As folks may have noted, I like graphs; they can be very useful illustrations, particularly of historical trends. Consider this graph, taken from the 2012 US Federal Budget (via).
What is striking is the long-run stability of economic growth in the US, apart from one episode which stands out fairly dramatically. Very dramatically (pdf) given that:
industrial production fell nearly 50 percent from its prior peak. The unemployment rate reached 24 percent in 1933: About one in four people in the workforce was without a job. By 1933, the price level was more than 25 percent below its 1929 level.Evan Soltas points to a particularly revealing indicator:
the median firm was operating at a loss: only 40 percent of firms were running a profit by 1933, as compared to roughly 90 percent under normal macroeconomic conditions.Apart from that stand-out episode, it is a picture of an economy with a strong tendency towards an economic equilibrium around a steady rate of per capita economic growth. Sure, there are also business cycles but (again with an obvious exception) these are relatively mild, compared to the persistence of the underlying growth rate. Even that wildly abnormal episode also sees an acceleration in growth that "overshoots" and then a return to the long-run growth trend.
So, does one base study of macroeconomics--of the economy in aggregate--around the reality of that steady underlying growth or around the wildly abnormal episode? Unfortunately, what became known as macroeconomics was born during that abnormal episode and that origin has marked it ever since.
For it really was a highly abnormal episode. To further see how abnormal, let's extend the time-frame backwards (using data from here).
Even without inserting a trend line, we can see that there is a strong, persistent, tendency to a steady rate of per capita economic growth, with that one stand-out episode.
What is not nearly as striking as the persistence of growth are the bumps in the road--the business cycle is comparatively minor in its effects on economic growth, except for that same stand-out episode.
The average rate of US per capita economic growth from 1790-2011 has been 1.8% per annum. But US economic growth did shift to a new trend line from about 1878. The rate of per capita economic growth from 1790-1878 was 1.4%; from 1879-2011, 2.1%.
So, US economic growth can shift from one long-term trend to another, but such a trend can be very persistent. This upward shift in long-term growth around the beginning of the last quarter of the C19th took place in the US but not in the UK, which had a quite different experience.(The UK GDP data available from the above source only goes back to 1830.)
The 1830-1878 US per capita economic growth rate of 1.4%pa was not significantly different from the UK's rate of 1.3%pa over the same period. (Though, in the very long run of history up to that time, both rates were remarkably high, a result of shifting from an economy dominated by the land/labour constraint to one dominated by the capital/labour ratio.) Since the US could add inputs rather more easily than the UK (all that accessible land), the UK's greater rate of technological innovation was apparently significantly compensating for the US's addable inputs advantage.
Around 1878, things shifted. From 1879-1914, the US economic growth rate was 1.6%pa while the UK per capita economic growth rate slowed to 1.0%pa. US technology increasingly outstripped the UK's during this period (though not as much as is sometimes suggested: the British generally remained ahead in military technology).
Given the broadly similar institutional structure, likely the greater scale of the US economy--and greater access to cheap resources--assisted this surge in economic growth once the disruptions of the War Between The States had settled down. But part of the reason for the increase in US economic growth was probably the US's adoption of the gold standard in 1873--particularly after the end of the Reconstruction Era meant a stable constitutional order--as said adoption eased the transfer of capital (human and financial) from the UK to the US. Since the UK had been on the gold standard since 1717--apart from the 1797-1821 suspension due to the Revolutionary and Napoleonic Wars--merely being on the gold standard was not the advantage, it was having a reliable Transatlantic payment system with the main exporter of capital (the UK).
Conversely, one can argue that the expansion of the gold standard in the 1870s (Germany, France and the US all adopted the gold standard in that decade, as did various other countries) significantly disadvantaged the UK.
[Read the rest at Skepticlawyer or at Critical Thinking Applied.]