How Capital And Technology Create Economic Growth

Capital And Technology Create Economic Growth

What types of growth result from capital investment and technology?


Countries have been striving for growth for hundreds of years now. There are numerous measures for describing "growth," including freedom, happiness, and wealth. The reality is that economic growth — wealth — is the most researched area of economic success. While there are arguments in favor of gauging economic success through freedom and happiness, investigations into these areas have been limited and are not the primary focus of the individual. Rather, GDP per capita, national GDP, and average income are all measures that are used to estimate the economic success of a country.

This being said: what brings about economic growth within a country? Why are some countries better off than others? There is an infinite number of answers to these questions, but today I'd like to focus on two: capital investments and technological advancement. It may be surprising to find that in the early 1800s, the United States had a very similar average annual growth rate as almost all other countries. Today, the United States is an economic powerhouse with the highest national GDP in the world.

In the late 1800s, global GDP began to grow exponentially, but not every country was reaping the benefits. Rather, it was a select few nations that lead this global productivity expansion. What spurred this incredible growth? Capital investments. Simply put, investing money into machinery increased production. The Industrial Revolution spurred a new degree of productivity both within the United States and overseas. This, coupled with the advancements that were being made in technology, lead to growth.

While this seems pretty straight-forward, there are some underlying economic explanations for what happened between the late 1800s and today that caused global GDP to multiply over seven times. According to the Harrod-Domar model of capital accumulation, investment in physical machinery — the means of production — causes economic growth. This theory rings true at the surface, but it fails to account for diminishing returns. There is a limited amount of labor within a country. When there are only four machines, increasing the amount of capital will increase productivity! More people manning more tools will create more products. But when everyone already has a machine, adding another machine would only marginally increase the amount of productivity. So, in the short-term, capital investments lead to increased growth, but after a certain point, the diminishing return of that investment is too high for it to have an impact.

What does that mean? Well, simply that capital investment alone doesn't lead to long-term economic growth. But it does explain the spur of the Industrial Revolution and what led to economic growth in the early 1800s. So what sustains that growth? Why didn't the concept of diminishing returns apply in this situation? This is where the Solow model is introduced. This model asserts that tech advancements economize labor, increasing individual efficiency. The advancement of technology allows people to use capital over time because the capital itself changes.

However, this model is also flawed. Robert Solow was under the impression that these advancements are independent of the market. He believed that these technological progressions were a result of random scientific discoveries and creations and were not related to investment or growth.

Unfortunately, that is not an accurate depiction of technological advancement for two reasons. First, technology and innovation are a result of both demand and investment. They are not random, nor are they separate from the market. The demand for better, more efficient, higher-quality products drives these advancements through investments. What Solow failed to account for was that knowledge grows from investments into research and development. This is the primary reasoning behind research grants given by the government. Investment into knowledge leads to technological advancement. Companies, hospitals, and entities invest in better technology as a result of demand by the population for those additional or better goods and services.

To put it concisely, there are hundreds of reasons why the world and individual nations experience growth. However, there should be a degree of emphasis placed on short-term capital investments and their relation to technology. Each of the economic models suggested in this article is incomplete without the other. Together, they explain a very simple concept: investing in tools and machines (hardware) and investing in the development of these tools creates economic growth.

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11 Things Only People With Texting Anxiety Will Understand

Did I respond too quickly? Ugh, auto-correct! Why is he taking so long to respond?

Some lucky humans were blessed with the social confidence that others can only dream of. These divine individuals can text anyone--their crush, friend, boss, ex, you name it--without feeling nervous. How do these demigods face those three evil dots which signal an incoming response with such blatant disinterest? It's as if they know the response will be in their favor! Either that or they are so utterly courageous that even the possibility of rejection fails to strike fear into their hearts. Whatever magic these bold humans use, not everyone is as lucky. Here are some things that those without texting anxiety just won't understand:

1. Over analyzing punctuation and phrasing.

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I hear Ye Old Cafe has an awesome lunch menu!

2. Predicting a rejection and assuming the worst.

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Great, he hates me! He thinks I'm a total weirdo and is probably mocking my very existence right now.

3. Auto-correct embarrassment.

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Don't seem too eager... PLEASE LOVE ME! Dang, I think that was too eager...

4. Those three little dots of dread.

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Wow, your response time is impeccable... NOT! Just say what you need to say!

5. Assuming the worst when someone doesn't respond.

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She has probably been attacked by zombies...and I was too slow to save her. Oh god! What if she's still being attacked? What do I do?

6. Feeling like a bother when you text first.

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Hey! Oh dang, I'm probably annoying her...I take it back!

7. Trying to decipher the exact meaning of excess letters.

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"Funnyyy!" OK, three y's, that means he thinks I'm actually funny? No, he's definitely mocking me.

8. Deciding on a context appropriate emoji.

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OK, to use the eggplant emoji or to not use the eggplant emoji...

9. Immediately regretting a text and wishing there was a way to undo it.

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"LOL, you're sooooooo funny :)" OH GOD NO, that sounded way too eager! ABORT MISSION!

10. Wondering what you did wrong when someone is online but ignores your text.

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Great, that status was probably about me...she could at least say it to my face!

11. The fear of misinterpreting a text.

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He didn't use a smiley face...that means he's mad at me! Or is he just busy? Or maybe he just didn't see it...should I send it again?

Cover Image Credit: Corri Smith

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Dave Ramsey, Thank You For Sharing Your Money Tips And Knowledge With The Rest Of Us

From just starting your program and being only on baby step one I have realized many things.


Ever since starting college I have always had that thought in the back of my head about how am I going to pay off my student debt after getting out of college. This is probably a thought that every student has when they attend college and they know that after they receive their education that they are out in the real world where they have payments to make every month and probably be in debt for most of their life. But after watching your podcast and following your Instagram and seeing all these people paying off hundreds of thousands of dollars in a couple of months is very inspirational.

Paid off student debtDave Ramsey Instagram

From just starting your program and being only on baby step one I have realized many things. One, I spend money on a lot of things that I don't need but never realized until I started tracking my spending to make a budget. Two, saving a thousand dollar before actually tackling your debt is a great task as it shows that if you can save a thousand you can find a way to pay off your debt then. Though it does seem like a long process that doesn't seem possible till you finally hit the triple-digit mark. Three, you don't actually need a credit card in life because you will actually have money you can spend instead. Though I am still wondering how exactly this would work later on with wanting to buy homes and cars.

But overall thank you for sharing your story and knowledge about money and your experiences so others can learn and do better with theirs. So let's all be weird and not broke as you like to say.

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