Numéraire
Volume the Twentieth · of the table of twenty-six
The Aggregates · Group V · № 20 · Gr

The Growth

why nations are rich

The growth is the first of the aggregates, and with it the table turns a corner. The families so far have studied the economy up close — the price of a thing, the quantity exchanged, the failures of the market, the institutions that frame it. The aggregates pull back to the economy taken whole, and to its great motions across a nation and across generations; and the first and grandest of these motions is growth, the long climb by which a people comes to produce vastly more than its ancestors did. It is, the author holds, the only economic question that finally matters: why some nations are rich and others, no less capable, remain poor. The first thing to grasp is that growth is the great exception. For all of history before about 1800, there was none — humanity lived in a Malthusian trap, where every improvement was eaten by more mouths and the standard of living stood still at subsistence. Then, in one place, the trap broke, and output per person began a climb that has not stopped. The volume asks where that growth comes from, and why it reached some peoples and not others. The answers run through accumulation and its limits, through the churning creation and the borrowing of knowledge, to the deepest source of all — and arrive at a reframing that inverts the premise of the rest of economics: that the wealth of the modern world is not the accumulation of scarce things but the compounding of ideas, which are not scarce at all. And it ends on the doubt that shadows that hope: whether the modern burst of growth was a one-time windfall now nearly spent, the great enriching inventions behind us and their successors fainter, so that the rich world is already slowing.

in print · № XX · 12 of 12 plates
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The argument of the volume

Begin with the trap, for growth is best understood as the escape from it. Thomas Malthus described a world — the only world there had ever been — in which any improvement in production was swallowed, within a generation or two, by an increase in population: a better-fed people had more surviving children, the extra mouths ate up the surplus, and the standard of living was pressed back down to subsistence. For ten thousand years the trap held; technology bought numbers, not prosperity, and the peasant of 1800 lived little better than his ancestor of the Stone Age. Then, around 1800, in Britain and northwestern Europe, the trap broke: for the first time, the growth of production outran the growth of population, output per person began to rise, and it has risen ever since. This escape — from the world where living standards were fixed to the world where they grow without apparent limit — is the most important event in economic history, and explaining it is the task of the volume.

What is the engine of the escape? The obvious answer is accumulation — give each worker more capital, more tools and machines, and output per worker rises. But Robert Solow proved that accumulation alone cannot sustain growth: capital runs into diminishing returns, each new machine adding less than the last, until the economy reaches a steady state, a standstill where all saving goes merely to replace what wears out. Worse for the theory, his own accounting showed that most of the growth actually observed was not accumulation at all but a residual — a part left over, which he attributed to technological progress and which others, more honestly, called the measure of our ignorance. So the engine is not the multiplication of things but the improvement of methods; and methods improve, as Aghion and Howitt formalized Schumpeter's insight, by creative destruction — a churning sequence in which each new innovation wins the temporary monopoly that rewards it by destroying the innovation before, and is destroyed in turn by the next. Growth at the frontier is the relentless replacement of the old by the better, proceeding only where the power of the displaced does not block it.

But most nations do not grow at the frontier; they grow, or fail to, by catching up to it. Alexander Gerschenkron saw the paradox of backwardness: the latecomer can borrow what the pioneer had to invent, and so leap forward faster than the leader ever climbed — if he can build the conditions to absorb the borrowed knowledge, the capital and skill and, above all, the institutions. Convergence is real but conditional; it gathers only the nations alike in those conditions, and leaves the rest behind. And this points to the deepest truth, which Paul Romer made precise: the source of lasting growth is not things, which are rival and scarce and run into diminishing returns, but ideas, which are non-rival — used by all at once, forever, without being consumed — and so escape diminishing returns entirely. Because ideas can be shared without being divided and combined without limit, growth driven by ideas need never end; the wealth of the modern world is the compounding residue of discovery. Why, then, are some nations rich and others poor, when ideas are free for all to use? Because producing ideas takes incentive and adopting them takes the freedom to let the new displace the old — both of which are matters of institutions. The question of growth runs back into the question of the rule, and the answer inverts the premise of economics: the master fact of the modern age is not scarcity but the abundance of the one thing that does not run out. Yet whether that abundance can keep the rich world growing at the pace of the past century is gravely doubted: Robert Gordon holds that the great enriching inventions were a one-time windfall, their like unlikely to return, so that even the engine of ideas may be running slow.

