The economy grows when technological improvements or investments in human or physical capital boost productivity, when the labor force increases, or when investment in physical capital adds to the economy's productive stock--and thus total output expands.
But this begs the question: What boosts productivity or creates incentives to invest? Economists differ in their specific answers to these questions, but the different theories point to five primary factors:• The level of human capital and whether talent is encouraged to boost the economy's productivity
• Cost of and access to financial capital, which allow firms and entrepreneurs to make real investments that create technological progress to use in the economy
• Strong and stable demand, which creates the market for goods and services and allows investors to plan for the future
• The quality of political and economic institutions, including the quality of corporate governance as well as political institutions and a legal structure that enforces contracts
• Investment in public goods, education, health, and infrastructure, which lays the foundation for private-sector investment
Strong empirical evidence in economics and other social sciences suggests that the strength of the middle class and the level of income inequality have an important role to play for each of these five factors boosting productivity and spurring investment.
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