Economic Growth has four Sources

Adam Smith wrote the seminal book on the subject of economics, An Inquiry into the Nature and Causes of The Wealth of Nations, or today simply The Wealth of Nations (1776). Smith told us that the wealth of a nation is measured by the sum of the values of all of its productive resources for creating wealth. He defined “the wealth” of a nation as the goods and services that are necessary and useful in its culture and society.  These things include food, clothing, housing and material objects, and also its educational, healthcare, welfare, government, and including its leisure and entertainment.  Smith refused to recognize as “wealth” certain elements of the government, but this essay is too short to treat it as part of this essay. Since Smith’s time, economists have enumerated only three sources for producing goods and service; they are Land, Labor and Capital, where Capital includes the value of all buildings, machines, tools, patents, know-how, inventories (materials and finished products) and their cost of financing. Tools used by laborers in Smith’s definition were anything that was necessary to change the form, fit or function of material (tools observed by Smith were primarily hand-tools).  Machine-tools driven by water or steam – seldom encountered in Smith’s era — are the most directly-cost effective means of effecting technical change. Later than Smith’s era , but not by much, the steam engine invented by James Watt and the dynamo, by Michael Faraday would be enormous agents of change.  Today the transistor is the greatest source of improvement in the current industrial age.  The transistor was initially most used in clerical applications, marking the first stage of huge cost-savings.  

Smith observed that different shops where labor was hired to make products could be more productive if their laborers were divided into specialties, such that no single worker made the whole finished product.  He called this “division, or specialization of labor.” Today, an assembly line may be distributed across different nations, illustrating that business organization is among the opportunities for improvement.  Smith also observed that some laborers were more productive than others, and that training could increase production with no increase in numbers of laborers.  Similarly, improvements to tools could also result in more production with no increase in numbers of laborers.  There you have the basics subjects of economic growth; of making better use of Land, Labor and Capital, the basic trinity of all production costs since The Wealth of Nations.  The objects improved among that trinity are the four preceding items:  technological change, labor skills/training, management, and organization.  Change is persistent.  “Entrepreneur” is the term economists use to describe those persons that observe opportunities and execute changes for doing something better; finding a more suitable resource, changing the product to make it more efficient in its purpose. Applying new technology to the product; organizing the flow of manufacturing to be more timely; “just in time delivery” saves both time and money, as the Japanese used it to great manufacturing efficiency in the post-World War II era.  Its effect upon commerce has been enormous throughout the world; leading to globalization.  

Smith went beyond manufacturing and described how a nation’s economy could become more productive still, by concentrating production upon products that enjoyed geographically advantaged-access to natural resources in achieving competitive advantage of a particular product.  David Ricardo, a contemporary of Smith’s, noted there was comparative advantage for nations that made only some products at lower cost or better quality (or both) than other nations.  If those nations could produce surpluses of what they produced best and traded with other nations that likewise enjoyed producing-advantages for other goods and services, it was a win-win trading result for both nations to exploit between themselves.  He illustrated his law of comparative advantage as wine produced in Portugal and cloth produced in England; each traded their low-cost-high quality products between them for their mutual benefit.  This is the fundamental basis for economics in world trade.  A nation does not have to be the best in producing tradable opportunities with others, just better quality/lower price than another country.  If a nation is best in the world that is “absolute advantage,” but better than someone else is “comparative advantage.”  Comparative advantage is favorable enough to always make foreign trade viable somewhere if delivery cost is overcome.  To make tradable objects and services endows commerce.  Commerce is not agriculture and is not manufacturing, but it is trading goods and services that are agricultural or manufactured to create producer/customer relationship.  Manufacturing and growing products and services are the objects of commerce and include transportation and navigation as a part of commerce. 

Economic growth is measured by the annual increase in a nation’s Gross Domestic Product (GDP) relative to a prior period in time.  This is an enormous calculation overseen by the National Bureau of Economic Research, an independent non-profit organization.  The data collected for it is a responsibility of the Commerce and Labor Departments.  Ultimately, the calculation represents the sum of all production costs from raw materials to finished products during a specific period of time.  Year-over-year Increases of GDP generally increase the standard of living for the people of the nation.  That is a reason economists study the causes of growth of GDP to explain their sources. It is exceedingly elusive to determine the specific cause and cost of GDP of growth from statistics used to calculate GDP.  There are no systems for recording these values as the data are not “observable” for capture.  By inferential means, it is nearly certain the greatest driver of growth is entrepreneurial action among all the producing nations.  That conclusion establishes a basis for determining what conditions best maximize actions of entrepreneurs?                                                                                November 29, 2020