Economic Growth

Economists usually define economic growth as the increase in an economy's full-employment output over time when they are speaking of the growth goal, either the simple increase or the increase in per capita terms. 

The chief sources of growth in full-employment output are growth in labor employment, capital accumulation, and technological advance. Technological advance reflects such things as improvements in the quality of labor through increased educational levels, improvements in the quality of capital through inventions, and improvements in the techniques of production, including those which arise from increased sizes of firms. 

Increases in the capital to labor ratio and technological advance have been the chief contributory factors to growth in U.S. output per capita. Changes in the labor employment to population ratio, reflecting trends in labor force participation rates and the average work week, also affect growth in per capita output. And the population growth rate influences growth in per capita output independently of its effect on the capital to labor ratio, since it affects the pressure of population on natural resources.

The government influences growth in output per capita through policies affecting the sources of growth. The primary focus of government growth policy has been on increasing capital accumulation rates, and the primary means for accomplishing this has involved using fiscal policies to increase the aggregate saving function and imposing investment tax credits. Other possibilities include policies to affect population growth rates, labor force participation rates, the average work week, education and training levels, and research leading to technological advance.

The Golden Rule of Accumulation suggests that the long-term target of government growth policy should be the aggregate saving ratio corresponding to the growth path which maximizes consumption per unit of labor input, a proxy for per capita consumption. The intermediate term target for the aggregate saving ratio might be higher or lower, depending on how quickly the community wishes to approach the Golden Rule path.

An alternative view, the laissez faire position, is that the government should adopt a neutral policy toward the aggregate saving function and the investment demand schedule, insofar as possible, and let the private market determine both the rate of economic growth and the level of the equilibrium m growth path.

Whether the growth of output per capita in the future will match that of the past, or even be positive, probably depends on whether technological advance, particularly in the area of energy resources, can offset the constraint posed by fixed and exhaustible natural resources.