Wednesday, January 28, 2009

Capitalism and Markets Fuel Economic Growth

The chart above (click to enlarge) shows annual real GDP per capita (in 2004 dollars) from 1800 to 2008 (data from Global Financial Data, paid subscription required). Between 1800 and 1904, real GDP per capita grew in the U.S. at 1.5% per year, a sustained, positive growth rate in real output over an entire century that was likely historically unprecedented until the 19th Century, and even then a phenomenon isolated to only America and Western Europe. The 1.5% annual growth translated into almost a 5 time increase in per capita real GDP between 1800 and 1904, from $1,069 to $5,202.

As impressive as the 1.5% real annual growth was in the 19th Century, the average growth rate in the 20th Century increased by more than a third, to above 2% per year from 1904-2008, an increase in the growth trend clearly observable in the chart above (blue line). Because of the higher growth rate, real GDP increased more than 8 times between 1904 and 2008, from $5,202 in 1904 to $42,675 in 2008.

How much better off are we today because of the acceleration of economic growth from 1.5% per year in the 19th century to 2% in the 20th century? The dashed brown line above tells the story. If annual growth had continued at 1.5%, real GDP per capita today would be only $24,475 (about the level back in 1982); instead it's actually 74% higher at $42,675.

We hear a lot lately about the defects and flaws of the market economy, and the death of capitalism, etc., but as the
Adam Smith Institute points out "Capitalism is the only economic system ever to manage a consistent and long lasting rise in the average standard of living." As bad as economic conditions might appear today, the trend in economic growth over the last 200 years, largely as a result of capitalism and markets, suggests that we still have a lot to be thankful for. Capitalism works.

25 Comments:

At 1/28/2009 10:54 PM, Blogger Heretic said...

Since 1904???
Looks to me like you don't have a case for 2% until we hit WWII.

 
At 1/28/2009 11:32 PM, Blogger Mark J. Perry said...

Heretic: Based on a time value of money calculation, using 5202 = PV, 42,663 = FV, N = 104, and solving for I = 2.04%, the average annual compounded rate of real GDP per capita growth is 2.04% between 1904 and 2008.

 
At 1/29/2009 2:25 AM, Anonymous poor boomer said...

Is growth good for unskilled workers?

 
At 1/29/2009 5:28 AM, Blogger 1 said...

"Is growth good for unskilled workers?"...

Growth is good for everybody poor boomer, especially the 'unskilled' workers...

In good economic times there's plenty of CHANCE for the unskilled worker to acquire a skill if he or she actually wants to...

 
At 1/29/2009 8:32 AM, Anonymous Anonymous said...

I keep seeing comments about unskilled workers on this blog. Having been an unskilled worker, I can confirm that the best thing for unskilled workers is to learn a skill.

 
At 1/29/2009 9:30 AM, Anonymous Anonymous said...

To me it appears that the pick up in growth occurred in the early 30's, which is when the US stopped using the gold standard domestically and confisicated everyone's gold in 1933 (Thank FDR). This allowed the FED to control money growth and therefore inflation. In 1971, Nixon closed the gold window entirely (Thanks Dick). Under a gold standard gold inflates at approx. 2%/year due to new supply. As a result, with 1.5% real growth, the nominal growth rate is approximately 3.5%. Not bad over the long term. But once you deviate from a constraining monetary base, gold. All bets are off. The FED is in charge. For better or worse.

 
At 1/29/2009 9:43 AM, Anonymous poor boomer said...

Actually, change rendered my mainframe IT skills obsoilete, while my unskilled wages did not allow me to update those skills. It wasn't until 1992 that I owned a PC.

Without money, I can't return to skill.

 
At 1/29/2009 9:44 AM, Anonymous poor boomer said...

er, without money, I can't return to school.

 
At 1/29/2009 10:49 AM, Blogger 1 said...

"er, without money, I can't return to school"...

Hmmm, sounds like nonsense to me...

Heck! Even in Missouri the state offers FREE classes for acquiring job skills...

