39

Whenever economic growth as a percentage of BNP drops close to zero, economists speak of a recession or even a crisis. In political debate, the focus is quite often on economic growth; in most democracies, leading parties are more likely to win elections if the economy is growing and opposition parties are more likely to win if economy is shrinking or growing very little. Therefore, politics goes through great effort to get the "economic growth" statistic above 0%.

Why is this exponential economic growth considered so important? Most countries in North America and Western Europe are already quite rich, and something like the Human Development Index tries to measure indicators of quality of life, rather than dollars which are just a method of payment. Is the government focus on optimising GDP just because it's easier to measure than a vague thing like quality of life, or are there more fundamental reasons for a society to try to maximise this quantity?

  • Can you possibly edit the question that it is at least addressing the political aspects of constant economic growth? This should be an exchange about Politics in general and not simply macro-economic theory. – user117 Dec 6 '12 at 0:26
  • 1
    Is there a StackExchange site for economics? – user1765 May 20 '13 at 22:21
  • @TomD There was but it got closed. – gerrit Jun 2 '13 at 15:38
  • 3
    since @gerrit comment, this happened: economics.stackexchange.com – mart Dec 22 '15 at 15:58
25

I found this question very interesting, and I wanted to learn more about it. So I showed it to one of my relatives who is a Professor of Economics at the BI Norwegian Business School.

He explained to me:

Technology and knowledge are always advancing. This allows us to constantly improve our efficiency and reduce the manpower needed to achieve the same things. For example, it takes much less manpower to manufacture a jacket today than it did in 1850. This effect is constantly happening. And that reduced need for manpower would leave a lot of people unemployed. Therefore, we have three options:

  1. A constant increase in unemployment. (Generally feared and loathed.)
  2. Less time at work per person. (Sometimes impractical. Wastes educational resources as people would still have to study and train just as much only to produce less. Might reduce people's earnings, etc.)
  3. Constant economic growth to create new jobs and counteract the reduced need for manpower caused by technological advancement.

The third option is generally preferred by policymakers, academics, the public, etc. for the reasons described above, as well as other reasons.

I showed him this simplified version of his explanation, and he said it was correct.

Also, there's hardly any limit to how far this can go. We now have machines doing an immense amount of work that used to be done by humans. I want to quote an insightful answer from Worldbuilding SE:

When robots are producing products much cheaper than humans could, it becomes trivial to afford the necessities of life. There are plenty of things possible for people to do which might seem absurd to us now - if I described the concept of a "let's play" video or unboxing videos to someone 50 years ago, and asked them to guess how many people could make a living just doing that... they would probably find the concept laughable. Right now, some people make several thousand dollars a month just videoing themselves eating. What kind of memes or entertainments will be popular 100 years from now?

How far up or down something is on the pyramid of human needs needs not matter for how much people are willing to pay for it. As basic human needs are satisfied more and more easily by improved technology, people will be willing to pay for increasingly superfluous products and services. These things will contribute to economic growth just as much as more fundamental industries.

Not that it's relevant at all, but I want to add that my personal opinion is that once a society is sufficiently developed, the second option has many benefits for the quality of life. But that's another story.

  • 5
    Seems to me all three of those are happening. BTW, that work-saving technological advancement is exponential as we have to put less work into creating technologies that help us put in less work etc. – PointlessSpike Jun 3 '16 at 14:34
  • You forgot option 4: the human population is decreased – JonathanReez Supports Monica Jan 22 at 18:57
  • @JonathanReez That's true, I guess. Although reducing the population would also decrease demand, potentially further increasing unemployment. (Depends on stage and type of automation, what goods can be produced, complex economic relationships, etc.) And, of course, very few countries consider decreasing the population to be an acceptable goal. – Revetahw says Reinstate Monica Jan 22 at 22:16
  • Option 2 would create more jobs, increase everyone's leisure time and probably have a marked overall improvement of mental health. Nothing causes psychological burnout as much as 'crunch time'. The idea that it's 'wasteful' to not wring out every single drop of productivity from your workers is just one of the reasons capitalism has rapidly become a moral void. – Shadur Apr 5 at 15:17
  • @Shadur Yeah, I agree. – Revetahw says Reinstate Monica Apr 5 at 15:18
6

Without being able to completely back it up with citations, but from what I understand is the growth needed to guarantee the payment of interest. If there is no growth, there is no need for additional money in the system and thus interests would go down or could not be paid. As a consequence there is a permanent need for growth.

