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Lucas on Economic Growth

Yesterday’s mail brought the 2003 Annual Report of the Federal Reserve Bank of Minneapolis. It features an article by Robert Lucas entitled “The Industrial Revolution: Past and Future.”

Lucas makes several interesting observations – all amidst one troubling omission.

Here are just a few of his observations:

· “nothing could be further from the truth than the idea that poverty is increasing [worldwide].” Between 1960 and 2000, world population grew at an average annual rate of 1.7%; world production grew at an annual average rate of 4%: “Production per person – real income – thus grew at 2.3 percent per year, which is to say that the living standard of the average world citizen more than doubled.”

· While the current degree of inequality between rich countries and poor countries “is without precedent in human history,” it hasn’t changed significantly since 1960.

· “The entire colonial era was a period of stagnation in the living standards of masses of people. European imperialism brought advances in technology to much of the colonized world, and these advances led to increases in production that could, as in British India, be impressive. But the outcome of colonial economic growth was larger populations, not higher living standards.”

· “What occurred around 1800 that is new, that differentiates the modern age from all previous periods, is not technological change by itself but the fact that sometime after that date fertility increases ceased to translate improvements in technology into increases in population. That is, the industrial revolution is invariably associated with the reduction in fertility known as the demographic transition.”

The troubling omission is that Lucas doesn’t mention the division of labor. I have only a hunch, but it’s a strong one: a market-driven division of labor, as Adam Smith sensed, is key to economic growth. Economists still too blithely overlook it.


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