The argument remains open. What follows is an attempt to fix its exact edges.

The twelve plates of this volume

  1. i The Trapin print Malthus; the trap in which, for all of history, every gain in production was eaten by more mouths — and growth is the escape no one foresaw. Read the plate →
  2. ii The Takeoffin print the Industrial Revolution; why sustained growth began around 1800, and why in Britain rather than anywhere else. Read the plate →
  3. iii The Steady Statein print Solow; accumulation and its limits — capital runs into diminishing returns, and the residual that remains is technology, not stuff. Read the plate →
  4. iv The Churnin print Aghion; creative destruction — growth as the churning replacement of the old by the better, and the power that would block it. Read the plate →
  5. v The Catch-Upin print Gerschenkron; the advantages of backwardness — catching up by borrowing what the leader invented, if the conditions allow. Read the plate →
  6. vi The Talentin print human capital; the wealth that is in skilled and educated minds rather than in machines. Read the plate →
  7. vii The Multitudein print population and growth; the demographic transition, and whether more people mean more mouths or more minds. Read the plate →
  8. viii The Ideain print the capstone: the source of growth is ideas, which are non-rival and do not run out — so the wealth of nations is the compounding of knowledge. Read the plate →
  9. ix The Mapin print geography against institutions; whether mountains and climate or rules and laws decide a nation's fate. Read the plate →
  10. x The Measurein print the national accounts; what it means to add up a nation's product, and what the great sum leaves out. Read the plate →
  11. xi The Slowdownin print secular stagnation; whether the age of rapid growth was a one-time windfall now nearly spent. Read the plate →
  12. xii The Ceilingin print the limits to growth; whether a finite world of resources can sustain the endless compounding of ideas. Read the plate →

In closing

This volume took up the first of the aggregates, and with it the table's turn from the economy seen up close to the economy taken whole. Its subject was the grandest question economics asks — why some nations are rich and others poor — and its starting point was the recognition that growth is the great exception: that for all of history before about 1800 there was none, and that explaining the modern enrichment means explaining an escape from a trap that had held since the dawn of farming.

The volume followed growth from the trap to its deepest source. Thomas Malthus described the world without growth, in which population expanded to consume every gain and living standards stood still at subsistence — the world that broke, no one quite knows exactly how, around 1800. Robert Solow showed that the obvious engine, the accumulation of capital, cannot sustain growth, for it runs into diminishing returns and halts at a steady state; and his own accounting proved that most growth is not accumulation but a residual, the technological progress he could measure but not explain. Aghion and Howitt opened that residual, showing technology to advance by creative destruction — the churning sequence in which each innovation destroys the one before. And Gerschenkron showed how the nations behind the frontier grow by catching up to it, borrowing what others invented — but only if they build the conditions to absorb it, so that convergence is real but conditional, and the poor who lack the conditions are left behind.

And then the volume found, beneath accumulation and catch-up alike, the deepest truth of growth. Paul Romer made it precise: the source of lasting growth is not things, which are rival and scarce and run into diminishing returns, but ideas, which are non-rival — used by all at once, forever, without being consumed — and so escape diminishing returns entirely and can compound without end. The wealth of the modern world is the residue of discovery; the great escape was the moment the non-rival engine of knowledge overtook the rival world of stuff. And the question of why some nations seized this and others did not runs straight back into the institutions the previous family described — for ideas are free to all, but producing them takes incentive and adopting them takes the freedom to let the new displace the old. Growth thus inverts the premise of economics: its master fact is not scarcity but the abundance of the one thing that does not run out — though whether that abundance will keep the rich world growing, or whether, as Robert Gordon contends, the age of rapid growth was a one-time windfall now nearly spent, is the doubt on which the volume finally turns and the question it leaves open. With this the aggregates open. Growth is the long upward trend of the whole economy; around it the economy swings in booms and slumps — the cycle; through it runs the changing value of money — the level; and the growing product must be divided between those who labor and those who own — the share. The first of the great motions is traced; the others remain.

Growth is the compounding of ideas, and ideas do not run out; the wealth of nations is the residue of what they have discovered and learned to use. So the question is not why growth must end, but why it ever began — and why it reached some peoples and not others. Whose effort compounds, and whose merely repeats?