OVERVIEW AND ORGANIZATION OF THE CHAPTER

This chapter focuses on the nature of the macroeconomic growth process that has characterized the United States experience, and manifested itself in the changing pace and sources of the rise of real output per capita in the U.S. economy during the past two hundred years. Our main interest is, indeed, in the twentieth century, but we believe that its major characteristics and the nature of the underlying forces at work are most clearly seen in comparisons between the century just past and the one that came before.

A key observation that emerges from the long-term quantitative economic record is that the proximate sources of increases in real gross domestic product per capita in the century between 1889 and 1989 were quite different from those which obtained during the first one hundred years of the American national experience. Baldly put, the national ecomomy moved from an extensive to an increasingly intensive mode of growth, and its development at the intensive margin has become more and more dependent upon the acquisition and exploitation of technological and organizational knowledge.

Our first objective, therefore, must be to assemble and describe the components of the U.S. macroeconomic record in some quantitative detail, in a manner that exposes the nature and dimensions of the contrast between the nineteenth and twentieth centuries. We approach this task within the well-established framework of “growth accounting.” This enables us to show the secular acceleration that occurred in the growth rate of total factor productivity, which is the weighted average of the productivities of capital and labor, and the growth in the importance of total factor productivity as a source of labor productivity and per capita output increases.

The most important economic problem in any age is to know what we want, to define useful and worthy ends, and to balance our efforts among them in due proportion. In social affairs, even more than in private life, however, the conceptions of one era tend to persist into another, when circumstances have changed, and so to provide false guides for social policy. In the United States, the dominant purpose of economic policy has been, and still is, to foster economic growth; that is, to maximize the pace at which we enlarge our capacity to produce goods and services. But multiplication of goods and services no longer promises the large rewards it used to do. My purpose is to urge the need for reconsidering the high priority we assign to this objective and so for striking a new balance among the goals towards which our economic life is, in a broad sense, directed.

The achievements of economic growth in the last century

During the last one hundred years the output of this country per head of population approximately quintupled. This in itself, however, is not the measure of our economic success. Our success lies rather in the fact that economic growth was made to serve a number of purposes of first-rate importance.

The most significant was that a very large portion of our population, then living below or near poverty levels and under intense economic pressure, was lifted above the poverty line and placed in comfortable circumstances.

Introduction

This paper is a very brief treatment of three questions relating to the history of our economic growth since the Civil War: (1) How large has been the net increase of aggregate output per capita, and to what extent has this increase been obtained as a result of greater labor or capital input on the one hand and of a rise in productivity on the other? (2) Is there evidence of retardation, or conceivably acceleration, in the growth of per capita output? (3) Have there been fluctuations in the rate of growth of output, apart from the shortterm fluctuations of business cycles, and, if so, what is the significance of these swings?

The answers to these three questions, to the extent that they can be given, represent, of course, only a tiny fraction of the historical experience relevant to the problems of growth. Even so, anyone acquainted with their complexity will realize that no one of them, much less all three, can be treated satisfactorily in a short space. I shall have to pronounce upon them somewhat arbitrarily. My ability to deal with them at all is a reflection of one of the more important, though one of the less obvious, of the many aspects of our growing wealth, namely, the accumulation of historical statistics in this country during the last generation.

For the most part, the figures which I present or which underlie my qualitative statements are taken directly from tables of estimates of national product, labor force, productivity, and the like compiled by others.

Dramatic statements about the remarkable growth of the industrialised market economies are by now superfluous. The forces which account for this notable experience, however, still challenge explanation. And without a well-tested explanation, we are in a poor position to say whether rapid growth has now come to an end or whether it is likely to be resumed. Equally, we are in a poor position to suggest what policies might regenerate and sustain rapid growth were that an agreed aim of public policy.

Although, as said, we do not as yet have a well-tested explanation, a good deal of ground has been cleared, and the elements of a general understanding of the causes of rapid growth have begun to come into view. This being the case, I think it will be useful to try to draw these together as well as I can. This may help us discover how much agreement there is about the factors underlying postwar growth. And it may help us see where the empirical basis of our theories is especially weak and where, therefore, future work ought to be directed.

