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World economies perform miracles every day - they create new businesses, and invest in people, technologies and capital with the purpose of bettering our lives.
Over the course of history, many human societies have experienced stagnant or even no economic growth. The reasons for such occurrences were numerous, most of them having to do with non-existent social infrastructures, as well as adequate financial incentives, considered essential for economic growth. Economic theory purports that economic growth “feeds” itself through an incentive system, which could not function without the following three institutions:
Markets bring together buyers and sellers of goods and services, whereby market prices provide an incentive for both sides to balance the supply and demand. Furthermore, in order for markets to function properly, they need established property rights to govern ownership, use and disposal of goods and services, as well as means of monetary exchange to facilitate all kinds of market transactions. But for economic growth to be persistent and sustainable, it first has to come from somewhere. For the past two centuries, the western world has enjoyed extraordinary growth in productivity. And it all came from three main sources; namely, investments in new capital, people, and new technologies. New CapitalThe more new capital is invested per worker, the more real GDP per hour of labor increases. In other words, capital investment is positively correlated to labor productivity. Perhaps the most dramatic upturn in labor productivity was experienced during the Industrial Revolution, when accumulation of capital in factories, on farms, in financial institutions, shopping malls, etc., added an exorbitant amount of productivity to western economies. PeopleMany economists consider investments in people, in their knowledge and skills, as the primary source of economic growth. Just think how much the development of two of the most basic human skills—writing and mathematics—has contributed to economic and other types of growth. Just try to imagine not being able to keep records of transactions or calculate values of assets. These “basic” skills were at the heart of scientific and technological advances two hundred years ago at the onset of the Industrial Revolution, just as they are today in the Digital Age. Although, it should be mentioned that much of the human capital is still much less glamorous and consists of millions of people working diligently every day and completing efficiently and expediently their respective portions of the perhaps endless line of production tasks. Technological AdvancesInvestments in capital and people have greatly contributed to the economic growth over the centuries. However, the hunger for technological advancement made even greater contributions to the overall wealth. It is a fact that humans are more productive today than they were some two hundred years ago. But this is not because the world has more steam engines, more ships or more horses at its disposal. Rather, it is because new technologies have made us exponentially more productive than old technologies ever could. Can you imagine the world without computers? Or without cars and jets? Or the Internet? New technologies have enabled humans to embody their language, writing and mathematical skills into actual physical capital, capable of yielding real wealth for longer periods of time. Source: Economics, Seventh Edition, by Michael Parkin, Pearson Education, 2005.
The copyright of the article Wheels of Economic Growth in Investment is owned by Inya Ivkovic. Permission to republish Wheels of Economic Growth in print or online must be granted by the author in writing.
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