I n t h I s c h a p t e r y o u w I l L

public good:
Once one person discovers an idea,
the idea enters society’s pool of knowledge, and other people can freely use it. Just
as government has a role in providing a public good such as national defense, it
also has a role in encouraging the research and development of new technologies.
The U.S. government has long played a role in the creation and dissemination
of technological knowledge. A century ago, the government sponsored research
about farming methods and advised farmers how best to use their land. More
recently, the U.S. government has, through the Air Force and NASA, supported
aerospace research; as a result, the United States is a leading maker of rockets and
planes. The government continues to encourage advances in knowledge with
research grants from the National Science Foundation and the National Institutes
of Health and with tax breaks for firms engaging in research and development.
Yet another way in which government policy encourages research is through
the patent system. When a person or firm invents a new product, such as a new
drug, the inventor can apply for a patent. If the product is deemed truly original,
the government awards the patent, which gives the inventor the exclusive right to
make the product for a specified number of years. In essence, the patent gives the
inventor a property right over his invention, turning his new idea from a public
good into a private good. By allowing inventors to profit from their inventions—
even if only temporarily—the patent system enhances the incentive for individu-
als and firms to engage in research.

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5 4 6
PA R T N I N E
T H E R E A L E C O N O M Y I N T H E L O N G R U N
Because it has accumulated over so many years, this fall in productivity growth
of 1.9 percentage points has had a large effect on incomes. If this slowdown had
not occurred, the income of the average American would today be about 60 per-
cent higher.
The slowdown in economic growth has been one of the most important
problems facing economic policymakers. Economists are often asked what
caused the slowdown and what can be done to reverse it. Unfortunately, despite
much research on these questions, the answers remain elusive.
Two facts are well established. First, the slowdown in productivity growth
is a worldwide phenomenon. Sometime in the mid-1970s, economic growth
slowed not only in the United States but also in other industrial countries,
including Canada, France, Germany, Italy, Japan, and the United Kingdom.
Although some of these countries have had more rapid growth than the United
States, all of them have had slow growth compared to their own past experi-
ence. To explain the slowdown in U.S. growth, therefore, it seems necessary to
look beyond our borders.
Second, the slowdown cannot be traced to those factors of production that
are most easily measured. Economists can measure directly the quantity of
physical capital that workers have available. They can also measure human cap-
ital in the form of years of schooling. It appears that the slowdown in produc-
tivity is not primarily attributable to reduced growth in these inputs.
Technology appears to be one of the few remaining culprits. That is, having
ruled out most other explanations, many economists attribute the slowdown in
economic growth to a slowdown in the creation of new ideas about how to pro-
duce goods and services. Because the quantity of “ideas” is hard to measure,
this explanation is difficult to confirm or refute.
In some ways, it is odd to say that the last 25 years have been a period of
slow technological progress. This period has witnessed the spread of computers
across the economy—an historic technological revolution that has affected
almost every industry and almost every firm. Yet, for some reason, this change
has not yet been reflected in more rapid economic growth. As economist Robert
Solow put it, “You can see the computer age everywhere but in the productivity
statistics.”
What does the future of economic growth hold? An optimistic scenario is
that the computer revolution will rejuvenate economic growth once these new
machines are integrated into the economy and their potential is fully under-
stood. Economic historians note that the discovery of electricity took many
decades to have a large impact on productivity and living standards because
people had to figure out the best ways to use the new resource. Perhaps the
computer revolution will have a similar delayed effect. Some observers believe
this may be starting to happen already, for productivity growth did pick up a bit
in the late 1990s. It is still too early to say, however, whether this change will
persist.
A more pessimistic scenario is that, after a period of rapid scientific and
technological advance, we have entered a new phase of slower growth in
knowledge, productivity, and incomes. Data from a longer span of history seem
to support this conclusion. Figure 24-2 shows the average growth of real GDP
per person in the developed world going back to 1870. The productivity slow-
down is apparent in the last two entries: Around 1970, the growth rate slowed
from 3.7 to 2.2 percent. But compared to earlier periods of history, the anomaly

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C H A P T E R 2 4
P R O D U C T I O N A N D G R O W T H
5 4 7
is not the slow growth of recent years but rather the rapid growth during the
1950s and 1960s. Perhaps the decades after World War II were a period of
unusually rapid technological advance, and growth has slowed down simply
because technological progress has returned to a more normal rate.
Growth Rate
(percent
per year)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1870–
1890
1890–
1910
1910–
1930
1930–
1950
1950–
1970
1970–
1990
0
F i g u r e 2 4 - 2
T
HE
G
ROWTH IN
R
EAL
GDP
PER
P
ERSON
.
This figure shows
the average growth rate of real
GDP per person for 16 advanced
economies, including the major
countries of Europe, Canada, 
the United States, Japan, and
Australia. Notice that the growth
rate rose substantially after 1950
and then fell after 1970.
S
OURCE
: Robert J. Barro and Xavier Sala-i-
Martin, 
Economic Growth
(New York:
McGraw-Hill, 1995), p. 6.
Q U I C K Q U I Z :
Describe three ways in which a government policymaker
can try to raise the growth in living standards in a society. Are there any
drawbacks to these policies?
C O N C L U S I O N :
T H E I M P O R TA N C E O F L O N G - R U N G R O W T H
In this chapter we have discussed what determines the standard of living in a
nation and how policymakers can endeavor to raise the standard of living through
policies that promote economic growth. Most of this chapter is summarized in one
of the 
Ten Principles of Economics:
A country’s standard of living depends on its
ability to produce goods and services. Policymakers who want to encourage
growth in standards of living must aim to increase their nation’s productive ability
by encouraging rapid accumulation of the factors of production and ensuring that
these factors are employed as effectively as possible.

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5 4 8
PA R T N I N E
T H E R E A L E C O N O M Y I N T H E L O N G R U N
Economists differ in their views of the role of government in promoting eco-
nomic growth. At the very least, government can lend support to the invisible
hand by maintaining property rights and political stability. More controversial is
whether government should target and subsidize specific industries that might be
E
CONOMIST
J
EFFREY
S
ACHS HAS BEEN A
prominent adviser to governments
seeking to reform their economies and
raise economic growth. He has also
been a critic of the World Bank and the
International Monetary Fund (IMF), the
international policy organizations that
dispense advice and money to strug-
gling countries. Here Sachs discusses
how the countries of Africa can escape
their continuing poverty.