Explore the History of Economic Growth and Living Standards

Living Standards and Economic Growth: A Historical Perspective

• For most of the last 1000 years, GDP per capita levels were low and similar across countries, with Italy having the highest GDP per capita at some point.
• The 18th century saw exponential growth in GDP per capita levels in Britain, making it the first country to "take off."
• Italy and Japan took longer to take off, but eventually shot up to surpass Britain in a matter of years.
• India and China had their take off between the 1990s and 2000s, with China's GDP per capita rising rapidly.
• Modern economic thought began in the 17th century as people tried to understand why certain countries were richer and stronger than others.
• The 18th century was the culminating point of a long process that created the pre-conditions for take-offs to take place, including the formation of nation-states and economic systems, expansion of trade, scientific revolution, and technological innovation.
• Adam Smith's "Inquiry into the Nature and Causes of the Wealth of Nations" discussed how economic systems based on decentralized activities conducted by different actors pursuing self-interest work and expand.
• Smith's formula for the wealth of nations, which could be assimilated to GDP, included total output, productive labor employed in agriculture and industry, population, output per unit of labor, and the share of the population employed in agriculture and industry.
• The two engines of growth in living standards are labor productivity and employment rate, with the contribution of the first engine potentially unlimited in the long run.
• Technology is the engine of growth, as it leads to increased productivity of labor through improved equipment, new methods of production, new products, new inputs, new markets, and new ways of organizing production.
• The Cobb-Douglas function on production includes labor, capital, total factor productivity, and technological coefficients as variables.
• The marginal productivity of labor is influenced by societal and environmental factors such as natural resources and geography, but innovation and improvement of technology remain the basis of economic growth.