Growth theory: Encyclopedia II - Growth theory - Origins of the concept of Economic Growth

Growth theory - Origins of the concept of Economic Growth

In the early modern period, European nations began conceiving of the idea that economies could "grow", that is produce a greater surplus of value which could be expended on something other than mere subsistence. This surplus could then be used for consumption, warfare, or civic and religious projects. The previous view was that only increasing either population or tax rates could generate more surplus money.

In the mercantile period, growth was seen as an increase in the total amount of specie, that is circulating medium such as silver and gold, under the control of the state. This led to policies to force trade through a particular state, the acquisition of colonies to supply cheaper raw materials to which value could be added before selling on.

The insight that it was the increasing capability of manufacturing which led to policies in the 1700's to encourage manufacturing in itself, and the formula of importing raw materials and exporting finished goods. Under this system high tariffs were erected to allow manufacturers to establish "factories", from "factor", the term for someone who carried goods from one stage of production to the next, and local markets which would pay the fixed costs of capital growth, and then allow them to export abroad, undercutting the prices of manufactured goods elsewhere. Once competition from abroad was removed, prices could then be increased to recoup the costs of establishing the business.

Under this theory of growth, the road to increased national wealth was to grant monopolies, which would give an incentive for an individual to exploit a market or resource, confident that he would make all of the profits when all other extra-national competitors were driven out of business. The "Dutch East India Company" and the "British East India Company" were examples of such state granted trade monopolies.

In this period the view was that growth was gained through "advantageous" trade in which specie would flow in to the country, but to trade with other nations on equal terms was disadvantageous.

The modern conception of economic growth began with the physiocrats and with the Scottish Enlightenment thinkers of David Hume and Adam Smith, and the foundation of the discipline of political economy. The theory of the physiocrats was that productive capacity, itself, was the mark of growth, and the improving and increasing capital to allow that capacity was "the wealth of nations". David Ricardo would then argue that trade was a benefit regardless of the relative capital involved, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "comparative advantage" would be the central basis for arguments in favor of free trade as an essential component of growth.

In the early 20th century, it became the policy of most nations to encourage growth of this kind. To do this required enacting policies, and being able to measure the results of those policies. This gave rise to the importance of econometrics, or the field of creating measurements for underlying conditions. Terms such as "unemployment rate", "Gross Domestic Product" and "rate of inflation" are part of the measuring of the changes in an economy.

This notion of growth as increased capital stocks was codified into the Solow growth model, which created a series of equations which showed the relationship between labor, capital and investment. The late 20th century, with its global economy of a few very wealthy nations, and many very poor nations, led to the study of how the transition from subsistence and resource based economies, to production and consumption based economies occurred, leading to the field of Development economics, including the work of Amartya Sen and Joseph Stiglitz.

In mainstream economics, the purpose of government policy is to encourage economic activity without encouraging the rise in the general level of prices (in other words, increase GDP without creating inflation). This combination is seen as, at the macro-scale (see macroeconomics) to be indicative of an increasing stock of capital. The argument runs that if more money is changing hands, but the prices of individual goods are relatively stable, then it is proof that there is more productive capacity, and therefore more capital, because it is capital that is allowing more to be made at a lower cost per unit. See Economies of scale, Inflation, Hyperinflation, Price, Supply and demand.

Adapted from the Wikipedia article "Origins of the concept of Economic Growth", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki