How important was (a) the labour supply (b) capital stock growth in accounting for the rapid pre-1973 "Golden Age" growth?

The so-called "Golden Age" of economic growth in the OECD countries is generally accepted as having lasted from around 1950 to 1973. Between these dates (but not exclusively so), the advanced economies, and especially those in Western Europe that had been devastated by the impact of W.W.II recovered to their pre-war levels of economic sophistication, and then proceeded to rapidly expand at almost unprecedented levels, far exceeding the previously taken "belle epoque" of 1890-1913. This growth was also an elegant rebuttal to those who maintained that there would be an inevitable revisiting of the depressing economic conditions that had been the norm in the inter-war years. Yet the slowdown at the end of the period was almost as sharp in its onset as the acceleration had been nearly a quarter of a century previously. As the stagnation persisted, it became apparent that a quick return to the experiences of the Golden Age was unlikely to occur spontaneously, and thus the study of the conditions that had lead to such growth in this period became a necessary prerequisite were it ever to be achieved again.

The classic argument to explain the systematic rise in growth rates in the advanced countries at this time is the so-called "convergence hypothesis," first advanced by Abramovitz. This states that when the productivity level of one country is substantially superior to that of a number of other economies due to differences in productive technique, then lagging countries are in a position to embark on a process of catching-up. Further, this catch-up will continue as long as there is a lot of new knowledge that can be gained from the leader. As the distance between the leader and the followers narrow, however, so too does the stock of unabsorbed knowledge, and the catch-up rate of growth will retard unless the followers engage in substantive research and development themselves. A further implication is that it is not abnormal for the leader to experience lower growth than the followers, as it must invest its resources in pushing further the boundaries of technical knowledge, and this is a harder process than simply assimilating pre-existing techniques.

This hypothesis, when applied to the Golden Age, assumes the USA as the leader and Western Europe (and to a certain extent also, Japan) as the followers. Figures for growth rates in this period certainly confirm that the USA was one consistently of the poorest performing economies of the group. Yet Baumol points out that the US has maintained its absolute productivity growth rate and is still the "leader of the pack" whilst having had inferior growth performance. This being accepted, the question to answer is for what reasons this experience of growth occurred. The starting point is an examination of supply side factors, notable capital and labour. Crafts and Toniolo provide data showing that investment ratios for the period were much higher than in the 1920s and 1930s, which would suggest that the growth in the rate of the capital stock was much higher in the post-war years. However, they believe that there is less of an explanation in the growth of total employment, which was 0.4-0.5% pa in the earlier period, but just 0.6% pa during the Golden Age, not a significant increase. Maddison supports this view by demonstrating that growth in labour inputs during this period was actually slower in some countries (UK, Holland, Japan) than in the post-Golden Age period. However, he believes that labour does contribute in another way, in that a noted structural change took place that shifted labour away from unproductive sectors (mainly agriculture, even at the end of the war) and into more productive, industrial sectors. Kindleberger and Kaldor have independently proposed theories that suggest this structural change was due to exploitation of surplus agricultural labourers by industrialists, who were able to boost profits in this sector and by reinvesting these profits, induce an investment and export-led expansion. However, these theories fail to explain why the growth occurred specifically at this time, given that abundant labour supply had been apparent in Europe throughout the nineteenth and twentieth centuries as a whole. As a result, the force of argument that the labour supply was a crucial factor in accounting for Golden Age growth is diminished.

Returning to the capital stock growth, Crafts and Toniolo present figures from Levine and Renelt that suggest that the acceleration of growth during the Golden Age was a result of greater investment in not only narrow, physical capital, but also broad (i.e. human) capital also, and this approach, in incorporating modern endogenous growth theories, differs from the growth accounting theories which Maddison and others have used as a basis for their explanations. There is also another factor that must be addressed, as it is accepted by both camps that focusing on capital and labour inputs alone does not explain all of the growth. Maddison believes that they can only explain three-quarters of the growth, the rest is incorporated in a term known as "total factor productivity (TFP)," which is difficult to both define and measure, but broadly reflects technological advancement, and how that affects the productivity of capital and labour. TFP is derived from such advances as economies of scale, physically more efficient means of production, and improved managerial techniques, among others.

All of this provides support for the convergence hypothesis, but there are shortcomings in this theory, most notably in that it does not seem to explicitly provide for the failure of Lesser-Developed Countries (LDC) to practise it in relation to one another, instead with all appearing to stagnate. Abramovitz believes that certain conditions have to be in place that allow a country to engage in the process of catch-up; these he terms social capability, and defines as the societal ability to adequately absorb more advanced technology. If a country does not possess the means for the diffusion of new knowledge, the conditions for encouraging structural change, and macroeconomic and monetary conditions that encourage and sustain capital investment, then the country cannot benefit from the catch-up process. Europe and Japan did possess all of the necessary qualities, most notably according to Maddison, high levels of skill and technology in the economy, and the institutional capacity to raise and allocate large capital resources. Thus these uniquely favourable circumstances were the foundation upon which growth was achieved through advances in TFP, the rapidly growing capital stock, and to a lesser extent, a change in the allocation of labour resources. There is, however, by no means a clear consensus on this issue, and it will remain a source of further contention and research in the future.

The much lamented slowdown in productivity since 1973 needs to be put into perspective, as Crafts and Toniolo rightly point out. Although set in comparison with the Golden Age, recent trends have been disappointing, when compared with the inter-war period, they still display an encouraging aspect, and are even on a par with the pre-W.W.I era. However, this outlook, whilst commendable for its pragmatic approach, is vulnerable to the accusations of being too lax in its evaluation of the seriousness of the slowdown. In particular, one criticism could be that it is more important to compare a country's performance inter-spatially than inter-temporally, particularly in the case of the UK which demonstrated particularly stagnant growth, and was a constant underperformer in the Golden Age. Thus it is not reassuring to maintain that its performance now is superior to that of the inter-war period, as that does not acknowledge, let alone offer a solution, to the undeniable fact that the British economy lags behind its international rivals.

An alternative approach is simply to accept that there is only so long an economy can play catch-up for, and that the early 1970s was the period when the gap between the leader and the followers in the OECD became narrow such that the advantages from diffusion of technology from the USA to Europe became negligible. Indeed, Abramovitz maintains that the expansion lasted longer than one might have expected because conditions in the 1960s persisted that allowed for favourable and substantive capital investment. Without these, he believes that it would have been the case that the retardation of growth would have started several years prior to when it actually did. Eichengreen also believes that the catch-up process ran out of steam, but he puts forward a different explanation of why this would be so. Throughout the Golden Age, workers agreed to moderation in wage increases and shareholders to reduced dividends in order that investment could take place that would raise future profits and bring rewards then. As the slow-down process begins, workers begin to renege on the agreements they have come to, and demand higher real wages now as they believe that economic conditions are likely to worsen in the future (or maybe they are just tired of being told that their reward for moderation will arrive in the future). The consequence of this is a gradual reduction of the resources available for investment, and thus is almost a self-fulfilling prophecy on the part of the workers as the growth rate is depressed due to the fall in investment.

Finally, if it is accepted that the Golden Age growth was a counterweight to the stagnated growth of the inter-war periods, then it can be hypothesised that the overall trend from 1890 to the present day has been one of a steady rate of growth, that the overall trend has been steady, regardless of periods when growth has either been faster than normal (the Golden Age), or lower than the long-run average (the inter-war period). If this is the case, then this offers further support for Crafts and Toniolo's position as outlined above. However, it also diminishes the prospects that there will ever be a return to the levels of expansion that were seen in the Golden Age.