Both the breadth of this assignment and the limits of my own competence require that I restrict attention to the experience of the industrialised market economies as a group, and, correspondingly, to the common causes which I see behind it. A general view of this experience should help us understand the differences among countries in their rates of growth, in so far as those differences have a systematic character.

Few things have been more common in recent economics literature and in political pronouncements than expressions of dissatisfaction with the pace of U.S. economic growth, accompanied by ringing demands that we “can and must” speed the pace of our development. And, of course, few things have been less common than objective analyses of the grounds for dissatisfaction or coherent and comprehensive programs for accelerating our growth. This is the gap that Edward Denison's book attempts to fill. His work is, in fact, a notable contribution to a vexed and difficult subject. In astonishingly brief compass, Denison presents a picture of past trends in output growth and in the development of the various sources to which the growth of productive capacity can be traced, a projection of the probable future flows from these sources, and a measured evaluation of the possible steps that might be taken to make the flows still larger. Moreover, in grappling with these complicated and still largely unexplored issues, he has achieved a quite remarkable combination of technical finesse and depth with clear and almost deceptively simple exposition. The book is, therefore, a minor miracle of lucidity and persuasiveness which calls for the most serious study by economists while it engages the attention of a much wider audience.

It would perhaps be too much to say that, with the appearance of Denison's book, the whole subject of U.S. economic growth has been decisively clarified, that we now know where we have come from, where we are going, and what we can reasonably try to do about it.

Religion apart, no aspect of human affairs has such pervasive and penetrating consequences as does the way a society makes its living – and how large a living it makes. And few societies have experienced such radical alteration in the level of their income and in the manner in which it is earned as has this country during the last seventy-five years. In this period, in common with most of the countries which share in the civilization of the Western world, America has been passing through the complex series of changes we associate, however vaguely, with industrialization. Wherever this process has held sway, the application of science to industry and the accumulation of capital have transformed the economic life of peoples. But in America, these forces have operated in a peculiarly favorable environment and the transformation in the modes of living and working have been especially profound.

Industrialization has reshaped our lives, not only during the years people work, but during those in which they are not yet old enough to work and during those in which they are too old. In this essay, however, I will try to write about the impact of industrialization, not on the whole of our mortal span, but rather on those peculiarly malleable, impressionable, and seminal years of youth – not “from the cradle to the grave,” but from the cradle to the job.

My interest in economic growth, like that of many other economists, began during World War II. I was involved first with efforts to plan the size of the U.S. war production program, and later with studies of German production capabilities.

How large could the U.S. program be? How much would the economy prove capable of producing if it could be stretched to its limits? The capacity of the U.S. economy had not been tested since 1929. Roosevelt's massive armaments programs were the result of a debate about the growth of U.S. capacity during the dozen years of the Depression. Economists took leading parts in the debate and differed widely. Richard Gilbert and Robert Nathan were among the economist–heroes of that bureaucratic and political struggle. In retrospect, I am convinced that the vision and calculations that backed a very large program were decisive factors in the war. Men and arms had to be deployed and terrible battles had to be fought; but once the huge armament contracts were awarded, it turned out that the capacity to execute them was there. The material advantage of the Allies over the Axis had been created.

Calculations of German production capabilities were far less successful. They rested at bottom on the assumption that the German economy had been fully mobilized when the war began. The high hopes that the British and U.S. governments placed in strategic bombing stemmed from this assumption.

There are two standard ways of viewing the process of economic growth. One sees it as the outcome of capital formation and technological and organizational progress, including progress made possible by enlargement of scale; the other as a process of transformation in the use of a country's resources, principally in the size, intensity of use, and training of its labor force and its occupational and industrial structure. The two views are sometimes regarded as competitive, sometimes as supplementary. The truth is, however, that manpower development, capital formation, and technological progress are so closely allied and so interdependent as almost to confound analytical separation.

