Growth that Makes Us Richer and Growth that Doesn’t

Economists distinguish between two kinds of growth, extensive and intensive. Extensive growth raises a nation’s total output, but doesn’t make the populace better off and can easily make it worse off. Intensive growth, on the other hand, raises the average person’s standard of living.

Extensive Growth

Extensive growth is the result of population growth: putting more people to work allows the economy to produce more goods and services. Extensive growth would not affect the standard of living if each additional worker were equipped with the same tools and resources as the existing workers, but this requirement is difficult to satisfy. If the quantity of farmland is fixed, for example, more farmers means less land for each farmer, and the farmer must choose between working harder and accepting a smaller harvest. Either way he is worse off.

Irish farmers were in precisely this situation in the nineteenth century. The custom among Irish Catholics was to divide an inheritance equally among the sons of the family. So long as there was more than one son, the farmers of each generation worked less land than the farmers of the previous generation. Eventually the average farmer held only about an acre of land and was able to survive only by planting all of the land in the most productive crop, potatoes. Gregory Clark notes that

…an acre of potatoes, with careful spade husbandry, could supply to a family more than 6 tons of potatoes a year, 36 pounds a day, nearly enough to subsist on.1

In England, where the eldest son inherited the farm and the rest had to fend for themselves, a typical farmer worked twenty acres of land. The paucity of his resources meant that the Irish farmer was poor relative to his English neighbour, and worse was to come.

Jared Diamond has documented a number of cases in which societies have expanded to fill an ecological niche so completely that they have no resources held in reserve. A single shock (a drought, a longer winter) can then lead to disaster.2 For the Irish the shock came in the late 1840s in the form of a potato blight that destroyed the potatoes while they were still in the ground. The resulting famine caused the deaths of something between 1 and 1.5 million people over the space of a few years. Another 1 million people emigrated to escape starvation.

A part of the explanation for China’s long stagnation likewise lies in its reliance on rice as a staple. China was initially able to accommodate a rising population by expanding its borders and using marginal lands more effectively. Rice production was augmented by introducing specialized strains of rice and adopting best practices. Once these gains had been realized, however, further output could only be increased by working the fields more intensively, bringing into play the phenomenon that economists call “diminishing marginal productivity.”

Farmers organize their work so that it provides them with the greatest possible harvest. They carry out the most productive tasks first, and then move on to successively less productive tasks, until at last they decide that the rewards of the remaining tasks are too small to justify their labour. They leave these tasks undone. What happens when farmers choose to work the land more intensively? They do some of the tasks that they had previously judged to be not worth doing. Since these additional tasks are less productive than the ones they were already taking on, their harvest rises by a smaller proportion than their labour.

Now think of population growth as increasing the size of the farm family. For concreteness, imagine that the size doubles. If each person works as hard as farmers had worked in the past, the amount of work doubles and the harvest less than doubles: everyone eats less well. Alternatively, everyone can eat just as well if the amount of work more than doubles, meaning that each person works longer than farmers had worked in the past. This is the essential character of extensive growth: there is more production but the quality of life is not rising.

The potential upside to population growth is Smithian growth. A larger and denser population facilitates the development of markets, and markets expand everyone’s choices. The more limited are the markets, the closer everyone must be to self-sufficiency. The more extensive are the markets, the more people can choose to specialize in the production of a limited variety of goods. They sell what they produce but don’t need, using the proceeds of the sale to purchase the goods that they need but don’t produce. Everyone becomes a specialist who trades with other specialists. More goods are produced, a wider variety of goods are produced, and they are all produced more cheaply.

Intensive Growth

Intensive growth occurs when each worker is able to work with more (or better) tools, raw materials or skills. Since each of these things make the worker more productive, the society is able to produce more goods and services without increasing the amount of work that people do. The average person becomes materially better off than he was before.

The Solow growth model shows that, over longer horizons, there is a link between working with more tools and skills and working with better tools and skills. Specifically, the better are our tools and skills, the more of them we will choose to acquire. This linkage implies that, again over longer horizons, the growth rate of our material well-being is completely determined by — indeed, equal to — the rate of technological progress.3

Lipsey, Carlaw and Bekar suggest a thought experiment that shows how pivotal technological progress is to our rising standard of living.

Imagine freezing technological knowledge at the levels existing in, say, 1900, while continuing to accumulate more 1900-vintage good and services and while training more people longer and more thoroughly in the technological knowledge that was available in 1900.4

We would all possess more things, but our standard of living would be hugely lower than it is today. Had such a freezing of technology actually occurred, here are the aircraft that would be flying in and out of our international airports.

And here are the automobiles that would be rushing along our highways. Think about how rich we would be if there were two of these in every garage! No, let’s think big…three in every garage!

The Wider Frame

The connection between technology and material well-being is the first hint that growth cannot be explained by narrowly defined economics. Science, society, war, disease, philosophy, and religion have all played a part in the improvement of mankind’s material well-being.

  1. Gregory Clark, A Farewell to Alms (Princeton, 2007), p. 25.
  2. Jared Diamond, Collapse (Viking, 2005).
  3. See Charles Jones, Introduction to Economic Growth (Norton, 1998) for a good introduction to this model. The growth rate of material well-being is measured by per capita output, and the rate of technological progress is measured by total factor productivity.
  4. Richard Lipsey, Kenneth Carlaw and Clifford Bekar, Economic Transformations (Oxford, 2005), p. 11.