Limit to growth

April 18, 2007 10:00 AM

Why is economic growth necessary?

Sorry for this utterly naïve question. Our current economic system seems to need growth to stay on track, while unlimited growth is being questionned on ecological grounds. So why is growth necessary, in real terms (GDP/inhabitant)? There's the start of an explanation here but I'm not sure I really understand.

posted by bluefrog to work & money (32 comments total)

This answer is somewhat amorphous, but basically people get antsy if their standard of living never rises. Overall increases in standards of living generally occur with overall increases in GDP (this doesn't occur equitably per person).

Also, we spend a lot more on stuff-we-don't-need-but-makes-us-happy than any generation before us.
posted by 2bucksplus at 10:10 AM on April 18, 2007

I'd always thought it was ultimately because nations are essentially in competition with one another for control of resources. If you don't grow, someone will eventually outgrow -- and overpower -- you.
posted by treepour at 10:14 AM on April 18, 2007

You have essentially asked the question, "Please summarize a theory of macroeconomics," as posters to AskMe do from time to time.

I predict you're not going to get a decent answer here. The kind of format that is appropriate for an answer to this question is a textbook, not a free-entry comment field. The one that usually gets recommended in answers to this question is Greg Mankiw's Macroeconomics; you may prefer his "Brief Principles of Macroeconomics" because it is brief.
posted by ikkyu2 at 10:16 AM on April 18, 2007 [4 favorites]

For one thing, there are a lot of people in this country and all over the world suffering in poverty, and it would be nice if we had some more money and goods that we could give or trade with them to raise their standards of living. Also, the gains that come from economic growth both go to fund and represent profits from things like cures for diseases, bigger and better computers, astonishingly beautiful works of art, and faster modes of travel to far away places. In an international capitalist economy, more economic growth is a signal that we're inventing new stuff and that in certain ways, things are getting better.

There's also evidence that GDP growth makes people care more about ecological damage (e.g., when you're wealthy, you have the luxury of caring whether the air is polluted) and gives them the resources to do something about it. We can argue over whether that balances out the damage that we do to the planet on the way to getting there, but it does happen.
posted by decathecting at 10:20 AM on April 18, 2007

The US (as a country) is deeply in debt. We must make more money in the future to pay back our debt plus interest. If we don't grow, we default on our debt, which would be very bad for us, and very bad for the people we owe money to.
posted by grateful at 10:25 AM on April 18, 2007 [1 favorite]

I Am Not An Economist. Still, here goes.

It probably isn't necessary, unless your system is predicated on the continued maintenance of an economic elite, as ours is. In a more localized, homeostatic system, a minority couldn't hoard for very long. Things would eventually level out, through economics or, more likely, social or physical intervention.

But in an economy based on growth, those at the top will always be slowly but consistently distancing themselves from those at the bottom; they'll be able to purchase/invest in more things that drive growth, increasing their wealth geometrically.

But this is also pretty reliant on people continually buying stuff. Which means making stuff disposable - both physically and emotionally - which means growing.

Basically, it's part stupidity and part greed. The greed and stupidity are everyone's, but both tends to pool a lot more quickly and thickly at the top.

And, yeah, read on macroeconomics too. But remember that there are interests, both tacit and explicit, among economists in keeping individual, social and ethical realities viewed as externalities. Any true economics is social science first, mathematics second. Our economic system is deeply rooted in very real exploitation, and since no one really has the courage to just out and explicitly justify that with a formula, it tends to get left out of the pure theory.
posted by poweredbybeard at 10:33 AM on April 18, 2007 [1 favorite]

Wait a second--Mankiw, Mankiw, ... got it.
posted by Phred182 at 10:34 AM on April 18, 2007

Oops, should've previewed.

For one thing, there are a lot of people in this country and all over the world suffering in poverty, and it would be nice if we had some more money and goods that we could give or trade with them to raise their standards of living.

I'm really sorry, but I have to call bullshit on this. There are metric oodles of money floating around already, held mostly by people who did little to no work for it. The problem is one of distribution, not production.
posted by poweredbybeard at 10:35 AM on April 18, 2007

Bluefrog, no offense, but you really need to change your reading habits. The blog you were reading is essentially making the argument that the economy doesn't need to have a stable money supply or investment -- the government should hyperinflate the dollar to pay off all of it's debts and leave the people that loaned money to the government by purchasing savings and other government-issued bonds -- 36% of the debt is held by taxpayers, btw -- holding a bag full of worthless paper and empty promises. Then the government should switch to the islamic banking system, which eliminates risk-free interest and ignores that economies expand and contract -- because that's working really well for them.

