July 03, 2002

The Accumulation Century, the Education Century, and What Comes Next...?

The nineteenth century was the age of invention, innovation, and accumulation. New technologies were developed in the lab and installed in the field, on the road, and in the factory. These new technologies were for the most part embodied in expensive and sophisticated capital goods. Hence economic growth in the nineteenth century was overwhelmingly the accumulation and deployment of physical capital goods that embodied productve modern technologies.

By contrast, the twentieth century saw not a rise but a fall in the physical capital-output ratio. We have many more and much more sophisticated machines and structures now, yes. But the ratio of the value of capital to the value of output has fallen. In this sense, the twenteith century was the human-skill century, one in which the key complementarity was not between technology and machines but between technology and the skills and capabilities of the labor force.

What comes next? What will the start of the twenty-first century bring? Unless the U.S. makes a major national effort, a variety of forces seem to be working to make the upgrading of the educational and skill level of the American labor force much slower in the future than it has been in the past. Falling prices of high-tech capital as the information technology revolution rolls forward may boost the capital-output ratio once again. But such predictions are hazardous: there is also evidence that modern information technologies make the returns to upgrading skill and education levels so high that they ought to be irresistible to anyone seeking to make a living in twenty-first century America.

Ballpark Benchmark-Year Estimates of the Physical Capital-Output Ratio in the United States, 1820 to the Present

ChartObject Chart 1

Estimates made by Angus Maddison (1995), Monitoring the World Economy (Paris: OECD). Note that Maddison's estimates exclude the residential capital stock.

Posted by DeLong at July 3, 2002 01:20 PM | TrackBack

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