From the early 1950s to the mid-1970s, Western Europe enjoyed a ‘Golden Age’ of economic growth: per capita incomes grew at an average of 3.8% a year, far faster than at any comparable period in history. In the years since, growth has been considerably slower although still very respectable by long-run historical standards.

Understanding this experience is important not only for policy-makers but also for growth theorists and economic historians. It is the central aim of two new books from CEPR. These report on a substantial body of research, offering new interpretations of both the speeding up and slowing down of post-war European growth. The work employs better historical data than previous studies, uses new ideas from endogenous growth theory, and recognises the importance of institutional and political economy considerations.

The most obvious message from this research is that the Golden Age was both unique and unrepeatable. This needs to be absorbed both by economists testing propositions in growth theory and by politicians learning that the assumptions on which their earlier policy frameworks were constructed are no longer valid.

Growth in the 1950s and 1960s was stimulated by a variety of factors: technology transfer, post-war reconstruction, structural change and an unprecedented investment boom. The growth of total factor productivity was astonishingly rapid in the most successful countries, and much faster than could have resulted from the endogenous sources stressed by modern growth theory. New accommodations between labour and capital both underpinned rapid growth and were sustained by it. And energy crises, the rise of newly industrializing countries in the Far East, and the powerful impact of technological change on unskilled labour were all problems for the future.

Careful analysis of Europe’s ‘catch-up’ growth during the Golden Age (the extent to which European countries caught up with productivity levels in the US) offers several conclusions which bear on recent controversies in growth economics. First, catch-up involved reductions in the technology gap between follower and leader countries as well as some convergence in their capital to labour ratios.

Second, it is clear that catch-up was generally incomplete: European-American productivity gaps in manufacturing are even now quite large. Hence the strong negative relationship between initial income levels and subsequent growth in the early post-war years neither implies complete convergence of per capita income levels nor does it rule out endogenous growth.

Third, the investment boom ran into diminishing returns as traditional growth theory predicts. Overall, it seems that some aspects of that theory are still relevant, including Solow’s famous insight that in the long run, increasing the savings rate affects the level of income per capita rather than its growth rate. At the same time, the CEPR research argues strongly against the usual assumption of common technology across countries. It also implies that countries may differ in their ability effectively to assimilate new technical knowledge.

Finally, it might be inferred that the most plausible models of endogenous growth are those based on endogenous innovation of new products and processes rather than on constant returns to routine investment, and that the rate of endogenous total factor productivity growth is quite modest.

The historical record pretty clearly demonstrates that catching-up is not automatic. Underlying the Golden Age was a policy framework that was superior to that of the unfortunate inter-war years. For example, trade liberalization and ‘social contracts’ between capital and labour were integral parts of post-war reconstruction. Their importance is partly revealed by the existence of ‘winners’ and ‘losers’ and differences in the speed of catch-up.

For example, Ireland and the UK were both losers: the former suffered from its commitment to protectionism and import substitution in the 1950s, while the latter’s productivity growth was retarded by its idiosyncratic industrial relations system. Higher taxes were implicit in Europe’s post-war settlements and in this sense were conducive to growth rather than the disincentive that growth theory predicts.

The two CEPR volumes also reveal that measurement issues are critical for both historical analysis and policy formulation. The most important ones centre on ‘human capital’, which lies at the heart of much modern growth theory. This is an area in which market failures may be serious and where policies to promote faster growth are often likely to focus.

The research makes clear that standard approaches to measuring human capital, which rely on estimates of school enrolment ratios or years of formal schooling, are inadequate. For example, they imply that Germany has an inferior record to the UK in human capital formation.

Better estimates of stocks of human capital, which embrace both training and learning at work, are essential. It is also important in assessing investment in human capital to recognise that production strategies and skills accumulation are strongly interrelated. Craft production and mass production have quite different implications for apprenticeship and management education.

How will this research programme develop in future? The most promising area seems to be the link between growth and equilibrium unemployment. Here, an examination of the contrasts between the Golden Age and the subsequent slowdown in terms of the nature of technological change, the implications of the post-war settlements and the shifts in comparative advantage entailed in the growth and development process is a natural starting point.

Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe since 1945, Cambridge University Press for CEPR, 1996