The current economy needs to grow to avoid inflation. The more the economy grows, the less the buying power of the dollar decreases. That's really what interest is -- it's compensation for the value of the dollar that you [put in that bank, loaned to the government, invested in a company] decreasing.

When the value of the dollar drops drastically, such as during an economic recession or by the government that maintains that currency issuing more money, you get into hyperinflation. One of the symptoms of hyperinflation is that the value of the dollar drops so quickly that interest rates, salary increases, etc. can't keep up with the plummeting value -- so your buying power drops, and suddenly you're struggling to make ends meet and purchase food. Last week a loaf of bread cost $10, this week it costs $100 and your pay increase was only $50/hour...

That's what this guy's avocating that the government do. He's a whackjob.
posted by SpecialK at 10:39 AM on April 18, 2007

The most obvious is population growth and retirees living well into old age. Without growth you wont be able to generate new jobs for your increasing population or pay social services for retired people.
posted by damn dirty ape at 10:45 AM on April 18, 2007

damn dirty ape hits the core issue. Economies MUST grow, because populations do.

If you were able to get to zero population growth, in theory you could support a zero-growth economy as well. In practice it would never be that exact; some years it would be up, some years down, but overall it could center on about zero if there are no additional consumers being added to the equation.

It probably wouldn't HAPPEN, but it's at least theoretically possible.
posted by Malor at 11:03 AM on April 18, 2007

damn dirty ape: The OP asked about growth of per capita GDP, so population growth is not a factor.

The short answer to the broadest possible interpretation of the question is probably that people want more and better stuff. People want to feel better off than their ancestors. A higher GDP per capita means people can buy more things and better things. Sometimes this isn't an ecological problem, e.g. if I buy more and better software, but buying more things is where those ecological problems come in, e.g. if I buy a second home.

The OP's question may also mean something along the lines of why does the US economy need to keep expanding at this point in time, which is the question that SpecialK and grateful are addressing. The answer to that question is more complicated and involved debt, trade, etc.
posted by ssg at 11:09 AM on April 18, 2007

Economies MUST grow, because populations do.

Though what people usually neglect to mention is that populations are, more often than not, growing most quickly where poverty - the net result of the growth economy - is the highest.
posted by poweredbybeard at 11:16 AM on April 18, 2007

See Brad DeLong's review of Benjamin Friedman's The Moral Consequences of Economic Growth. DeLong emphasizes the effects of economic stagnation or decline on political stability.

[Friedman] makes a powerful argument that—politically and sociologically—modern society is a bicycle, with economic growth being the forward momentum that keeps the wheels spinning. As long as the wheels of a bicycle are spinning rapidly, it is a very stable vehicle indeed. But, he argues, when the wheels stop—even as the result of economic stagnation, rather than a downturn or a depression—political democracy, individual liberty, and social tolerance are then greatly at risk even in countries where the absolute level of material prosperity remains high.

Consider just one of his examples—a calculation he picks up from his colleague Alberto Alesina, Ropes professor of political economy, and others: in an average country in the late twentieth century, real per capita income is falling by 1.4 percent in the year in which a military coup occurs; it is rising by 1.4 percent in the year in which there is a legitimate constitutional transfer of political power; and it is rising by 2.7 percent in the year in which no major transfer of political power takes place. If you want all kinds of non-economic good things, Friedman says—like openness of opportunity, tolerance, economic and social mobility, fairness, and democracy—rapid economic growth makes it much, much easier to get them; and economic stagnation makes getting and maintaining them nearly impossible.

That said, preindustrial societies like China were able to maintain political stability with little or no economic growth per capita. See DeLong's review of Ken Pomeranz, The Great Divergence: ... what growth there is follows a labor-intensive, resource-economizing logic that--as it did in the nineteenth century Yangzi delta--boosts elite consumption but not mass standards of living.
posted by russilwvong at 11:17 AM on April 18, 2007

Not right, Malor. Not only would you have to have ZPG, but those people and their corporate enterprises would also have to show no desire to accumulate wealth. They'd have to be content with income=expenditures over their entire lifespan. They could start no new business ventures. Then your idea might work.

