What is economic growth, and why is it good? (is it good?)

Fellow bathhousers, one of my new year’s resolutions is to write one post a week reflecting on my Introduction to Economics Part 2 course. I missed part 1 and get the impression, after the first week, that we’re not going down the route of structured learning. Therefore expect some ill-informed and unstructured musings, on which I would highly value your thoughts. First one below.

I want to find the answer to the question in the title, but I’m going to start by summarising what the lecturer told us, so you can critique that as well. He certainly didn’t give us the answer to my question, which is why I’m posing it here. So he said:

1)      The interest of a consumer is to maximise utility (I’m not quite sure what he meant by utility?)

2)      The interest of a producer is to use the resources at their disposal to create profit

3)      Profit is not a dirty word, it is a motivation to take risks

4)      Economic Self-interest is always the main driving force (when pushed, he claimed it might not be 100%, but it was certainly well over 90%). He also said, on a similar theme, ‘desire is the seed of economic activity’

5)      Ultimately everything comes back to money. Eg although you might think the emotional satisfaction of spending time with your kids isn’t about money, it still comes back to how much of a pay cut you’re willing to take to accommodate that – ie it has value.

6)      Income = transfer earnings + economic rent

  1. Where transfer earnings = minimum I must earn to stay in my job rather than take another one
  2. Economic rent = the result of the fact that not everyone is willing or capable of taking the same risk that I am

7)      In the 1930s we realised that economics couldn’t be left to producers and consumers, the state had a role to play as well – economics needs to be managed. And it’s not the micro-equilibrium that’s important, it’s the macro-equilibrium (ie between nations, not between individuals)

8)      So at the moment, the problem isn’t around production or supply, it’s all about distribution. And the ultimate aim should be growth that is continuous and sustainable. He believes that we have to ‘grow together’ – ie grow but getting more equal as we grow.

9)      And finally, the biggest sufferer in the recession is China.

So, comments on any or all of that most welcome. It led me to thinking. Lots of economists claim that growth is essential, green hippy types claim that we have to stop growing otherwise we’ll destroy the planet. So firstly, what is growth? Secondly, is it not possible to grow without using more resources (theoretically, or practically?). Thirdly, and on a different note, how exactly do growth and inequality relate to eachother.

What is growth?

Obviously it’s the increase in GDP, where GDP is the total value of the goods produced in a country in a year (theoretically the same as the total income, and the total expenditure). So why is it so important?

If the population is increasing then GDP has to rise in order to ensure everyone stays at the same level (on average). But I don’t think that’s what economists mean when they say growth is essential, they mean GDP per person has to increase – is that right?

After a good hour and a half wandering round the internet and discussing it with Nick and Pete, I’ve failed to find an answer that’s both believable and understandable. Here’s a version: growth is the creation of value. And value is created by labour, where people with different skills create different value (eg a mechanic creates a lot of value working on a car, but not very much if he’s trying to paint a canvas, whereas a painter creates lots of paint value but not very much car-based value). That doesn’t seem right, because I’d have thought you could create an equilibrium where each year, say, everything broke and had to be fixed again. People are working, but there’s no growth – the same value is produced each year. Bugger. Essentially I have no idea, Sahil and others, please help.

Right, onto my second question. Does growth (whatever that is) necessarily mean more environmental harm, or are greenies conveniently combining 2 ideologies (anti-materialism and environmnentalism), or is it theoretically possible to have environmentally positive growth, but just rather unlikely? At the weekend Gordon Brown said he wanted people to realise their aspiration for a new car, a bigger house, and a holiday abroad. He got booed by the greenies in the audience. But how about if the new car was an electric one, the bigger house was new and well-insulated, and the holiday abroad was on Eurostar. Is that necessarily bad?

Finally, the Spirit Level claims that in rich countries GDP does not relate to health and social well-being, but levels of equality do. They then use this to argue against the need for growth. However, their graphs simply show that GDP does not relate to social wellbeing, they don’t show any data for growth vs outcome (eg rate of change of GDP vs outcome). Is it possible that while equality is better, growth is also better? Ie, as my lecturer said, we need to grow, but we need to grow while moving closer together?

Right, that’s quite enough. I’m afraid it has turned into a list of questions rather than any answers. Please help. Simple terms please.

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5 thoughts on “What is economic growth, and why is it good? (is it good?)

  1. There is a lot here, so much to get stuck into. I like the sound of the course, nice and haphazard. For now, I assume he had a clever deeper reason why China is suffering in the recession, but with news today of 8.7% GDP growth in 2009 it better be a good one.

  2. I’m not sure, but I think his point was that their GDP growth in the face of recession has come at the expense of something, but I couldn’t quite work out what. Possibly workers? Maybe he meant the Chinese people have done badly out of it?

  3. Mainstream economics argues you need continual growth to cover the increasing population, the ‘depreciation’ of machinery (so you can make and buy new ones which won’t be instantly useful), and due to the credit system. If you lend money, which invests in something, you expect more money in return (interest). When this money+interest is leant again, you expect more interest. Hence you constantly need to keep expanding.

    None of this need be the case, needless to say. But what is it exactly that your are accumulating? Units of utility? Abstract hours of labour time? What is this value we are accumulating?

  4. I’ve stumbled across a partial answer to one of my questions, so I thought I’d share it here. I asked whether you could ever have growth that was environmentally positive, or whether economic growth and destroyign the environment were inextricably linked. It turns out that ‘decoupling’ (a word I’ve heard used, but never understood), means exactly that – decoupling economic growth from environmental destruction. There are two forms. Relative decoupling is when economic growth becomes less destructive per unit of growth, but level of destruction is still increasing. Absolute decoupling is when the absolute impact actually decreaeses.

    This interesting paper (of which I have to admit I’ve only read the summary) claims that although there is some evidence that relative decoupling might work, there is no evidence that absolute decoupling is possible.

    Therefore, they conclude, the only option is a much more fundamental realigning of our economy and society.

    What do you think? Possible?

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