Notes on differences between my presentation in class and the book:
Types of resources:
The book identifies four main resources: land, labor, capital and technology.
I add a fifth, which reflects some of the recent findings in macroeconomics. The fifth is “institutions”. These are the rules, laws, and customs that a society follows (or, that they don’t follow laws). The classic example of an institution is contract law. Contract law, and the legal system that supports it, allows people to form agreements which are adhered to. If the system does not work well, and contracts are not followed, the economy is less productive.
Economic growth can be defined in two ways:
§ Economic growth is a permanent (or sustained or on-going or…) increase in real per person income.
§ Such an increase can only come about one way, a permanent increase in worker productivity. The book emphasizes that growth is the result of an increase in worker productivity.
There are three primary causes of economic growth.
§ The largest source of economic growth is an increase in technology (or technological knowledge as the book says).
§ The two other primary sources of economic growth are increases in physical capital and increases in human capital.
§ Technology, physical capital, and human capital are increased by investment. Thus investment is critical to create economic growth.
There are four contingent causes of economic growth. Contingent means you must have these resources in order for the primary causes (investment) to work. All of these are examples of how institutions affect growth. An economy that has the following conditions will tend to growth faster:
§ a stable government
§ private property rights
§ open economy (freer trade)
§ stable money (no high or erratic inflation) and stable financial system
Limiting factors
There are three things that can limit, lessen, or inhibit the growth of an economy.
§ First is the diminishing returns of capital. The more capital an economy has, the less growth that capital will provide. This means poor nations have the opportunity to growth faster and “catch up” to richer nations. This is also called convergence.
§ The second limiting factor is a fast growing population. If population growth is high, it tends to strain or stretch resources such as capital and natural resources.
§ The last limited factor may be natural resources. For most major economies in the 21st century, it’s questionable whether finding enormous sources of natural resources is possible. If resources are finite and become depleted, the economy will have to invest in methods to deal with the depleting resources. This doesn’t stop growth, but it may lessen it to some extent. In numerous way in the past, many economies have made these types of adjustments to limited resources.
But finding an abundance of natural resources isn’t a solution either. This is referred to as the “Dutch Curse.” Countries, particularly small ones, who find a very large supply of some resource will tend to grow more slowly. An abundance of a natural resource can HARM growth. There are a number of theories why this turns out to be true, among them is the idea that the economy becomes preoccupied with getting rich by extracting the resource, it doesn’t develop technology, physical capital (except that which helps extract that one resource), and human capital. That is, the rest of the economy is neglected.
§ Avoid the Poverty Traps: Poverty Traps are situations where an economy gets trapped into poverty and the trap makes it persistent and hard to grow out of it. Poverty traps include: find an abundance of resources (see Dutch Curse above), conflicts (violence), corruption, and being land-locked with bad neighbors. The reason they’re called traps is because they are self-reinforcing. For example, conflicts tend to create poverty. And poverty will create the conflicts. It becomes a vicious cycle.