This thread is predictably degenerating into nitpicks over details and features of competing macroeconomic theories. I hope the O.P. has the sense to bail out and buy a textbook.
posted by ikkyu2 at 11:20 AM on April 18, 2007

ikkyu2: "You have essentially asked the question, "Please summarize a theory of macroeconomics," as posters to AskMe do from time to time.

I predict you're not going to get a decent answer here. The kind of format that is appropriate for an answer to this question is a textbook, not a free-entry comment field."

Couldn't agree more.

Get thee to a basic macro textbook. Mankiw's is great.
posted by Aloysius Bear at 11:21 AM on April 18, 2007

The kind of format that is appropriate for an answer to this question is a textbook, not a free-entry comment field.

I guess I feel that it should generally be possible to posit relatively succinct answers to succinct questions. If not, the question that's being asked probably isn't as succinct as it appears.

So, if the answer is going to be "go read a macroeconomics textbook," this implies (IMO) that the OP's original question either doesn't make sense or really requires a macroeconomic textbook to properly unpacked and understood.

But if the latter case is true, then one wouldn't expect measures like GDP and phrases like "economic growth" to have the widespread cultural currency that they do. Unless they mean something different in general than they do in academic economics (in which case the macroeconomics textbook is in part a grammatical primer on the proper use of these words/measures/phrases in a specialized setting).

So, inasmuch as a non-specialized use of the terms has validity, I still maintain that it all comes down to competition between nations (wealth as a form of power).
posted by treepour at 11:53 AM on April 18, 2007

I think that's a good question, and one that won't necessarily be answered by an economics textbook: they tend to concentrate on the how rather than the why.

Firstly, I think we have to be clear on what is meant by economic growth. It's not simply a growth in the amount of money, but of the goods and services in the system: more stuff is produced, more services are performed. This is just measured in money.

Secondly, it's important to remember that it's a slow exponential process. Like compound interest, the growth grows upon itself, each years extra wealth feeding into the next. Say the economy grows at a modest 3% per year, adjusted for inflation. Over a single year, that's very little. But over 25 years, that means everyone collectively is 2.09 times as wealthy as they were. Over 40 years, that means everyone's 3.25 times as wealthy as they were.

Now some people are saying you don't need growth because you can make poorer people's condition better just by redistribution. But it should be clear from the numbers that over a long period, redistribution cannot be nearly as powerful, since you're producing far more wealth than originally existed. Also, redistribution is not necessarily incompatible with growth: you can grow the economy some and still redistribute it.

So why should we seek it?

1. Other people want it. It means more stuff, and people want more stuff. You may not want that yourself, but material gain is a very popular goal for a awful lot of people. Why deny them what they want?

2. Happiness. Some disagree, but Johan Norberg for instance has put together compelling evidence that people are happier in a growing economy. Even if people get bored with the stuff they've already accumulated, steady growth means that they can keep accumulating more.

3. Alleviating poverty. The exponential nature of growth makes it a vastly more powerful means of alleviating poverty than redistribution of a fixed amount of wealth.

4. National security. Richer nations have a military advantage over poorer nations: they can afford more and better military technology. If your nation's economy doesn't grow and other nations' do, then yours is at a disadvantage.

5. Employment. The goods and services need people to make and provide them. This means more jobs for people to do.

Overall then, I don't think economic growth is an absolute necessity. However, it's very useful in a number of ways.
posted by TheophileEscargot at 12:36 PM on April 18, 2007

I second what a lot of people have written that the economy needs to grow to keep up with a growing population, and I also agree that that blog you linked to is total crap.

However, the economy doesn't have to grow. We can all live like cavemen provided enough of us die off to maintain a relatively constant population size.

The economy, the world economy, needs to grow because the population is growing, but the planet isn't. Resources are scarce, and more people are competing for the same or a slowing growing amount. Everyone needs to eat, and also have heat, shelter, electricity, healthcare, water, etc. As resource competition increases, techonolgy is used to extend those same amount of resources to more people.

