Efficiency in the use of resources shapes the wealth of nations
Economic history is concerned with how well mankind, over time, has used resources to create wealth, food and shelter, bread and roses. Nature provides resources and man transforms these resources into goods and services to meet human needs. Some resources remain in fixed supply, such as land, but the fertility of land can and must be restored after harvest. Over thousands of years of agriculture, mankind learned how animal dung, rotation of crops and the introduction of nitrogen-fixing crops could increase the yearly harvest. Natural resources such as coal, oil and iron ore are, however, non-renewable. Other resources are made by mankind. Capital, for example factory buildings and machinery and tools, is therefore renewable. Labour, finally, is a resource whose supply relies on how well mankind uses the other resources at hand. But labour has been in increasing supply since the transition from hunter-gatherer technology to agriculture about ten thousand years ago. The skills of labour, so-called human capital, were primarily based on learning by doing, and it is only since the nineteenth century that formal education has played an important role.
Efficiency is determined by the technology of production and by the institutions that give access to the use of resources. A convenient way of measuring efficiency is total factor productivity. The more output you get from a given amount of resources the higher the level of total factor productivity in an economy. You can measure the growth of total factor productivity by the growth in output which is not caused by an increase in inputs in production. Total factor productivity growth is caused by better use of resources due to new technological knowledge and better organization of production.
Institutions can be understood as the rules of the game for economic life. Institutions or principles such as the Rights of Man matter because if labour is not free to move it is unlikely that labour will find its most productive employment.