The economist John Kendrick applied such growth accounting to data from the Great Depression. [***See John W. Kendrick, Productivity Trends in the United States (Princeton, NJ: Princeton University Press, 1961), particularly Table A-XXII, p. 335, and the discussion of these calculations.***] ***Table 7.2 "Growth Rates of Real GDP, Labor, Capital, and Technology, 1920– 39*" summarizes his findings. Each row in ***Table 7.2 "Growth Rates of Real GDP, Labor, Capital, and Technology, 1920–39*" decomposes output growth into three components. In 1923, for example, output grew at a very high rate of 14.2 percent. This growth in output came from labor growth of 9.9 percent and capital stock growth of 2.0 percent. The remainder, which we interpret as growth in technology, grew at 9.5 percent. By all accounts, 1923 was a good year. The other entries in the table can be read in the same way.
Table 7.2 Growth Rates of Real GDP, Labor, Capital, and Technology, 1920–39*
|
Year |
Real GDP |
Unemployment |
Price Level |
Inflation Rate |
|
1920 |
0.4 |
1.4 |
2.1 |
-1.2 |
|
1921 |
-3.6 |
-11.5 |
1.5 |
4.0 |
|
1922 |
6.4 |
8.7 |
0.7 |
0.1 |
|
1923 |
14.2 |
9.9 |
2.0 |
9.5 |
|
1924 |
2.0 |
-3.2 |
2.6 |
4.9 |
|
1925 |
3.6 |
4.0 |
2.4 |
0.1 |
|
1926 |
6.2 |
4.2 |
3.2 |
3.4 |
|
1927 |
1.1 |
-0.2 |
2.9 |
0.5 |
|
1928 |
1.0 |
0.6 |
2.4 |
-0.3 |
|
1929 |
6.5 |
2.2 |
2.4 |
5.7 |
|
1930 |
-9.2 |
-8.1 |
2.0 |
-4.8 |
|
1931 |
-7.5 |
-10.5 |
0.1 |
0.4 |
|
1932 |
-14.5 |
-13.5 |
-2.2 |
-5.2 |
|
1933 |
-2.5 |
-1.0 |
-3.4 |
-1.2 |
|
1934 |
9.9 |
0.4 |
-2.8 |
13.7 |
|
1935 |
9.0 |
5.8 |
-1.4 |
6.6 |
|
1936 |
12.8 |
10.3 |
0.0 |
6.8 |
|
1937 |
6.9 |
5.8 |
1.4 |
2.9 |
|
1938 |
-5.5 |
-9.3 |
0.9 |
1.2 |
|
1939 |
9.1 |
6.2 |
-0.3 |
4.6 |
|
*All entries are annual growth rates calculated using data from John W. Kendrick,Productivity Trends in the United States (Princeton, NJ: Princeton University Press, 1961), Table A-XXII, 335. Following the discussion in Kendrick, the capital share (a) was 0.30 until 1928 and 0.25 thereafter. |
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Real GDP and technology were both growing in most years in the 1920s. In the early 1930s both variables decreased, and both grew again as the economy recovered from the Great Depression. In other words, technology growth and output growth are positively correlated over this period. This suggests the possibility that changes in technology caused the changes in output—always remembering that, as we observed earlier, correlation need not imply a causal relationship. An improvement in technology causes firms to want to produce more. They demand more workers, so employment and real wages increase. The increased output, through the circular flow, means that there is increased income. Households increase both consumption and savings. Higher savings means higher investment, so, over time, the economy accumulates more capital. Exactly the opposite holds if there is a decrease in technology: in this case, employment, consumption, and investment all decrease.
Does this theory fit the facts? For the roaring twenties, we see growth in output, labor, and capital. In addition, there was a positive technology growth rate in almost all the years of the decade. These movements are indeed consistent with the behavior of an economy driven by improvements in technology. Jumping back for a moment to individual markets, improvements in technology shift supply curves rightward. Increased output is therefore accompanied by decreased prices. The aggregate price level is nothing more than a weighted average of individual prices, so price decreases in individual markets translate into a decrease in the overall price level. From ***Table 7.1 "Major Macroeconomic Variables, 1920–39*", the price level actually moved very little between 1922 and 1929, so this fits less well.
Overall, the view that technological progress fueled the growth from 1922 to 1929 seems broadly consistent with the facts. Given the simplicity of the framework that we are using, “broadly consistent” is probably the best it is reasonable to hope for.
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