Steady State Per Capita Growth

Categories: Econ, Metrics

See: Steady State Economy.

Before we dive into the steady state per capita growth, meet Robert Solow: American economist, Nobel prize winner in economics, and creator of the neoclassical Solow model of economic growth (that last bit is the important part).

Long story short: the Solow model uses rates of capital accumulation, labor, and technological progress as they create economic growth over time. Just as companies scale as they grow, so does the entire economy. Companies use very different amounts of labor and capital, and very different processes, when they’re big compared to when they were tiny, and the idea is similar here, except that it views the economy as a whole.

The theory runs that the economy grows at the same rate of the population, but not in terms of productivity. Per capita income is not sustained as the economy and population grow.

Think about it this way: countries with lower GDP per capita still have a lot of room to grow. They’re bursting with growth. But eventually, as economies start to mature, per capita growth slows down.

Finally, the steady state per capita growth. It’s a type of equilibrium that pulls those under it...up, and pulls those over it...down. The steady state per capita growth is the sweet spot where savings and investment per capita equals the amount of investment needed to keep per capita capital constant, given population growth and depreciation. Outside of the steady state, per capita income is not constant: capital per capita is either growing or falling.

As the population and economy grows, they converge to this steady state. Economies with a lot of room to grow naturally have a per capita income that’s racing to the steady state...up and up and up. Growth pretty effortless for economies to jump upwards toward the steady state per capita growth (think: tiger economies).

Economies that are mature, and are trying to keep growing past a certain per capita income, are fighting to grow. They’re being pulled by gravity back down to the steady state. Since the economy grows at the rate of the population, mature economies can only grow so far past their steady state before they’ll be pulled back down to that equilibrium.

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Econ: What are Steady State, Steady Stat...2 Views

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And finance Allah shmoop What are steady state steady state

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growth and steady state per capita growth Bigger is better

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True when it comes to offensive lineman and wedding cakes

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and brass bands and the size of your uh you

00:19

know belt buckle Well it's also true in economies Everyone

00:22

likes economic growth The faster the growth the better More

00:26

production constant expansion But there's another option The city state

00:30

economy an economy with no growth Think of the steady

00:34

state as the economic equivalent to that feeling People say

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Yeah they get from meditation that Zen state that purportedly

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purges you of all earthly worries No desires no wants

00:45

just peaceful days spent in quiet fulfilling meditation Now imagine

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an economy sitting cross legged on a mat humming it's

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mantra That's the steady state The term steady state economy

00:58

refers to a situation where physical wealth and population remain

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steady An economy with zero percent growth or at least

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as close to zero percent is it Khun Get population

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doesn't grow birth rates run it replacement levels that is

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the birth rate matches the death rate So the population

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of your country is in twenty million people in two

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thousand eighteen It's twenty million In two thousand twenty eight

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it's still twenty million in twenty two eighteen more than

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just stable population in a steady state economy The per

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capita growth is also at zero as well Per capita

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growth refers to the amount of growth per capita or

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person You divide economic output usually measured by GDP by

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the number of people in the country You have a

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country with twenty million people with annual GDP of a

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trillion dollars Divide one trillion buy twenty million and that

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gets you per capita GDP of fifty grand So your

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country has per capita GDP of fifty thousand dollars Now

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in a steady state economy a few fast forward twenty

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years per capita GDP is what Yes still fifty grand

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It's days fifty thousand dollars One hundred years from now

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we'LL in a steady state economy Production is on Ly

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used to replace stuff that gets worn out where Chevy

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Nova breaks down so the factory makes another one for

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you You get to drive that one until well you

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know the wheels fall off There's no additional growth Everything

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on ly operates to replace things that have broken down

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there's another connotation to the steady state economy it has

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to do with the environment Will the steady state is

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considered more ecologically friendly because it doesn't grow It doesn't

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burn through a CZ Many resource is compared to an

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economy that chases constant growth Imagine a civilisation in tune

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with nature a small village separated from modern conveniences one

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surrounded by lush forests and fertile river banks the kind

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of civilization that uses the last remnants of moose and

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trails to make organic water filtration systems for their camp

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Not exploitive of resource is on ly hunting as much

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as is needed Replanting every tree your crop They used

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everything done in a way that doesn't deplete the environment

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That's a steady state In practice A steady state would

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be difficult to maintain right It's more of a conceptual

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benchmark than anything that exists in real life or nature

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you know like a helpful customer service rap or an

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honest politician It would be difficult to hold population steady

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in any society at least without resorting to authoritarian move

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like the one China did with their one child policy

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Also keeping per capita growth at zero would require significant

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limitations It would also make the economy susceptible to recession

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It would be easy to slip from zero percent growth

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into Ah you know shrinkage Small closed societies in relatively

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isolated areas might be able to maintain a steady state

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but it would be difficult for a large modern economy

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to live that way So yeah we keep coming back

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to the meditation thing It's relatively easy to meditate in

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an isolated monastery on a mountaintop somewhere alone away from

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distraction But try to meditate when you're surrounded by ringing

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cellphones and traffic noise and the smell of someone brewing

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coffee in the next room Yeah it's enough to give

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someone a cynic You have been there done that going

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