Economic Growth

The Force That Compounds

In the short run economies wobble around their trend; in the long run the trend is everything. An economy growing 2 percent a year doubles living standards in roughly 35 years; at 7 percent, every decade.

The rule of 70 does the arithmetic:

$\text{years to double} \approx \frac{70}{\text{growth rate \%}}$

Compound growth is why small differences in rates dwarf every other economic question over a generation. Physical capital (machines and infrastructure per worker) faces diminishing returns: the tenth truck adds less output than the first.

Human capital includes the education, skills, and health embodied in workers. Like physical capital, it also faces diminishing returns eventually.

Engines and Institutions

Technology provides better recipes for combining the same inputs. Unlike capital, ideas do not run into diminishing returns because one blueprint serves everyone at once, making it the engine of sustained growth.

Institutions (property rights, courts, stable money) are the invisible infrastructure making accumulation safe. Pitfall: capital can be bought and technology copied, but no one invests where contracts fail.