 
At 1/29/2009 11:06 AM, Anonymous poor boomer said...

Cite, please!

Government job programs do not exist for the benefit of employees. They exist for the benefit of employers.

The available job training is probably for undesirable jobs that the free market cannot fill without government assistance.

 
At 1/29/2009 11:16 AM, Anonymous poor boomer said...

to 1:

I see that MO has a Family Development Account which provides matching savings funds for education, training, home purchase or repair, and starting a business.

As a poor person who cannot save a dime - after rent, student loan, and health insurance, I live on $75/mo plus food stamps - I note that I am unable to find any provision that would help low income people who cannot save up any money (and who therefore would not receive any matching funds).

 
At 1/29/2009 12:00 PM, Anonymous Anonymous said...

poor boomer, why are paying for health insurance? What state/county do you live in? Most states offer free healthcare to people who make so little that they qualify for food stamps.

Also, you got a student loan? I thought you were unskilled?

 
At 1/29/2009 1:02 PM, Blogger Bret said...

Do you really think that the data, measurements, and derived statistics are good enough to discern 1/2% growth rate difference over two one-hundred year periods?

 
At 1/29/2009 1:14 PM, Blogger 1 said...

"Cite, please!"...

You have access to the net, do your own homework...

"Government job programs do not exist for the benefit of employees. They exist for the benefit of employers"...

LOL!

Oh dear! We surely don't want those who do the hiring and cranking out the paychecks to have a benefit courtesy of the state and some of the money they extorted from said employer...ROFLMAO!

"The available job training is probably for undesirable jobs that the free market cannot fill without government assistance"...

Ahhh, now we have the nut of it...

You are trying to rationalize your sloth and self pity...

Good one poor boomer!

"I see that MO has a Family Development Account which provides matching savings funds for education, training, home purchase or repair, and starting a business"...

Ahhh, what's your point poor boomer? Another excuse for crying 'poor mouth'?

Where do you live poor boomer?

Are you trying to tell me that there isn't a similer web site to this site here where you live?

Consider perusing these HUD sites since after all you help pay for them with what the federal government extorts out of each of your paychecks...

Note the following from the US Department of Labor: High Growth Job Training Initiative

 
At 1/29/2009 2:26 PM, Blogger spencer said...

Using log growth rates I have calculated that per capita real GDP growth has been:

1850-1900....1.4%
1900-1950....1.4%
1950-2008....2.1%

This data appear to imply that the modern mixed economy with government playing a significant role has done a far superior job of improving living standards than the small government economy prior to 1950.

P.S. Before someone complains that the depression distorts the 1900-1950 data it does not. Because of the rapid growth in the 1940s growth was back above trend by 1950 and the depression does not pull the 1900-1950 trend down.

 
At 1/29/2009 2:33 PM, Blogger Audacity17 said...

Mark, you're showing GDP per capita. Is there anyway you can adjust this for purchasing power?

 
At 1/29/2009 2:48 PM, Blogger Mark J. Perry said...

Audacity: The chart shows REAL GDP in 2004 dollars, so the series has been adjusted for purchasing power.

 
At 1/29/2009 5:53 PM, Anonymous poor boomer said...

Anonymous said:

poor boomer, why are paying for health insurance? What state/county do you live in? Most states offer free healthcare to people who make so little that they qualify for food stamps.

Also, you got a student loan? I thought you were unskilled?



I have an expensive chronic condition, hence the health insurance. Actually I pay approx one-fourth and a disease-specific charity pays the rest.

Yes I got a student loan so I am an educated unskilled worker. (grin)

 
At 1/29/2009 5:58 PM, Anonymous poor boomer said...

1 said:

"Cite, please!"...

You have access to the net, do your own homework...


Actually I did hit the net right after posting that; I simply figured that you, being presumably more familiar than I with what is available in Missouri, might know of some obscure gems that might be missed in a cursory web search.

 
At 1/29/2009 6:42 PM, Anonymous poor boomer said...