Please correct me if I'm wrong, I'm more of a politics guy and less the economical expert ;)

  • 1
    I think this is the point, the whole social-economical system of capitalism is based on the interests from the money. – Danubian Sailor Dec 6 '12 at 6:58
  • 1
    @lechlukasz - Not really. Debt is one of 2 main ways implemented to raise capital. Equity is the other one. our particular modern system is heavily based on debt, but that was our social choice, not related to "capitalism" per se. Some fairly smart people (E.g. Nissim Taleb) strongly advocate moving to a lot more equity based system, for good reasons. – user4012 Dec 6 '12 at 17:36
  • @lechlukasz additionally, although our present system of debt relies on interest, this too is a choice. There exist other methods to motivate creditors to lend out money, such as demurrage or the system implemented by the Swedish JAK bank. But that's more of an economic question. – gerrit Dec 9 '12 at 16:02
  • 1
    @Sven, yes, you are wrong (if I understand your answer). Growth is not required to make interest payments. Interest can be paid in a steady-state system with no growth. This is the clearest explanation I've found on the issue. Now, if you modified the statement to say that growth is required to guarantee the levels of interest that we have come to expect, I wouldn't disagree with that. But, it sounds like your answer is claiming that growth is needed for any level of interest. – Nate Aug 1 '13 at 11:08
  • @Sven I agree with Nate, need for growth and debt service are not necessary related. However bond holders would prefer to hold bonds of country with better growth perspective - Italy is good example of that – lowtech May 19 '14 at 21:51
5

Most people want not only to be WELL off, but to become BETTER off as time goes by. The only way to make this happen is through economic growth. Put another, it's not just the level of economic well-being but the "first derivative" that counts.

A prolonged period of economic stagnation, is a situation where you couldn't make anyone better off without making someone worse off; this is called "Pareto optimality." Even in the United States, this would lead to political dissatisfaction and calls for change.

Economic growth is the "lubricant" of politics. Without it, politics are much harder to manage when there isn't "enough to go around."

  • 1
    "A rising tide lifts all boats" – NaBUru38 Jun 2 '16 at 23:55
3

Humans are naturally creative so wealth should accumulate unless something has gone wrong, such as:

  • War and violence are destroying wealth faster than it can build up

  • Groups are not being allowed to express their potential due to bad ideas about race, gender, ethnicity

  • Too much of the wealth created is ephemeral or has planned obsolescence

  • Taxes are high enough to diminish the incentive to create

  • People spend their time in largely nonproductive labor such as filing complex tax forms, gambling in markets, militarism, rent seeking

  • Population is in decline, like in Russia & China

  • Steep barriers to innovation from regulation or incumbent firms

3

(1) The economic growth figure that's usually reported is real GDP growth. This takes into account inflation, but does not take into account population growth.

Example. You seem to be puzzled by why economists and politicians fret when real GDP growth is, say, 0.2%. The reason is that if real GDP growth is 0.2% but population growth is 1%, then real GDP per capita (person) actually falls by 0.8% (approximately).

In the US for example, the annual population growth rate has averaged around 1% the past 30-40 years. So just to keep real GDP per capita constant, the US needs annual real GDP growth of 1%. Any lower and that indicates falling living standards.

0% GDP growth means living standards (measured by real GDP per capita) are falling by 1% per year, which is pretty terrible.

(2) Your other concern — regarding why we don't use other measures of living standards — is well-founded. Criticisms about GDP and GNP are as old as the concepts themselves. Every student to introductory macroeconomics is taught about the limitations of GDP as a measure of living standards.

One big and important reason is that GNP and GDP are the oldest, most well-established measures of living standards. Their development started in the 1930s (Great Depression) and was institutionalized by the UN and World Bank after the war. Every country has had regular GDP estimates for a very long time now.

Other measures are less well-established, not as well-developed, and have fewer resources devoted to their measurement. So although GDP is not a perfect measure, it is the most standard and accepted one we have right now, and so that's why we use it.

