Friday, January 26, 2007

Economic Growth

We now take economic growth for granted, but historically it is a very recent phenomenon, see the graph above. In human history, sustained positive economic growth has only been a reality in the last few hundred years. Using this dataset of GDP per capita from year 1 to 2003 in Western Europe, we can see that:

1. It first took more than 1800 years (until about 1820) for per capita income to double from $600 to $1200, and the annual growth rate during that period was 1/25 of 1% per year, almost negligible.

2. It next took about 70 years (until 1890) for per capita income to double from $1200 to $2400, and annual growth in income was about 1% per year.

3. It next took about 60 years (until 1950) and economic growth was about 1.2% per year.

4. Since the 1950s, growth has been doubling every 20-25 years in Western Europe and the US, at a rate of about 2-3% year.

Bottom Line: Sustained economic growth of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years. Putting it in historical perspective, it makes the recent obsession with "income inequality" kind of inconsequential. It could be a lot worse, and was a lot worse throughout human history, for the average person. And complaining about income inequality in a country like the US where per capita GDP is about $42,000, must seem very strange to those in the rest of the world where per capita GDP is only $7500. Kind of like members of an exclusive, private country club complaining about differences in income between the "rich" and "super-rich" member of that club?


At 1/27/2007 5:30 PM, Blogger Gavin Kennedy said...

Absolutely correct. Thanks for the data set; I used this argument on the debate over Tyler Cowen's article today on absolute poverty is the real problem, not relative poverty on my Blog:

I shall post reference to Carpe Diem to increase readers' awareness of the your posting and supporting data.

At 1/28/2007 5:49 AM, Blogger Gabriel M said...

Yes! And this can connect nicely with free markets, at a theoretical, not just data level: A Unified Theory of the Evolution of International Income Levels (PDF).

At 1/31/2007 2:20 AM, Anonymous Anonymous said...

What is the blip of growth between 900 and 1100 AD? The graph indicates this occurred in all parts of the world, including places Europeans had not discovered yet - future Latin America for one. Is there a relationship here with the Medieval warm period, since the Vikings settled Greenland right around 1000 AD? Frankly, I would have expected to see SOME economic growth during the 12th and 13th centuries due to the development of the cloth industry in Europe and the Hansa trading system.

At 2/08/2007 8:31 AM, Anonymous Anonymous said...

Since the 1950s, growth has been doubling every 20-25 years

Erm...has growth been doubling, or has the size of the world economy been doubling?

I.e. are you describing velocity or acceleration ?


Post a Comment

<< Home