This work is distributed as a Discussion Paper by the STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH SIEPR Discussion Paper No. 01-05 Two Centuries of American Macroeconomic Growth From Exploitation of Resource Abundance to Knowledge-Driven Development Moses Abramovitz Stanford University Paul A. David All Souls College, Oxford & Stanford University August 2001 Stanford Institute for Economic Policy Research Stanford University Stanford, CA 94305 (650) 725-1874 The Stanford Institute for Economic Policy Research at Stanford University supports research bearing on economic and public policy issues. The SIEPR Discussion Paper Series reports on research and policy analysis conducted by researchers affiliated with the Institute. Working papers in this series reflect the views of the authors and not necessarily those of the Stanford Institute for Economic Policy Research or Stanford University. ____________ TWO CENTURIES OF AMERICAN MACROECONOMIC GROWTH FROM EXPLOITATION OF RESOURCE ABUNDANCE TO KNOWLEDGE-DRIVEN DEVELOPMENT By Moses Abramovitz Stanford University and Paul A. David All Souls College, Oxford & Stanford University First draft: August 1999 Revised: November 2000 This version: February 2001 ©Moses Abramovitz and Paul A. David Contact Author’s Addresses: Professor P. A. David, All Souls College, Oxford OX1 4AL, UK Tel.: +44+(0)1865+79313; Fax: +44+(0)1865+79299; E-mail: <[email protected]> Professor P. A. David, Department of Economics Landau Economics Center, Stanford University, Stanford, CA. 94305-6072. Tel: (650) 723-3710; Fax: (650) 725-5702; E-mail: <[email protected]> ABSTRACT This monograph is concerned with the nature of the process of macroeconomic growth that has characterized the U. S. experience, and manifested itself in the changing pace and sources of the continuing rise real output per capita over the course of the past two hundred years. A key observation that emerges from the long-term quantitative economic record is that the proximate sources of increases in real GDP per head in the century between 1889 and 1999 were quite different from those which obtained during the first hundred years of American national experience. Baldly put, the economy's ascent to a position of twentieth-centuryglobal industrial leadership entailed a transition from growth based upon the interdependent development and extensive exploitation of its natural resources and the substitution of tangible capital for labor, towards the maintenance of a productivity leadership through rising rates of intangible investment in the formation and exploitation of technological and organizational knowledge. ACKNOWLEDGEMENTS AND EXPLANATORY NOTE A first draft of this essay was completed in August 1999, concurrently with the appearance of the authors’ paper entitled “American Macroeconomic Growth in the Era of Knowledge-Based Progress: The Long-Run Perspective,” SIEPR Discussion Paper 99-03, Stanford Institute for Economic Policy Research, Stanford University. The latter, a somewhat shortened form of the original, advertised itself as a chapter contributed to Volume 3 of The Cambridge Economic History of the United States,S.L.Engermanand R. E. Gallman, then still forthcoming from Cambridge University Press. In the event, however, the text that emerged from the publisher as Chapter 1 in CEHUS , Vol.3 [Cambridge and New York, C.U.P., 2000 (pp. 1-92)], was a radical abridgement of the original essay: omitted were the detailed statistical tables underlying the summarytables in Part One of the text, virtually all of the quantitative material and analysis supporting the narrative interpretion presented in Part Two, the Endnotes to the text (which in the original equalled in lenght of the material comprising Part One), and serveral Technical Appendices pertaining to productivitymeasurement issues that bear immediately upon the interpretative arguments developed in this work. The authors therefore have felt a two-fold call: to make a more polished version of the complete work available for wider consultation by distributing it in electronic form, and to carry the story forward into the 1990s. In doing so, we also wish to acknowledge our gratitude for the helpful comments that Robert Gallman offered on the preliminary drafts, and to take this opportunity – not afforded by the published version – to join with many others in mourning the loss that his premature death has meant for the field of American economic history. We are happy to reiterate here our thanks to our friends and colleagues Charles Feinstein and Gavin Wright for undertaking to read and comment on the whole of the August 1999 manuscript; and to Ralph Landau, who generously lent his encouragement and support to the Matrix of American Economic Growth Project at SIEPR, under the auspices of which the present manuscript was completed. [Postscript by P.A.D., March 2001: Very soon after the revision of the August 1999 draft had been completed, Moses Abramovitz died, on 1 December 2001 within a month of reaching his 89th birthday. The sequelae to that sad event postponned my work on the incorporation