RETURN American Development in Retrospect

Taking a long view of the development of the American economy from today’s vantage point suggests a still powerful system capable of continued growth, but perhaps at a reduced rate, especially compared with less developed nations currently approaching the peak levels of industrial expansion. Historical national income data indicate that the US economy recorded an average annual rate of growth from the 1840s to the 1990s of 3.4 per cent. This average conceals, of course, large fluctuations from year to year and even decade to decade. As noted above, the average annual growth rate in the 1840s and 1850s may have been as high as 4.75 per cent. From the 1870s to the Great Depression of the 1930s the average was about 3.75 per cent. From the beginning of World War II in the early 1940s to the present the average was approximately 3.2 per cent. 

Attempting to explain this kind of long-term trend is daunting and it must be accepted that our current knowledge of the forces which govern the growth and decline of national economies is still in its infancy. During the 1960s and 1970s statistical exercises designed to identify the underlying causes of American economic growth became popular, the best known results being those of Edward Denison, who sought to quantify the contribution of increasing factor supplies of the basic factor inputs of land, labour and capital and a "residual" component of growth he called the "residual." Logically it seems plausible to suspect that the ability of an economy to expand output must depend upon either increases in the supply of factor inputs (finding and utilizing more land, growth of the labour force, accumulation of capital) or upon finding ways of utilizing the available inputs more efficiently —making them more productive. Such things as improvements in technology, better organization, improved skills and the like would be possible ways of achieving such gains in factor productivity. Although the estimates made by Dennison and his successors have been subject to criticism, the results of such "growth accounting" suggest some plausible trends. In the case of the US, it appears that increases in supplies of factor inputs have become less important causes of growth over the whole period since 1840 and that, conversely, increases in factor productivity have become more important, with the latter accounting for 15 per cent of growth in 1840-1860, 27 per cent 1870-1930, and 45 per cent in 1950-1990. Increases in supplies of land resources, for example, accounted for 10 per cent of the increase in income in the period 1840-1860, but zero per cent in the period 1940-1990. 

Thus, it seems likely that the determinants of factor productivity have played an important and increasingly important role in determining the growth of the American economy. Unfortunately the forces which in turn are accountable for changes in factor productivity are difficult to isolate. This not only limits our ability to explain the past, it challenges any attempt on the part of even American policy makers to beneficially influence the future.