Tuesday, July 20, 2010

Science grows 2.5% annually why doesn't the economy?

What causes economic growth? Much of the world still lives in grinding poverty, figuring out a way to get them out of this is important. The best way seems to be for their economy to grow.

There are many theories as to what causes economic growth. The founder of Google claims
"Virtually all economic growth (in the world) was due to technological progress. I think as a society we're not really paying attention to that," Page said. "Science has a real marketing problem. If all the growth in world is due to science and technology and no one pays attention to you, then you have a serious marketing problem."

If technological progress causes growth there should be a link between the amount of scientific progress and the amount of growth. Here is a very interesting article about the rate of the increase in scientific knowledge.

'What I found, using this simple proxy for difficulty, in each field — biology, astronomy, chemistry — was a curve with the same basic shape. In every case, the ease of discovery went down, and in every case it was a curve called an exponential decay ...[I] discovered asteroids get 2.5 percent smaller each year. So while the ease of discovery drops off quickly as early researchers pick the low-hanging fruit, it can continue to “decay” a long time, becoming slightly harder without ever quite becoming impossible"

Say science increases in the level of knowledge by 2.5% a year.

What is the rate of economic growth? 'Since 1820, world development has been much more dynamic. Per capita income rose more than eightfold, population more than fivefold.' 190 years growth 8 fold increase is a growth rate of about 1.1% per annum. Or for two specific countries the UK from 1830 to 2008 had average real GDP 1.97%. The US 1830 to 2009 real GDP of 3.62%.

Other things cause economic growth

-Demographics more people of working age means more stuff gets made.

-Institutions. The rule of law matters. If people think anything the build will be plundered off them they wont build much.

-Governments. Some ways of running a country seem to result in more economic growth than others. Communism was never that good at creating economic growth for example.

-Taxation. At a certain point if you tax people too much they wont work anymore. If you dont tax people enough you might not be able to afford schools. Knowledge of what level of taxation is beneficial to economic growth should improve over time.

-Financial innovation. By getting capital to the people who best use it financial innovation is supposed to help economic growth. If it doesn't we should not spend money bailing out investment banks.

-Foreign aid: Aid to developing countries seems to have a mild positive effect on their economic growth rate though in specific areas it seems to have a negative effect

What else can affect economic growth and how great an effect does it have?

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