US Economic Growth

US Economic Growth

Economic growth—basically, increasing sales per person[1]—underlies improvements in the standard of living. Technological innovation is the primary driver of economic growth today, particularly in developed countries with stable or declining populations. [2] As a recent World Economic Forum report concludes, “In the long run, standards of living can be enhanced only by technological innovation.”[3] This is good news for the US, which has long led the world’s technological growth, and remains in excellent position to continue its economic growth through technological innovation.
For most of human history population growth was the primary driver, because as the ancient Greek writer Xenophon observed, with more people there can be more specialization, and “[o]f necessity he who pursues a very specialized task will do it best.[4] Although fortuitous discoveries and transfers of information sometimes also boosted growth,[5] the long-term rate of economic growth in pre-industrial societies remained gradual at best.
European growth rates quickened with the Industrial Revolution, starting in the late 18th century. Steam and, later, electric power triggered many innovations. There was a flood of new goods—railroads, threshing machines, refrigerators, etc.—and of new manufacturing processes that sharply reduced costs by simplifying labor, substituting machinery, or having machines perform previously inconceivable tasks. Such changes rendered traditional cost structures and productive capabilities obsolete, and produced a cornucopia of new or newly affordable goods.
The Industrial Revolution also made manufacturing and commercial exchange the dominant sectors of modern economies. Technological innovation proved crucial for their profitability and economic survival,[6] as well as for military power.
Underlying technological innovation were growing communities of scientists, engineers, and mechanics who employed scientific discoveries that had been accumulating since the days of Galileo and Newton. Accordingly, by the late 19th century businesses, universities, and militaries in advanced nations built new institutions, or expanded traditional ones, to train scientific personnel and perform research: institutes of technology, research laboratories, secular universities, night schools, and vocational schools.
But technological innovation alone cannot generate economic growth. To increase sales, innovations must be desired, and those who desire them need purchasing power to buy them. Only the combination of desire with purchasing power, known as economic demand, can turn technological innovations into economic growth.
In other words, there are three ingredients necessary for economic growth: technological innovation, a desire for that innovation, and the purchasing power to buy it. The US is extremely well situated to supply all three.

Technological Innovation

As of recent reports, the US has as many people with a college or higher degree as China, India, and Russia combined, 26% of the world’s total.[7] The US also continues to enjoy a substantial influx of science and engineering students, of whom more than two thirds remain here 10 years after graduation.[8]
More than 700 US universities do serious research at a 2009 cost of $54 billion.[9] US corporations employ more than 800,000 scientists and engineers, primarily in the US.[10] Of the top universities in the category of Engineering/Technology and Computer Sciences, ranked by papers published or cited in major scientific journals and number of Nobel or Fields medalists, the US has the top 15 universities, 20 of the top 25, and 52 of the top 100, and 154 of the top 500 universities in the world,[11] only 4 fewer than Japan, Germany, the UK, France, China, and India combined.[12]
The US spends a third of all the R&D expenditures by countries spending $1 billion or more, and at $405.3 billion US R&D expenditures exceed those of China, the second largest spender, by 260 percent. In aerospace and defense, US public and private R&D will total $88.8 billion in 2012, compared to $26.2 billion for the rest of the world. US R&D for defense alone exceeds total R&D expenditures in every other country but China, Japan, and Germany.[13]  In energy R&D, US public and private spending in 2012 will be 37% of global spending, in life sciences R&D, 49.7%, in information and communication technologies, 58%, and in chemicals and materials 27.5%.[14]
Although most US expenditures on R&D come from the private sector, unlike many other countries, even in governmental R&D the US predominates. The National Science Foundation’s annual report, Science and Engineering Indicators: 2012, which uses 2009 data on government expenditures estimates that US governmental R&D expenditures totaled $164.3 billion in 2009, compared to $110.2 billion for the EU, and $31.1 billion for Japan. Totals for China were unknown.[15] As I think this small selection of statistics clearly indicates, the bottom line is that the US R&D effort remains far greater than any other nation’s, and remains by far the largest in the world.


The Industrial Revolution’s preeminent current historian Robert C. Allen states, “the frenetic pursuit of income to buy novel consumer goods, many imported from abroad as the [British] economy globalized in the seventeenth century, was a cultural basis of the Industrial Revolution.”[16] In other words, the Industrial Revolution came in response to economic demand. Economic demand consists of desire coupled with purchasing power. Marketing is the discipline of stimulating desire; finance, of generating purchasing power.


