How Capital And Technology Create Economic Growth
Start writing a post
Finance Investing

Capital And Technology Create Economic Growth

What types of growth result from capital investment and technology?

Capital And Technology Create Economic Growth

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.

Report this Content
This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.

23 Pandemic-Approved Date Ideas That'll Send Sparks Flying From Six Feet Apart

There's a safe way to date right now and yes, it includes masks.


While some people would rather opt out of dating altogether during the pandemic so they don't have to wear a mask on a first date, others are choosing to listen to both guidelines and their heart in order to find love during the time of coronavirus (COVID-19).

Should you be one of the individuals welcoming romance right now, there are pandemic-approved dates you can go on that still adhere to guidelines (and yes, you'll have to wear a mask).

Keep Reading... Show less

I didn't believe the notification when it came through to my phone: Ruth Bader Ginsburg had died from complications due to cancer.

Keep Reading... Show less

In our patriarchal society, men hide from their feelings, but toxic masculinity is literally killing men. They swallow the pain and move on so that they can look, feel, and act "tough."

But, strength is derived from asking for help and voicing your struggle and, trust me, working on your mental health is one hell of a struggle. The real way to "man up" is to acknowledge the downfalls in unjust societal norms. Mental health problems do not mean that a man is weak, they are neurologically-based disorders that require professional treatment.

Keep Reading... Show less

11 Things Your Boyfriend Should Do Before He Drops $499 On A PS5

Let's start with spending less time gaming and more time with you.


Scrolling through Twitter this week had me rolling on the floor laughing as I read some of the hilarious tweets from ladies who, whether in a relationship or not, shared reactions to the news that PlayStation 5 is on its way

As this "buy your boyfriend a PS5" joke takes off across the internet, let's just say, there are a few things your BF should be doing before dropping $499 on the new gaming system — or, if the tweets are real for some, before you buy it for him as a gift.

Keep Reading... Show less
Politics and Activism

Sorry, But 'I Don’t Care About Politics' Is Not A Valid Excuse For NOT Voting

The younger generation of voters is so crucial to the upcoming election because our vote is going to shape the world that we are about to enter as adults.


When I ask my friends if they are voting this term most of them respond with "no" followed by an explanation of "I don't care enough," "It doesn't affect me," or "I don't keep up with politics," etc. I get it, as a college student I know that there are many other things to be concerned about like school, relationships, work, and friends. I also understand that keeping up with politics can seem like trying to keep up with an over-exaggerated reality show that has way too many seasons. Not to mention most news stations and websites are biased so it's hard to decipher if what you hear is true or fake.

However, despite all of this annoyance, as the next generation of Americans, we have to remember that we owe it to ourselves, our families, and to our futures to care.

Keep Reading... Show less
Tasia Sli

Tasia Sli and Anna Yang met in quintessential New York fashion at a chic rooftop event, inquisitive Yale grad Anna gravitating towards model/entrepreneur Tasia.

Keep Reading... Show less
Photo by Anna Hernández-Buces

"Do you have big parties on Cinco de Mayo?"

Keep Reading... Show less

Two of my favorite things in life are reading and books. Obviously, they go hand-in-hand. In my life, I've realized that there is nothing better than learning about the current world or getting fully immersed in another world. Reading can inspire, teach, and entertain you.

For me, the feeling of opening a book and smelling that fresh book smell can't compete with anything else.

Keep Reading... Show less

Expecting mother and wife to singer/songwriter John Legend may have accidentally slipped up and revealed the gender of her and Legend's third baby today on her Instagram story.

Keep Reading... Show less

20 Books About Latin And Hispanic Heritage Absolutely Everyone Should Have On Their Bookshelf

Any ally of the community needs to be reading these incredible reads.


I go through phases when it comes to what I like to read. I am typically reading two books at any given time: one serious nonfiction and one escapist fiction novel to have on hand and open up depending on my mood.

What remains consistent, however, amongst most of my fellow bibliophiles is a desire to try new and different authors and genres. I, as an Indian woman, have been partial to reading books written by fellow Indian and Desi writers since I first got a library card.

Keep Reading... Show less
Health and Wellness

I Asked 46 Women What They Thought About The Term 'Plus-Size', And Here's What They Had To Say

It's 2020, where change is inevitable and norms are not only questioned, but challenged.


We live in a world where it's become customary to push boundaries, break rules, and question standards upheld by society. Though try as we might, some of these standards are harder to conquer than others — body image is one of the top contenders.

For years, the body positivity movement has pushed for the acceptance of all marginalized body types not represented or celebrated in the media. Recently, we've gotten better at appreciating and accepting all body types, but one thing that's still lingering is the stigma of body image in the fashion industry — more specifically, the term "plus-size."

Keep Reading... Show less

Many popular TV shows are holding off premiers until spring, so most people are relying on their television subscriptions to get them through a socially distant fall semester.

Thankfully, Netflix was busy filming this past year because there is a ton of new original content coming in the near future. From mysteries to romances, here are some of the best new shows you have to check out this year:

Keep Reading... Show less

Taylor Swift Sang 'betty' At The ACMs And It Was The Perfect First Live 'folklore' Performance

I guarantee that Inez is spreading rumors about how fire this performance was.


The Academy of Country Music Awards were last night and the performances were wonderful, but Taylor Swift's live version of "betty" from her newest album "folklore" really took the cake for me.

Keep Reading... Show less
Health and Wellness

9 Reasons I Unfollowed All The Fitness Influencers On My Instagram Feed

I don't need to feel bad about myself because of who I follow on social media.


Throughout quarantine, something that a lot of us picked up on was working out. With all the free time, it seemed like the perfect opportunity to work on that "dream bod" you've been wanting for years, or to just feel good about yourself.

A common way to stay motivated and keep yourself on-task is to follow fitness influencers on various platforms. For some people, yes, this can be a healthy and helpful way to keep your drive. In other cases, however, this can do more harm than good.

Keep Reading... Show less
Facebook Comments