Tying It Together

If you compressed the last million years of human history into 24 hours, then it’s only in the last one minute that humanity has moved beyond grinding poverty and subsistence. That makes that last minute seem rather miraculous: Something unleashed the forces of economic growth, and as a result, today you live in one of the richest countries in the world, at the richest moment in the history of humanity.

Perhaps that inspires a feeling of gratitude. For me, it also inspires a sense of wonder: What caused this growth, and will it continue? While some countries have enjoyed the good fortune that economic growth brings, others have experienced slower growth, and as a result, billions of people remain poor. What explains this? A Nobel Prize–winning economist who pondered these questions was moved to write that:

The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.

I agree. As we’ve seen, small differences in economic growth rates, once they’ve compounded for hundreds of years, can have massive effects. This means that the insights that might yield even a small change in the rate of economic growth have staggering consequences for human well-being.

Economic growth can continue as long as we keep coming up with new ideas.

This chapter has drawn together the key insights from several generations of economists trying to uncover the drivers of economic growth. The result is a basic framework that sees the key ingredients of output as being labor, human capital, and physical capital, together with the recipes or technology we use to combine them. More inputs lead to more output. An earlier generation of economists had hoped that the process of capital accumulation—boosting the quantity of machinery available to workers—would be enough to sustain ongoing growth. But the insights of the Solow model dashed that hope. It delivered the good news that boosting the rate at which we invest in capital will boost output, which in turn will generate more investment in capital, and hence a further boost in output. As a result, greater investment can lead the rate of economic growth to rise for a few decades as the economy transitions toward a new high-output steady state. But the Solow model also delivers bad news, explaining why capital accumulation is not a strong enough force to generate sustained economic growth. The problem is that eventually diminishing returns kick in, and extra machines won’t generate enough extra output to pay for the extra maintenance they require. When the economy hits its new steady state, this force no longer propels the economy forward.

What, then, drives economic growth? New ideas—in the form of ingenious inventions, advanced business processes, and innovative management techniques—provide new recipes for combining labor, physical capital, and human capital. These new recipes allow us to create more output with the same resources. Ideas don’t depreciate, and hence if we keep generating new ideas, the economy can keep growing. As long as ideas help us use our existing resources more effectively, there are no limits to growth.

All of this identifies the proximate causes of growth: It’s due to labor, physical capital, human capital, and—perhaps most importantly—new ideas. But what are the deeper causes of economic growth? What economic settings will lead to more investment in new ideas, supplemented by investments in capital that embodies these new ideas, and in the human capital needed to take advantage of new technologies? Focusing on the deeper causes of economic growth suggests that what really matters are the incentives and institutions that spur more of these investments. Careful studies of the varied growth paths of different countries over many periods of history reveal that property rights, government stability, effective regulation, and research and development policies all encourage the investments that will cause growth. Together, these insights provide a roadmap that poor countries might be able to use to ignite economic growth.

As important as these findings are, economists have yet to discover the perfect recipe for generating new ideas. This is why economics is engaged in a search for new ideas about how to generate … new ideas. Yes, that sounds a bit meta. But it also explains just why economics is so important: If ideas are important drivers of growth, then the ideas of economists about how to motivate businesses to invest in creating more ideas are the most important ideas of all. If economists can figure out which rules and incentives will generate the most new ideas, we may catalyze an era of even faster economic growth. The possibilities here are extraordinary. This suggests that creating new ideas about ideas could turn out to be the most transformative idea in the history of humanity.