Nobody Knows Where Economic Growth Comes From

A blog about business and economics.
Aug. 6 2012 2:38 PM

Nobody Knows Where Economic Growth Comes From

I remarked on Twitter earlier today that the world would be in better shape if economists admitted they have no idea where economic growth comes from. Some folks pushed back, saying: "No, no, no. We know it's technology."

That's actually what I mean. Economists have shown that modern economic growth can't be accounted for merely by growth in the size of the labor force or by accumulation of additional capital. You need to add a third element into the mix. This element is sometimes called "total factor productivity" and sometimes called "technology," but it represents a statistical discrepency, not an inquiry into independently identifiable properties of technological growth. It's like Molière's doctors explaining that opium puts people to sleep because of its virtus dormitiva.

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If the discrepency were small, this might not be a big deal and we'd say that economists had shown that capital accumulation is the key to economic growth. But it's not small. What's been found is that economic growth is largely unexplained. Using the word "technology" as a label for the discrepency makes it sound as if the issue is much better understood than it really is.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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