Why Are Some Countries Rich and Others Poor?
May 21, 2015
More than two centuries ago, Adam Smith wrote the book that is generally credited with initiating the science of economics. The central question he addressed is contained in its title, An Inquiry into the Nature and Causes of the Wealth of Nations. What is amazing is how prescient Smith was. Almost everything he said 240 years ago is still true today.
Modern economic studies are confirming it.
Think of an economy as reflecting three fundamental features: capital, labor, and what I will call the “efficiency factor.” A country’s stock of capital consists of machinery, buildings, land, etc. Labor consists of the country’s human resources that are used in production. The efficiency factor determines how well the country turns capital and labor into output.
Now let’s jump to the bottom line: which of these three factors is most responsible for differences in GDP per person in countries around the world? The answer: it’s the efficiency factor.
