Economic Development and Growth: A Survey‪.‬

The most basic challenge for economics is to understand the nature and causes of economic progress. But what exactly is to be explained? What are the facts? One very striking fact is historical--the rapid acceleration in the rate of economic progress since the early 1800s. Another is geographical the huge differences in levels of economic progress in different parts of the world today. The questions virtually ask themselves. Why did economic progress accelerate? Why is it not universal? On the whole, these two questions have been addressed by two different specialized fields within economics. Economic history has addressed the question of change over time, and development economics has addressed the question of contemporary differences across countries. The theory that until recently guided work in both fields--the Ricardian theory--measures economic progress in terms of the quantity of output produced by the economy. It sees the economy as a kind of machine that transforms inputs (labor, natural resources, capital) into output: the amount of inputs and the technology of the machine determine the quantity of output. If output increases more rapidly, it is either because of larger amounts of inputs or because of better technology. If output is low in some countries, it is because inputs or technology are lacking. Since Solow (1957) showed that increases in physical inputs explain only a small part of observed changes or differences in output, Ricardian theory has focused primarily on the nonphysical in explaining growth--on technological change and on increases in human capital in the form of skills and knowledge (Lucas 2002, Galor 2005).