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Growth Accounting, 1865-1929: TheGreat Traverse
J. Bradford DeLongProfessor of Economics, U.C. BerkeleyResearch Associate, NBER
delong@econ.berkeley.eduSeptember 30, 2008In 1869 the United States had 35 million people in it, at an averagemeasured economic standard of living of some $1,600 year-2008 dollarsper year, at least two-thirds farmers or other small-town rural dwellers. By1929 farming and other small-town rural dwellers were down to one-eighth of the population, the United States had 122 million people in it,and the average measured economic standard of living was some $6,000year-2008 dollars per year. These give us growth rates of 1.9% per yearfor the population of the country and of 2.1% per year for output percapita. (Contrast with growth rates of 2.9% per year for population—from4 to 35 million—and 1.4% per year—another near-tripling—in measuredeconomic output per capita.)The continuation—nay, the acceleration—of growth in output per workeralongside continued population growth is especially remarkable given thatthe frontier had closed in the immediate aftermath of the Civil War: thenatural resources the United States had then conquered were all that therewere. Yet growth continued: the focus shifted from expansion andresources to industrialization. America became an industrial economy.Even farming became an industrial occupation: no longer muscle, ox, andhorsepower but automatic reapers, harvesters, pumps, stationary gasolineengines, tractors.
2So we shift the production function we work with away from the resource-focused “Malthusian” one we have been dealing with up to now to adifferent rule-of-thumb for economic growth:
g
(
Y
)
=
12
g
(
K
)
+
12
g
(
L
)
+
g
(
E
)
( )
where g(Y) is the proportional growth rate of total output, g(L) the growthrate of the population or labor force, and g(E) the growth rate of theefficiency of labor. Subtract off the growth rate of the labor force fromboth sides to get:
g
(
y
)
=
12
g
(
k
)
+
12
g
(
E
)
where now g(y) and g(k) are the growth rates of output per capita and thecapital stock per capita, respectively. Subtract off half of the growth rateof output per capita from both sides:
g
(
y
)
−
12
g
(
y
)
=
12
g
(
y
)
=
12
g
(
k
)
−
g
(
y
)
( )
+
12
g
(
E
)
Multiply by two:
g
(
y
)
=
g
(
k
)
−
g
(
y
)
( )
+
g
(
E
)
And let’s give the difference between the growth rates of the capital stockand the growth rate of output per worker a name: d, for capital
d
eepening—the extent to which the economy becomes “more industrial”in the sense that each unit of output made is backed by and in fact requiresan increasing number of units of capital behind it:
g
(
y
)
=
d
+
g
(
E
)
This is a very simple equation. In an industrializing economy, the growthrate of output per worker will be equal to the growth rate of the efficiencyof labor E plus the amount of capital deepening d.
3What determines the rate of capital deepening? Let’s write down anequation for the growth rate of the capital stock per worker k, with s beingthe share of national output saved and invested in capital and p
k
being theprice of capital goods in terms of output as a whole:
g
(
k
)
=
s p
k
Y K
−
δ
−
g
(
L
)
where
δ
is the rate of depreciation—the rate at which the capital stockwears out, rusts away, needs to be replaced. And let’s look before andafter an episode of capital deepening. Both before the capital deepeningstarts and after it ends:
g
(
y
)
=
d
+
g
(
E
)
=
0
+
g
(
E
)
=
g
(
E
)
And because there is no capital deepening y and k are growing at the samerate. This tells us that both in 1865 and in 1929:
g
(
y
)
=
g
(
k
)
g
(
E
)
=
s p
k
Y K
−
δ
−
g
(
L
)
g
(
L
)
+
g
(
E
)
+
δ
=
s p
k
Y K
K Y
=
s
/
p
k
( )
g
(
L
)
+
g
(
E
)
+
δ
Now let’s plug in some numbers. In 1865 the rate of population growth is3% per year, the rate of growth of the efficiency of labor is this 0.9% peryear we got from the British Industrial Revolution, the rate of depreciation
δ
is some 4% per year, the rate of national savings s is some 20% per yearand the price of capital goods p
k
we set at 1 in 1865. Thus our equationbecomes:
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