David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Learning Outcomes
By the end of this chapter, you should understand:
0 growth in potential output
f) Malthus' forecast of eventual starvation
0 how technical progress and capital accumulation made the forecast wrong
0 the neoclassical model of economic growth
0 the convergence hypothesis
0 the growth performance of rich and poor countries
0 whether policy can affect growth
0 whether growth must stop to save the environment
During 1870-2009 real GDP grew 11-fold and real income per person more than 5-fold. On average, we
are richer than our grandparents, but less rich than our grandchildren will be. Table 26. l shows that these
long-term trends were even more dramatic elsewhere. During 1870-2009 real GDP in Japan rose 100-fold
and real income per person 27-fold.
Table 26.l prompts three questions. What is long-run economic growth? What causes it? And can economic
policies affect it? We mainly focus on industrial countries that have grown a lot already.
Economists were always fascinated by the theory of economic growth. In 1798 Thomas Malthus' First
Essay on Population predicted that output growth would be far outstripped by population growth, causing
starvation and an end to population growth - the origin of the notion of economics as the 'dismal science:
Some countries are still stuck in a Malthusian trap; others broke through to sustained growth and prosperity.
We examine how they did it.
As Table 26. l shows, an extra 0.5 per cent on the annual growth rate makes a vast difference to potential
output after a few decades. By the end of the 1960s, economists had worked out a theory of economic
growth. It yielded many insights but had one central failing. It predicted that government policy made no
difference to the long-run growth rate.
592