of material on the boom of the 1990s, which he and I had been discussing during the preceding months. Thus, the release of the present version in the SIEPR Discussion Paper Series was delayed still further, and, alas, I must bear total responsibility for the form in which section 4 of Part Two appears. Unlike the rest of the manuscript, the text there could not benefit from Abramovitz’s close, critical vetting.] TWO CENTURIES OF AMERICAN MACROECONOMIC GROWTH From the Exploitation of Resource Abundance to Knowledge-Driven Development Contents Prologue: Focus, Method and Structure of the Work Part One: The Growth of the American Economy Since 1800: A Statistical Profile 1. Problems of Measurement 2. Output, Population and Output per Capita 3. The Changing Contribution of Labor Input per Capita 4. Labor Productivity Growth and Its Sources 5. What Measured Growth Fails to Measure 6. A Provisional Summary Part Two: The U.S. Economy’s Shifting Growth-Path 1. A Narrative Overview 2. Interpreting the Macroeconomic Record 2.1 The Critical Role of Technological Progress and Its Changing Direction 2.2 The Shifting “Bias” of Technological Progress and the Residual's Rise 2.3 The Rise of Intangible Capital Inputs: Underlying Forces and Implications 2.4 Private Sector Savings Behavior: Adaptive Response or Binding Constraint? 3. The Productivity Slowdown: A Search for Explanation 3.1 What the Growth Accounts Reveal 3.2 Is the Slowdown an Artifact of Mismeasurement? 3.3 Seeking Real Causes 3.4 Summing Up: A Persisting Puzzle 4. After the Slowdown, A “New Economy”? 4.1 Towards understanding the productivity growth revival of the 1990's 4.2 General Purpose Technologies and Productivity Surges, a Backward Glance 4.3 Reflections on the Future: From ICT Productivity Growth Paradoxes to Payoffs Part Three: American Growth in an International Perspective 1. The Theory of Catch-up and Convergence versus the Record of Growth 2. The Elements of Catch-up Potential and Its Realization 3. Bases of the Postwar Potential for Catch-up and Convergence 4. Conditions Promoting the Realization of Potential: The Past and the Future Afterword: The U.S. Historical Experience and Growth Theory, Old and New Endnotes for Parts One, Two and Three Technical and Statistical Appendices 1. Notes on the Production Function with Factor-Augmenting Technological Change 2. Notes on the Vintage Effect 3.Notes on Estimates of Trend Growth Rates of the Efficiency of Intangible Inputs 4. Appendix Tables and Statistical Sources Bibliographical Essay and References TWO CENTURIES OF AMERICAN MACROECONOMIC GROWTH: From the Exploitation of Resource Abundance to Knowledge-Driven Development Prologue: Focus, Method and Structure of the Work The focus of this extended essay is the nature of the macroeconomic growth process that has characterized the United States experience, and manifested itself in the changing pace and sources of the rise of real output per capita in U.S. economy during the past two hundred years. Although our main interest here lies with the dynamics of the twentieth-century economy, we believe that its major characteristics and the nature of the underlying forces at work are most clearly seen in comparisons between the century just past and the one that came before. A key observation that emerges from the long-term quantitative economic record is that the proximate sources of increases in real gross domestic product per capita in the century between 1889 and 1989 were quite different from those which obtained during the first one hundred years of the American national experience. Baldly put, the national economy moved from an extensive to an increasinglyintensive mode of growth, and its development at the intensive margin has become more and more dependent upon the acquisition and exploitation of technological and organizational knowledge. Our first objective, therefore, must be to assemble and describe the components of the U.S. macroeconomic record in some quantitative detail, in a manner that exposes the nature and dimensions of the contrast between the nineteenth and twentieth centuries. We approach this task within the well-established framework of “growth accounting”. This enables us to show the secular acceleration that occurred in the growth rate of total factor productivity, which is the weighted average of the productivities of capital and labor, and the growth in the importance of total factor productivity as a source of labor productivity and per capita output increases. Further, by taking account of changes in the quality of the productive inputs, we arrive at “refined” measures of total factor productivity growth which highlight two contrasts between the eras preceding and following the transitional decades, 1879-1909. The first of these is the enlargement of that element in the long-term growth rate of labor productivity that remains unexplained by the factor inputs we can measure and thus is associated, but not identical, with advances in technological knowledge – including in the latter the knowledge permitting realization of economies of large scale production.