Marketing creates desire by shaping innovations to maximize their allure, introducing them to potential buyers, communicating their value, and alleviating concerns that might inhibit their sale. Modern marketing uses a well-developed infrastructure for advertising and promotion, and increasingly uses technology and statistical tools to gather, organize, and analyze information about potential consumers.
As the leading market in the world since the end of World War I, if not before, the US has long since built a huge and highly sophisticated marketing sector. It is safe to assume that unlike many smaller, less developed, or more highly regulated markets, the US has long trained and deployed a plethora of highly skilled marketers, primarily US firms. No data directly indicates US superiority in marketing, but there are certainly indirect indications. For example, the US appears to have many more business schools, most of which stress marketing, than any comparable region. The Princeton Review lists 296 US business schools, whereas the Financial Times’ listing of European business schools includes only 75.[17] A ranking of the top 200 business schools in the world includes 82 in the US, 67 in Europe, and 36 in Asia and the Pacific. Rated by their marketing programs, this ranking lists 8 of the top 10 as US schools; 14 of the top 20; 18 of the top 30, and 22 of the top 40.[18] In other words, US capabilities in marketing are clearly equal if not superior to those of any other nation.

Purchasing Power

Any valuable widely acceptable as payment constitutes purchasing power. Today, it’s usually cash, of which central banks usually maintain a consistent supply, or credit, whose supply is quite variable. Credit is the purchasing power provided in return for a promise of repayment, and in developed nations now constitutes most of the purchasing power. It comes in various forms, including goods furnished on account, secured or unsecured loans, and equity investments. The cost and availability of credit depends on creditors’ trust in repayment, which means that the quantity of purchasing power likewise depends primarily on the trustworthiness of promised repayment.
 The financial industry arranges most credit transactions, and in the developed world has steadily improved systems for making promises of repayment trustworthier. These improvements have included advances in the rule of law; better processes for finding, securing, and if necessary taking possession of property that has been pledged as security; increasing the types of property that could be used as security by developing markets where such properties could be valued and sold; and the systematic gathering of information about borrowers.
Recent financial innovations, many based on computer power, have greatly increased the trustworthiness of repayment promises. Credit cards are a US mid-20th century invention based on rapid and easy communications, computerized systems for evaluating credit records, and more sophisticated understandings of credit portfolios. New financial understandings like portfolio theory and how to value options, new credit instruments, and ever-expanding information systems have further assured repayment, or allowed investors to protect against perceived risks.
These financial creations have supported a considerable expansion of credit in recent decades, one that has helped finance technological innovation through venture capital, and provided purchasing power to those who desire the fruits of that innovation.[19] In this way, purchasing power grows apace with technological innovation, supporting the demand that drives economic growth.
As with technological innovation and marketing, the US has long been a world leader in finance, and seems well positioned to continue providing the purchasing power necessary for economic growth from innovation. The US financial system is the most fully developed in the world, with by far the largest number of commercial banks.[20] At the end of 2010, the capital value of US credit securities, both debt and equity, was $67 trilliion. Western Europe’s market capitalization was, by the same measure, $63 trillion, while China’s totaled $16 trillion.[21]  In the area of venture capital and private equity, however—the type of credit most oriented to innovation—a list of 50 leading private equity/venture capital firms, which “control the bulk of all capital committed to private equity,”[22] indicated that those in the US raised $548 billion for investment purposes during the preceding 5 years as compared to $251 billion raised by those based elsewhere. The fact that US firms control 68.5% of the money raised indicates the overwhelming nature of the US advantage in venture capital.


The concept of technological growth that underlies my optimism about the US economic future derives from my study of ancient business history, particularly the astonishing story of classical Athens.[23] This great city-state, known as the cradle of western civilization, was a dirt-poor town until about 600 BC. It had a barter market on the Acropolis, and some silver mines, but most Athenians were sharecroppers who produced only enough food to subsist after paying a fixed rent to clan leaders.
Soon after the nearby Anatolian kingdom of Lydia pioneered coinage, however, this technological innovation began to enliven the Athenian market. Coins simplified sales, sped up transactions, and gave everyone better information about prices. The market became more central to Athenian life and attracted traders selling previously unknown goods. A desire for these appealing foods and wares motivated many Athenians to increase their purchasing power by working harder, having fewer children, devoting food-growing land to cash crops like olives and grapes, and sending young men into mercenary service in foreign wars.
Democracy, although limited, prevented the aristocrats from capturing all of the resulting purchasing power. As ordinary Athenians gained wealth they deposited cash with bankers, who could consolidate many small savings into commercial investments in ships and trade goods as well as consumer loans. Trade increased wealth further, allowing this small city-state to bequeath us a legacy of great literature, magnificent sculptures, and beautiful monuments.
As with coins, technological innovation has generated economic growth in advanced modern nations, especially the US, and the growth has occurred much as it did in Athens. Innovation stoked new desires. To satisfy those desires, people pursued purchasing power. Democracy protected them from rapacious elites, so that the resulting wealth got widely distributed. My suggestion here is that with the now deliberate pursuit of technological innovation we are excellently positioned to continue economic growth into the future. To be sure, the current mal-distribution of wealth in the US and other countries calls the wide distribution of benefits into question. But if democracy does prevail, we should continue to enjoy robust economic growth.

