Steady State Per Capita Growth

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.