1997-1998 Essay Contest
First Place Essay

Rule the Pool: How To Increase Economic Growth

Bill Anderson
White Bear Lake High School—South Campus
White Bear Lake, Minn.

A swimmer 's potential is established by heredity and realized through proper training. Good nutrition is the element that can make that realization possible or prevent it from happening.
 —  Ernest W. Maglischo (Maglischo 663)

We are entering a world where the old rules no longer apply.
 —  Phillip Sanders (qtd. in Crichton ix)

Contrary to the earlier belief that the economic growth gap between developed and less-developed countries was an object gap (amount of capital), there is a more important factor, the knowledge gap. The knowledge gap refers to the country's use of technology which contributes to the overall quality of the human capital (Stiglitz 1-2). Another crucial aspect of economic growth is the means by which the central bank maintains price stability in the country so as to encourage savings or investment as well as consumption. While, by itself, the central bank cannot increase the rate of economic growth, like good nutrition for the competitive swimmer, it is an element that can facilitate economic growth by steadily increasing the money supply so as to keep the money supply proportional to the growing economy
(Boyes 419).

Economic growth is described as occurring whenever a nation rearranges its resources in such a way that is more productive (Romer 2). The four main determinants of economic growth are labor, capital, land and technology (Boyes 464-67). While the land determinant is essentially a fixed input for economic growth, increases in the productivity of labor and capital are directly related to increases in technological progress which can also increase the quality of the land resources (Boyes 469; Miller 1). Internal resources aside, the biggest differences between developed and less-developed countries are labor quality and government policies on the use of world knowledge (Miller 3-4; “Neoclassical” 1).

It has been proven that growth of labor productivity and the growth of labor intensity go hand in hand with economic growth. While an already developed country cannot go much further as far as labor intensity, increasing labor productivity becomes all the more crucial for economic growth (Miller 2-3). Among the factors influencing or affecting labor quality are education level, quality of education, demographic change and attitudes toward work (Boyes 470-73). One factor that can greatly increase the productivity of labor is technological innovation which increases efficient productivity of the available inputs (Boyes 474; Sabillon 8; Miller 3).

This is where another significant factor in economic growth, government, comes into play. Through its policies, government can either hinder, through export specialization policies which inhibit use of new technologies from around the world, or encourage, through large investments in manufacturing which is responsible for a large portion of new technologies, use of new technology available from world knowledge (Sabillon 6; Stiglitz 2). Japan and Taiwan, countries that have made huge gains in economic growth, use tax incentives and subsidies to encourage technology (Kotler 4, 288). Generally, restrictions on use of world knowledge can be traced to groups who help create them because they might lose if the new knowledge is utilized (Miller 4). Says Joseph E. Stiglitz, senior vice president and chief economist at the World Bank in Washington, D.C., in an interview with Arthur Rolnick, Minneapolis Federal Reserve Bank senior vice president, “Innovations that make our society more productive have mostly winners but some losers.” Stiglitz thinks there should be job transition programs to accommodate the “losers” because “[p]eople are training for where the economy goes” (Stiglitz 4).

The central bank, like the Federal Reserve Bank in the United States, is in control of the amount of the money supply and its overall goal should be to maintain stable prices (Krugman 119; Boyes 365). The central bank has the ability to increase the money supply through monetary policy by buying government bonds, decreasing fractional reserve requirements and lowering discount rates, or decrease the money supply by doing the opposite (Boyes 368-371). While monetary policy can greatly stimulate the economy in the short run, it can eventually result in an increase in overall prices.

As it turns out, monetary policy is able to increase gross domestic product in the short run because of public misinformation about current overall prices. In the long run, however, poorly executed usage of monetary policy in cases like this will only cause an overall increase in prices (Humpage 5). The central bank is still able to assist economic growth, though, through a steady increase of the money supply to match increasing rates of economic growth.

The equation of exchange states that the quantity of money (M) multiplied by the velocity of money (V) is equal to the price level (P) multiplied by real income or real GNP (Y), or MV = PY (Boyes 365). In order to keep prices steady while, if the government is doing a good job, GNP is increasing, the central bank would need to increase the money supply proportionally, depending on whether the velocity is growing at a steady rate or not, which would help promote low inflation (Boyes 366-67). As Gary H. Stem, president of the Federal Reserve Bank in Minneapolis, says, in a low-inflation economy, “resource allocation moves closer to optimal, with attendant benefits for growth and living standards” (Stem 2).

What determines a nation's growth rate potential is not its hereditary benefits or impediments but, rather, the way in which a nation uses its resources. As shown by Japan and other East Asian countries, the degree to which the government encourages or provides incentive for use of developing technologies directly affects the rate at which the economy will grow. In this era of globalization, “where the old rules no longer apply,” technology is essential. At the same time, an economy can't improve on technology alone. It requires a balanced nutritional diet or steady increase of the money supply to match economic growth rates in order to keep overall prices down. Through hard work and determination, a nation, just like the competitive swimmer, is capable of making a big splash and possibly setting a few world records.

Canadian Department of Foreign Affairs and International Trade: "Beyond the Neoclassical Growth Model: Other Factors Behind Economic Growth."

Boyes, William, and Michael Melvin. Economics. Boston, Houghton Mifflin Company, 1991.

Crichton, Michael. Rising Sun. New York: Ballantine Books, 1992.

Humpage, Owen F. “Monetary Policy and Real Economic Growth,” Economic Commentary, Federal Reserve Bank of Cleveland,
Dec. 1996.

Kotler, Philip, Somkid Jatusripitak, and Suvit Maesincee. The Marketing of Nations. New York: The Free Press, 1997.

Krugman, Paul. Peddling Prosperity. New York: W. W. Norton and Company, 1994.

Maglischo, Ernest W. Swimming Even Faster. Mountain View, California: Mayfield Publishing Company, 1993.

Miller, Preston J., and James A, Schmitz Jr. “Breaking Down the Barriers to Technological Progress.” Federal Reserve Bank of Minneapolis 1996 Annual Report. March 1997.    

Romer, Paul M. “Economic Growth.” The Fortune Encyclopedia of Economics. Ed. David R. Henderson. New York: Time Warner Books.

Sabillon, Carlos. “Policy Making for the Attainment of Fast and Sustained Economic Growth.” Feb. 1997.

Stern, Gary H. “The Federal Reserve's Contribution to Sustained Growth.” Speech to Milwaukee Investment Analysts Society. Milwaukee, June 4, 1997.

Stiglitz, Joseph E. and Arthur Rolnick. “Interview with Joseph E. Stiglitz.”The Region. September 1997.

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