The purpose of this essay is to elaborate and illustrate the theme of interdependence and to sketch some of the main lines of connection between manpower development on the one side and capital formation and technological progress on the other. This is an expository paper, making no claim to originality. The factual assertions on which the argument depends mainly refer to the United States, although some have a wider application. For the most part, they are in the public domain, reducing the need to make a show of empirical support, but not guaranteeing accuracy. These notes are, therefore, provisional and, even in respect to their factual content, subject to verification.

Conventional versus total capital formation

The very distinction drawn between manpower development and capital formation rests in part on a conventional, but basically arbitrary, definition of the latter concept.

Among the many explanations of the surge of productivity growth during the quarter century following World War II, the most prominent is the hypothesis that the countries of the industrialized “West” were able to bring into production a large backlog of unexploited technology. The principal part of this backlog is deemed to have consisted of methods of production and of industrial and commercial organization already in use in the United States at the end of the war, but not yet employed in the other countries of the West. In this hypothesis, the United States is viewed as the “leader,” the other countries as “followers” who had the opportunity to catch up. In conformity with this view, a waning of the opportunity for catching up is frequently advanced as an explanation of the retardation in productivity growth suffered by the same group of followers since 1973. Needless to say, the size of the initial backlog and its subsequent reduction are rarely offered as sole explanations of the speedup and slowdown, but they stand as important parts of the story.

These views about postwar following and catching up suggest a more general hypothesis that the productivity levels of countries tend to converge. And this in turn brings to mind old questions about the emergence of new leaders and the historical and theoretical puzzles that shifts in leadership and relative standing present – matters that in some respects fit only awkwardly with the convergence hypothesis.

Economic growth is one of the oldest subjects in economics and one of the youngest. It was a principal concern of the Wealth of Nations, and it filled the thoughts of economists for the next three quarters of a century. As the Victorian Age wore on, however, growth lost its hold on the attention and imagination of the great body of academic economists. It was left to Marx and his followers, whose premature obsession with the demise of capitalism appealed to neither the political tastes nor the scientific bent of the discipline's exponents. And then, after the Second World War, following a hundred years of comparative neglect, there was a resurgence of interest and study that has been proceeding with vigor for the last four decades.

In the new effort, much that had been known a century and more ago had to be relearned. The new effort has had the benefit, however, of far better and more extensive historical and statistical materials and a more sophisticated theoretical framework. The accomplishments of the new research, however, have been modest, which is testimony both to the complexity of the subject and to the limitations of economics and of the other social sciences as well. Yet the study of growth is going on energetically. It is interesting, therefore, to ask what the newer work has added to the older and where the subject now stands.

The early debates over the role of government in economic life, at least during the era of industrialization, took the form of a contest between laissez-faire and thoroughgoing socialism. In Western Europe and North America, however, the movement away from individualism followed a much less radical course, which John Maynard Keynes was one of the first to define. His famous lectures in the mid-1920s on The End of Laissez-Faire carried the following passage:

Keynes, as we can now see, was among the first writers to form a definite vision of the kind of system under which we have come to live during the last half century, the system we now call the Mixed Economy or Welfare Capitalism or the Middle Way.

A vision of the possibility of economic growth lies close to the center of the idea of progress in general. Francis Bacon, the great precursor of the idea, proposed that progress could be founded upon a steady increase in knowledge gained by the application of experimental methods. But Bacon also held that the real and legitimate goal of the sciences is “the endowment of human life with new inventions and riches” and, in J. B. Bury's words, “the amelioration of human life, to increase men's happiness and mitigate their sufferings.”

Bacon's outlook immediately suggests how closely intertwined are the notions of progress and economic progress. They are not the same since progress broadly conceived includes intellectual, moral, and spiritual advance, as well as other satisfactions, which are not closely constrained by the supply of scarce goods. The starting point of their connection, however, seems to be the possibility of increasing our command over nature and the output of goods. At the same time, there is a strongly held and plausible idea that if we are to cultivate our nonmaterial, intellectual and spiritual, potentialities, we can do so only to the degree that we are relieved from elementary poverty and repetitive toil.

Considering how crucial economic progress is to the idea of progress generally, it is perhaps ironic that classical economics emerged as a source of skepticism and disbelief in the possibilities of progress rather than as a source of support.