The scars of the 2008 global financial crisis and the festering wounds of the ongoing European debt crisis seem to have obscured one simple textbook truth: long-term economic development largely depends on the growth of the total factor productivity (TFP), sometimes referred to simply as the technological progress.

TFP, however, is an elusive phenomenon. This is usually the unexplained part of the output growth, the “residual” left over after we have accounted for all other known contributing factors.  Another uncomfortable truth is that technological innovations per se do not guarantee a surge in TFP growth. New discoveries need to find their way into the production process, oftentimes overcoming well-known market failures - the obstacles such as information and coordination externalities (read more in Dani Rodrik’s “One Economics, Many Recipes”, 2007).

For example, it is well known that the Internet has been developed in the late 1960s, but became widely available only in the early 1990s. Thus, the first information and network technologies developed between the 1940s and 1970s have been the true force behind the advancement of the modern Digital Age.

Yet, for all the technological breakthroughs, the TFP contribution achieved in the industrialized world during the 1990s pales in comparison with the other two prominent decades – the 1950s and the 1960s.  The average TFP growth rate during this period in the United States is estimated to be around 1.4% as compared to only 0.9% in the 1990s.

However, the TFP growth of the 1950-60s USA may to a great extent have been based on the technological advances made several decades earlier. It may come as a surprise to many that the most “technologically advanced decade” of the 20^th century was actually the 1930s – the years normally associated in our minds with the Great Depression.

According to Alexander Field’s “The Most Technologically Progressive Decade of the Century” the employment of scientists and engineers in the R&D sector between 1929 and 1933 grew by a staggering 80%, and tripled between 1933 and 1940. This was happening in the face of deep labor cuts in other sectors.  The projects associated with the US government’s New Deal policies, such as the Hoover Dam in Nevada and the Lincoln Tunnel in New York, far from being the proverbial “bridges to nowhere”, the metaphors for wasteful public spending, exemplified technological advancements in structural engineering. Moreover,

A large portion of the infrastructure required for economically successful postwar housing construction was put in place during the 1930’s, as the consequence of the use of public funds to improve the road transport system. During the 1920’s infrastructure, particularly streets and highways, did not keep up with the burgeoning sales of private vehicles. Public expenditures during the 1930’s substantially remedied this, in a manner that impacted the productivity of the housing sector as well as that of the economy as a whole.

Certainly, not all investment has been done by the government, but public spending was instrumental in supporting the R&D-intensive projects during that time.

This historical example can indeed serve well the developing countries such as Georgia, which are contemplating the role of the public-private partnership investment funds. (see Georgia's Partnership Fund blog post by Michael Fuenfzig).

As for the developed countries, the 1930s seem to bear but little similarity with their present-day economic policies. According to evidence provided by The Economist, the share of R&D spending in GDP has been lackluster at best, as compared to countries such as South Korea. In part, this can be explained by the governments’ increased reliance on the incentives for private-sector R&D (a policy, which in itself has distinct advantages, but as the article suggests may not be enough).

And yet, it seems that in the times of deep recessions and weak recoveries, at the times when new technological frontiers could be crucial for the future growth, the greater government involvement in the R&D intensive investment projects may be warranted; and the belt-tightening in the areas of public spending such as research and development can prove a self-defeating strategy.