon right? The most persuasive counterargument says that we have only just begun to see the payoff of modern technologies. As a recent book by MIT’s Eric Brynjolfsson and Andrew McAfee, Race Against the Machine, points out, in the past few years innovative technologies addressing a number of seemingly intractable problems have reached the state where they’re either already on the market or ready to go—these include useful speech recognition, machine translation, self-driving vehicles, and more. So you can make the case that we are on the cusp of truly transformative technological change right now.

Who’s right? As Yogi Berra said, “It‘s tough to make predictions, especially about the future.” What’s clear, however, is that both sides are asking the right question, because technology is, ultimately, the main driver of long-run economic growth.

Quick Review

  • Long-run increases in living standards arise almost entirely from growing labor productivity, often simply referred to as productivity.

  • An increase in physical capital is one source of higher productivity, but it is subject to diminishing returns to physical capital.

  • Human capital and technological progress are also sources of increases in productivity.

  • The aggregate production function is used to estimate the sources of increases in productivity. Growth accounting has shown that rising total factor productivity, interpreted as the effect of technological progress, is central to long-run economic growth.

  • Natural resources are less important today than physical and human capital as sources of productivity growth in most economies.

9-2

  1. Question 9.4

    Predict the effect of each of the following events on the growth rate of productivity.

    1. The amounts of physical and human capital per worker are unchanged, but there is significant technological progress.

    2. The amount of physical capital per worker grows at a steady pace, but the level of human capital per worker and technology are unchanged.

  2. Question 9.5

    Output in the economy of Erewhon has grown 3% per year over the past 30 years. The labor force has grown at 1% per year, and the quantity of physical capital has grown at 4% per year. The average education level hasn’t changed. Estimates by economists say that each 1% increase in physical capital per worker, other things equal, raises productivity by 0.3%. (Hint: % change in (X/Y) = % change in X − % change in Y.)

    1. How fast has productivity in Erewhon grown?

    2. How fast has physical capital per worker grown?

    3. How much has growing physical capital per worker contributed to productivity growth? What percentage of productivity growth is that?

    4. How much has technological progress contributed to productivity growth? What percentage of productivity growth is that?

  3. Question 9.6

    Multinomics, Inc., is a large company with many offices around the country. It has just adopted a new computer system that will affect virtually every function performed within the company. Why might a period of time pass before employees’ productivity is improved by the new computer system? Why might there be a temporary decrease in employees’ productivity?

Solutions appear at back of book.