Contributors to Growth

… a core concept in Macroeconomic Policy

Click for MRU video

Click for MRU video

Concept description

Alex Tabarrok (reference below and link to right) identifies 14 contributors to economic growth:

  • factors of production: physical capital, human capital, organization, technological knowledge
  • incentives
  • institutions: property rights, political stability, dependable legal system, honest government, competitive and open markets
  • culture, luck, geography, history, ideas.

Tabarrok illustrates the contributors to growth in the following graphic.

Tabarrok’s 14 Pieces of the Growth Puzzle

ContributorsToGrowth

In introducing his video on how all these pieces of the puzzle fit together, Tabarrok says:

“Throughout this section of the course, we’ve been trying to solve a complicated economic puzzle – why are some countries rich and others poor? There are various factors at play, interacting in a dynamic, and changing environment. And the final answer to the puzzle differs depending on the perspective you’re looking from. In this video, you’ll examine different pieces of the wealth puzzle, and learn about how they fit.

“The first piece of the puzzle, is about productivity. You’ll learn how physical capital, human capital, technological knowledge, and entrepreneurs all fit together to spur higher productivity in a population. From this perspective, you’ll see economic growth as a function of a country’s factors of production. You’ll also learn what investments can be made to improve and increase these production factors. Still, even that is too simplistic to explain everything.

“So we’ll also introduce you to another piece of the puzzle: incentives. In previous videos, you learned about the incentives presented by different economic, cultural, and political models. In this video, we’ll stay on that track, showing how different incentives produce different results. As an example, you’ll learn why something as simple as agriculture isn’t nearly so simple at all. We’ll put you in the shoes of a hypothetical farmer, for a bit. In those shoes, you’ll see how incentives can mean the difference between getting to keep a whole bag of potatoes from your farm, or just a hundredth of a bag from a collective farm. (Trust us, the potatoes explain a lot.) Potatoes aside, you’re also going to see how different incentives shaped China’s economic landscape during the “Great Leap Forward” of the 1950s and 60s. With incentives as a lens, you’ll see why China’s supposed leap forward ended in starvation for tens of millions.

“Hold on – incentives still aren’t the end of it. After all, incentives have to come from somewhere. That “somewhere” is institutions. As we showed you before, institutions dictate incentives. Things like property rights, cultural norms, honest governments, dependable laws, and political stability, all create incentives of different kinds. Remember our hypothetical farmer? Through that farmer, you’ll learn how different institutions affect all of us. You’ll see how institutions help dictate how hard a person works, and how likely he or she is to invest in the economy, beyond that work. Then, once you understand the full effect of institutions, you’ll go beyond that, to the final piece of the wealth puzzle.

“And it’s the most mysterious piece, too. Why? Because the final piece of the puzzle is the amorphous combination of a country’s history, ideas, culture, geography, and even a little luck. These things aren’t as direct as the previous pieces, but they matter all the same. You’ll see why the US constitution is the way it is, and you’ll learn about people like Adam Smith and John Locke, whose ideas helped inform it. And if all this talk of pieces makes you think that the wealth puzzle is a complex one, you’d be right. Because the truth is, the question of “what creates wealth?” really is complex. Even the puzzle pieces you’ll learn about don’t constitute every variable at play. And as we mentioned earlier, not only are the factors complex, but they’re also constantly changing as they bump against each other. Luckily, while the quest to finish the wealth puzzle isn’t over, at least we have some of the pieces in hand. So take the time to dive in and listen to this video and let us know if you have questions along the way. After that, we’ll soon head into a new section of the course: we’ll tackle the factors of production so we can further explore what leads to economic growth.”

MRU practice questions

See http://www.mruniversity.com/node/330053, accessed 22 April 2016.

  1. Which of the following is a factor of production and best defined as ideas and inventions?

Source

Alex Tabarrok, The Puzzle of Growth, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-macroeconomics/wealth-of-nations-economic-growth, accessed 22 April 2016.

Atlas topic and subject

Wealth of Nations and Economic Growth (core topic) in Macroeconomic Policy.

Page created by: Ian Clark, last modified on 23 April 2016.

Image: Alex Tabarrok, The Puzzle of Growth, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-macroeconomics/wealth-of-nations-economic-growth, accessed 22 April 2016.