Final answer:
Investments in physical and human capital, along with technology, are essential for productivity growth. Continuous technological innovation can counterbalance the diminishing returns on capital and human investments, particularly important in high-income economies that foster a climate conducive to ongoing innovation.
Step-by-step explanation:
The relationship between investments and productivity is fundamental to understanding how economies grow. Investments in physical capital, human capital, and technology are considered essential for improving productivity. According to neoclassical economists, these investments lead to a market-oriented environment that rewards innovation and drives productivity growth. Over time, productivity in the U.S. has shown periods of both growth and decline. For instance, the average annual growth rate of U.S. labor productivity was 3.2% from 1953-1972, decreased to 1.8% from 1973-1992, and rose again to around 2% per year from 1993-2010. Factors such as capital deepening can lead to diminished returns if using the same production methods, but improvements in technology typically lead to greater productivity by creating more efficient ways of using capital. Too much investment in one area without innovation may meet with diminishing returns, but continuous technological advances can counteract this effect, particularly in high-income economies.