In 2008, a committee that included two Nobel laureates examined some alternatives to the standard GDP measure (PDF report). At the time I thought that some real change would come out of their report, but 8 years later it seems that nothing has changed. GDP is still the king of standard-of-living measures. Other measures remain mere supplements, albeit very useful ones.

1

The 2 main reasons are:

  • The economy has to grow in order to employ new workers since populations usually increase over time.

  • Perception of the people. Growth gives the impression of improvement. Without growth you can't keep up with the Jones's next door (other countries), which also affects people's perceptions.

This link pretty much says what I just wrote above:

http://www.marketplace.org/topics/economy/why-do-we-need-gdp-grow-anyway

"GDP growth is linked to jobs growth," says David Weil, a professor of economics at Brown University. "So unless the economy is growing rapidly enough, it's not going to be able to absorb the new workers who are coming in, much less reduce unemployment."

Each year, as a new -- and bigger -- crop of young people enters the job market, they are counting on GDP growth to make room for them in the job market. But it isn't just about jobs. Economists say that GDP growth affects how we view ourselves as a nation.

"Most people agree, I think, that output, and hence, their ability to consume should improve. This is sort of the American Dream -- things get better as you look toward the future," says Richard DeKaser, an economist with Wells Fargo.

  • 1
    But, why do jobs need to grow? If population doesn't grow the number of young people entering the labour market should equal the number of old people leaving it, so in my understanding, steady-state should be fine...? – gerrit Jun 13 '13 at 8:26
1

To start, the main drivers of economic growth are resources, technology, and institutions. Technology has been increasing our capacity of production for the last 700ish years. People have been getting more and more educated in western countries and new and more complicated machines are created with every generation. There haven't been any huge declines in natural resources. Given these circumstances, it would be strange for there to be anything but economic growth in developed countries over at least the last hundred years. If people were to hold their politicians accountable for not destroying the natural tendency toward growth, that would explain the phenomenon you observed.

In regard to GDP, most would admit that it is a flawed measure for the well being of a country. A nanny adds to GDP, a stay at home mother does not. Hiring more police to fight crime increases GDP. The main advantage is its simplicity to measure while getting fairly close to measuring the wealth of a country. There is no reason to maximize GDP in and of itself.

When something goes wrong in the economy, like the financial market crash in 1929, people get confused and scared, breaking down the basic institutions that allow for economic activity and growth. One potential (and somewhat controversial) policy solution to restore the market to its state before the shock is for the government to borrow and spend money as a stimulus. If the government follows this course of action, then it is essential for the economy to grow, otherwise the state will be unable to pay the debt and have to raise taxes on an already troubled economy or default on the debt leading to another potential crisis. If the economy does grow, then the debt can be paid back by tax increases or simply shrink to a manageable size relative to tax revenues.

1

National income is a strong indicator of country welfare or quality of life. Richer countries are most often better countries. You may convince yourself by a look at List of countries by GDP (nominal) per capita.

As for the Human Development Index, it is not so different from an income statistics, because HDI is the average of income index, education index, and life span index, and the latter two are affected by educational and healthcare expense, in other words, the major component of HDI is income.

-1

Without economic growths it's impossible for our pension system to pay out the pensions it promises retirees.

When retires can't get pensions that produces huge political problems.

  • 2
    Why is that true in a system where we're saving for our pensions? If economy is steady-state and inflation-free, I should get back exactly the money I put in, shouldn't I? – gerrit Dec 17 '15 at 14:42
  • 1
    @gerrit : Our society doesn't caluclate with retirees getting as much money back as they put into the system. – Christian Dec 17 '15 at 14:51
  • 1
    Average lifespans have gone up a lot over the last few decades. Pension levels that were sustainable when most people died soon after ceasing paid work are no longer sustainable now that people often live on past retirement for decades. – Lostinfrance Dec 17 '15 at 14:54
  • #shouldHaveUsedADefinedContribution401k – lazarusL Dec 17 '15 at 14:55
  • 1
    Letting people starve to death as retires when there money runs out because they didn't save 40% of their income in youger years politically problematic. Retires can vote. – Christian Dec 17 '15 at 15:14

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .