Growth Mechanics
Start with simplicity. Imagine a changeless world where people and things replicate themselves exactly. Chapter 3 showed that in total capital terms including human capital, although neither Mill nor Keynes used them, depreciation of both factors together, net of transfers from one to the other, equals exhaust in taste satisfaction. “Replacement investment,” or “depreciation investment,” is just enough to turn the generations over as new (net) output makes up the loss to consumption exactly. Ideas hold unchanged. That wouldn't be too far from the truth for our million years as homo erectus, or our millennia after as homo sapiens until some 50,000 years ago, or our centuries in the dark ages after Rome fell. Most of the new norms we
innovated, although not all, eventually regressed to the old ones.
Next imagine growth of everything at a constant rate. Capital, consumption and output all grow in constant proportion. Economists now call this “balanced” growth. Mill had described that possibility in 1844. Balanced growth isn’t driven by consumption restraint, as consumption never lags. And it isn’t driven by productivity gain, meaning more output per unit capital, since output grows no
faster. What drives it?
Suppose first that there are still no new ideas. If we are pioneers in a new world or empty niche, we might be able to increase numbers of exactly the same things and skill sets until we reach niche limits. Then what would pay for capital growth in that case? Zeno the Eleatic might insist that depreciation investment is never enough because it chases a moving target. But depreciation moves just as fast. Identical capital means identical in depreciation rates. That means the ratio of depreciation (pure consumption) to capital. The two racers hold neck and neck indefinitely. Depreciation investment is still enough, just as it was in the growthlessness before.
In balanced growth, as in standing still, it is the only need for of capital replacement.
Now comes a tougher problem. Niches in the real world are typically more or less
full. Here old ideas alone can’t bring growth. David Ricardo, Thomas Malthus and
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