Modern Economic Growth

When Did Modern Economic Growth Begin?

When did modern economic growth begin? Most economists can agree that modern economic growth began around the industrial revolution during the early 1800s in western nations like Great Britain and the United States.¹ The shift to modern economic growth could be seen when the old methods of production like small, family-run enterprises or ones that used slave labor were beginning to be outnumbered. The businesses that replaced them were large multilevel enterprises that used modern technology like heavy machinery to produce on a large scale.

The industrial revolution is when former behaviors like small-scale and low-energy production were no longer enough for continuous economic growth. For example, factories began to grow to increase their output levels, and to man these large factories, workers and their families flocked to the bigger cities for better-paying factory jobs, which left fewer farmers and farmhands. At the same time, electricity was being explored and introduced into people's everyday lives. To produce electricity, more large factories had to open to keep up with demand whereas a small-scale family model simply could not keep up.

Before the industrial revolution, people did not have the same need for basic education like literacy, nor did they condemn inhumane practices like slavery as we do today. As more people came to work in the cities and factories, education and fair working conditions became more important to them. As people earned more wages and socioeconomic status began increasing, people learned to organize themselves and advocate for better working conditions and wages. This eventually led to the labor movement.

Modern Economic Growth Theory

There are many modern theories of economic growth and development and sometimes they can appear similar. Before getting into them, however, let's establish what past theories of growth were based on.

In the past, economists stated that land, labor, capital, and entrepreneurship were the key to achieving both economic growth and development. Soon, those four resources were becoming easy to acquire. All of a sudden, many countries met these requirements, but some were seeing much more economic growth and development than others. This difference in success was then chalked up to the technology available to the economy. Those that had more advanced technologies were able to pull ahead of the others in the race to economic success.

As time went on, it was observed that much more went into modern economic growth. It was not only the practical elements going into the economy that stimulated its quantitative growth, but also the presence of qualitative factors that helped advance economic development. But what do we mean by that?

Economic growth and economic development are not the same, although they are often used interchangeably. Economic growth refers to a quantitative change like a nation's increase in GDP or higher national income. Economic development refers to qualitative values like an increase in the standard of living that occur alongside growth. Table 1 provides some examples.

It is important for an economy to grow because it increases the nation's ability to supply its inhabitants with the goods and services they need and want. For economic development like increased standards of living and healthcare to happen, the nation needs to have economic growth.

Now that we have established what economic growth and economic development are, we can dive into some of the most prominent modern economic growth models.

Modern Economic Growth Models

We will look at three of the most prominent modern economic growth models. While this is by no means a comprehensive list of all economic growth models, these are where we will start.

Modern Economic Growth Models: Keynesian and Neo-Keynesian Growth Theory

This theory states that economic growth is pushed by demand. If aggregate demand is what controls all other factors in the market, then an increase in government spending during recessions will boost economic activity.² When people are spending money, they are increasing aggregate demand which increases a nation's output.

Modern Economic Growth Models: Neoclassical or Exogenous Theory

This model incorporates the importance of technology along with labor and capital in an economy to achieve economic growth. This theory finds that exogenous factors like the savings rate are a determining factor for a higher level of investment and therefore production.² Population growth is also important since it represents the supply of labor, and with more labor and investment, we can have more production.² The third important factor that drives home the others is technological advancement. ²

Modern Economic Growth Models: Endogenous Growth Theory

This theory is similar to the neoclassical theory in that it values technological advancements but it differs because it states that technological advancements come from within the economy itself, rather than exogenous factors.² Where the Neoclassical Theory states that growth is a result of changes in technology, the endogenous model finds that if an economy invests in its human capital, like health and education, it will lead to economic growth.

Modern Economic Growth Characteristics

There are many modern economic growth characteristics, but we will stick to the most prominent ones. Economists say that for economic growth in general, a country needs land, labor, capital, and entrepreneurship. As long as those four characteristics are met, an economy can grow. However, as established by the newer economic growth theories, the characteristics of modern economic growth are more complex, as our economy has grown more complex. Let's take a look.

These characteristics all separate economies that are experiencing modern economic growth from those whose economies are still developing. In the end, the biggest change from past economic growth to modern growth is the all-around increase in knowledge, which is just as important as the original four factors. The main indicator of economic growth has not changed. GDP is still the most widely used measure to gauge an economy's development.