[1] The measurement is “the total of spending on finished goods and services within that territory over the course of a period, plus the net of exports and imports.” See Bureau of Economic Advisors, “A Guide to the NIPAs,” p. 5 http://www.bea.gov/national/pdf/nipaguid.pdf referenced July 19, 2012. We usually speak in terms of “real” or “chained” GDP, using the inflation-adjusted value of money. Thus, GDP as of January 1, 2012 stood at $15.468 trillion, whereas “chained” GDP was $13.429 trillion. For GDP see Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/data/GDP.txt, For chained GDP see http://research.stlouisfed.org/fred2/series/GDPC1?cid=106
[2] As when the ancients learned to make iron tools, military expeditions and traders found new agricultural stock, Archimedes invented his pump, Roman engineers created deep soil plows, and European colonists unearthed new goods and treasure.
[3] Sadly, the rapidity of these innovations and the political power of creditors and financial intermediaries have allowed irresponsible and unscrupulous financial behavior to do great harm. But such wrongs are no more inherent to finance than lawlessness was inherent to the west during its frontier days.
[4] The Origins of Business, Money, and Markets (Columbia University Business School, 2011)

[5] World Economic Forum, The Global Competitiveness Report 2012-2013, p.7. See also Table 2: Countries/economies at each stage of development, p. 10
[6] World Economic Forum, The Global Competitiveness Report 2012-2013, p. 7
[7]  quoted in Finley, Early Greece, 135
[8] David C. Mowery, Nathan Rosenberg, Technology and the Pursuit of Economic Growth, 1989: Cambridge University Press, p. 37
[9] Fig. 3-49, National Science Foundation, National Center for Science and Engineering Statistics, Science and Engineering Indicators: 2010, available at http://www.nsf.gov/statistics/seind10/c3/c3s5.htm
[10] Ibid.
[11] The Center for Measuring University Performance, The Top American Research Universities, 2011 Annual Report, available at http://mup.asu.edu/research.html
[12] National Science Foundation, op. cit.
[13] Shanghai Ranking Consultancy, http://www.arwu.org/FieldENG2010.jsp
[14] op. cit., http://www.arwu.org/ARWUStatistics2010.jsp
[15]  “Battelle R&D Magazine Annual Global Funding Forecast Predicts R&D Spending Growth will Continue While Globalization Accelerates,” http://www.battelle.org/media/news/2011/12/16/battelle-r-d-magazine-annual-global-funding-forecast-predicts-r-d-spending-growth-will-continue-while-globalization-accelerates
[16] Ibid.
[17] Ibid.
[18] Robert C. Allen, The British Industrial Revolution in Global Perspective (2009), Cambridge University Press.
[19] http://rankings.ft.com/businessschoolrankings/european-business-school-rankings-2011
[20] QS Global 200 Business Schools Report 2012, at http://www.topmba.com/mba-rankings/global-200/2011/region/asia. This ranking rates schools on a variety of characteristics.
[21] As of July, 2012 the US had 7,246 bank and thrift firms with $7.5 trillion in outstanding loans (including international loans). FDIC, Statistics at a Glance as of June 30, 2012, http://www.fdic.gov/bank/statistical/stats/2012jun/industry.pdf A fairly comprehensive list of all the banks in the world, not including thrifts, totals 1,290 banks. Of these approximately 93 are in the euro zone, and most of the rest are US banks. See Allbanks, “Banks of the World, at http://www.allbanks.org/main/list/
[22] McKinsey & Co., Mapping global capital markets 2011, Exhibit E2, p. 6 and Wikipedia, “List of Countries by GDP (nominal), List by United Nations.
[23] Dealogic, The Largest Private Equity Firms in the World: Anatomising the impact of the PEI 50,” http://www.peimedia.com/productimages/Media/000/179/537/Sample_pages_PEI50book.pdf

1 comment:

  1. Excellent piece! I'm going to craft a response to this, although it will be mainly an attempt to expand rather than contradict. I'm less optimistic about the position of the U.S. currently and will try to explain my thinking.