1 said:

Note the following from the US Department of Labor: High Growth Job Training Initiative


Cool, I like Geospatial Technology.

 
At 1/29/2009 6:58 PM, Anonymous poor boomer said...

1 said:

"Government job programs do not exist for the benefit of employees. They exist for the benefit of employers"...

LOL!

Oh dear! We surely don't want those who do the hiring and cranking out the paychecks to have a benefit courtesy of the state and some of the money they extorted from said employer...ROFLMAO!

"The available job training is probably for undesirable jobs that the free market cannot fill without government assistance"...

Ahhh, now we have the nut of it...

You are trying to rationalize your sloth and self pity...



Sure, they deserve a benefit - they certainly paid (taxes) for it.

I can go to a state job office armed with five jobs (listed online, so I can research first before taking 90 minutes to travel there) I want to apply for, and walk out with ONE referral.

The state job office here (NOT in Missouri, BTW) exists for the employer eather than the jobseeker because their primary function is that of gatekeeper - they don't give you a job referral unless they decide you meet the employer's requirements.

With the two hours I spend waiting in the office, and travel home, it takes me five hours to get ONE job referral.

So I no longer bother going to the office until I have found FIVE jobs to seek referrals to.

I figure my time can be more productively spent filling out apps directly and looking online.

And I was taught that you could work at anything you wanted in America; should I go into a training program to become a CNA when I don't want to become a CNA?

 
At 1/30/2009 7:48 AM, Blogger NoWhining said...

"Also, you got a student loan? I thought you were unskilled?"

In case you haven't figured it out, Poor Boomer is a poser. He/she has great communication skills, at least some education, and seems to have an above-average grasp (at times) on economic principles.

PB assumes the persona of a down-and-out, destitute, marginally employed post-middle ager with no job skills for purely polemic reasons. I'm fairly sure that the real PB is quite the antithesis to his/her online persona. The fact that PB's posts get such a rise out of you (and, at times, me) is more surprising than any of the drivel that he/she posts. My advice...take whatever PB posts with a grain of salt and move on.

 
At 1/30/2009 9:32 AM, Blogger VangelV said...

There is a big problem with how one reports inflation. Much of the 'growth' seen in the last 50 years is an accounting fiction created by manipulation of reported inflation and using an inadequate GDP deflator number. Some of it has also been created by the accumulation of unfunded liabilities that are also not accounted properly. Once the illusion fades away, many Americans and Europeans will find that reality is much worse than it seemed.

We also need to keep in mind that the posting seems to argue for much bigger government and more regulation and not free market capitalism. That argument was exposed for what it was quite some time ago and no amount of fake data will change the fact that more government (which is what we got in the past 50 years) is worse than limited government.

 
At 1/30/2009 3:22 PM, Blogger 1 said...

"In case you haven't figured it out, Poor Boomer is a poser. He/she has great communication skills, at least some education, and seems to have an above-average grasp (at times) on economic principles"...

Well I think you are on target NoWhining but one can't just discount the entertainment value poor boomer brings to the site...:-)

 
At 1/30/2009 11:09 PM, Anonymous poor boomer said...

NoWhining said:

In case you haven't figured it out, Poor Boomer is a poser. He/she has great communication skills, at least some education, and seems to have an above-average grasp (at times) on economic principles.

PB assumes the persona of a down-and-out, destitute, marginally employed post-middle ager with no job skills for purely polemic reasons. I'm fairly sure that the real PB is quite the antithesis to his/her online persona. The fact that PB's posts get such a rise out of you (and, at times, me) is more surprising than any of the drivel that he/she posts. My advice...take whatever PB posts with a grain of salt and move on.



I had not considered pursuing a career as a polemicist, but the "assumed persona" is pretty much the reality, and I am unable to refute any part of your description. Assuming such a persona would, it seems, be tedious if it were an act.

If it were up to me, surely I would rather have a good job, good income, and the other trappings of middle class American life.

 

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