Pesticides and fertilizers mean more food per unit of land than without them. But someone has to make the pesticides and fertilizers, and resources are consumed to produce them. That creates a need for a greater diversity of scarce resources, for each of which technology driven productivity can be used to increase output efficiency.

The "grow" part is that our needs grow. 20 years ago, healthcare didn't include routine quadruple bypasses and heart transplants. It does now. More strain on resources. There was no internet 20 years ago, more strain on resources. This could get very philosophical, so do what has been suggested and get a decent macro book.

Here's a decent, free start - Economics in One Lesson, by Hazlitt.
posted by Pastabagel at 1:02 PM on April 18, 2007

Resources are scarce

(Resources < everyone's desire for a plasma screen tv) !=(Resources need)br>
Every single other species has somehow managed to avoid this "scarcity" problem for the entirety of Earth's history. I know they haven't tended to do it in the way we would lke, but we're pretty damn clever, we can probably figure something out. And either way, the scarcity myth is really dangerous.

I mean, if you presume the right for the obscenely wealthy to live as they do, the necessity of privileging single-occupant motorists over decent public transit, and a whole host of other choices which are incorrectly painted as natural givens, then, sure, resources are scarce. And we'll die. And we'll deserve it.

Sorry. They call it the dismal science for a reason.
posted by poweredbybeard at 1:48 PM on April 18, 2007

Hm. The second "greater than" sign got munged. I'm sure you get the gist.
posted by poweredbybeard at 1:49 PM on April 18, 2007

An advantage of reading a macro textbook is that the author will understand, and be able to explain, what the word 'scarce' means in an economic context, unlike various commenters in this thread.
posted by Aloysius Bear at 1:53 PM on April 18, 2007

poweredbybeard: aniimals are limited by resources too. They way they avoid the scarcity problem? They don't... they die. They starve.
posted by Malor at 3:17 PM on April 18, 2007

I'm really sorry, but I have to call bullshit on this. There are metric oodles of money floating around already, held mostly by people who did little to no work for it. The problem is one of distribution, not production.

Well, no. The problem is that someone with 100x as much money as you does not consume 100x the resources. Warren Buffett famously stated that he eats hamburgers and drinks Cherry Coke two meals a day, and that the only thing he does better than you or I is travel by private jet. It's not like if you stripped the world's 1000 wealthiest people of their riches, people would stop going hungry. All you could really do is fire the people from the Louis Vuitton factory and force them to raise cattle. This argument is explained pretty well here.
posted by Kwantsar at 3:23 PM on April 18, 2007

Small is Still Beautiful
posted by Xurando at 4:31 PM on April 18, 2007

The problem is that someone with 100x as much money as you does not consume 100x the resources.

OK, point taken. Well said. But it still seems to me they have at least 100x the ability to dictate the flow of resources.

It's not like if you stripped the world's 1000 wealthiest people of their riches, people would stop going hungry.

No, but if you prevented them from making those riches by, say, buying up land in developing countries and turning what was once subsistence agriculture in to export-oriented monoculture, a lot of people probably would indeed stop going hungry.
posted by poweredbybeard at 6:09 PM on April 18, 2007

It's not like if you stripped the world's 1000 wealthiest people of their riches, people would stop going hungry. All you could really do is fire the people from the Louis Vuitton factory and force them to raise cattle. This argument is explained pretty well here.

Umm....according to the Sunday Times Rich List, the top 1000 richest people in the UK are worth £300 Billion. The top 400 in the US are worth $1.25 trillion.

Considering that Oxfam says that £50 billion per year would put every child in a school and save the lives of 500,000 women a year, I think it's fairly safe to say that redistributing almost $2 trillion dollars would put a lot of food in a lot of mouths.

That Jane Galt article you quote is an apologia for the rich - I mean really, Warren Buffet is a philanthrpoist because he keeps a few dozen peasants employed making Hermes bags. Give me a fucking break
posted by Jakey at 4:14 AM on April 19, 2007

Jakey-
Right on.

But it is an interesting question in the context of growth, though, yeah? Seems redistributing wealth on its own might not totally tackle that problem.

I'm all for it of course. :)
Just wonderin'.
posted by poweredbybeard at 7:04 AM on April 19, 2007

Jakey - The problem then becomes, once you've redistributed that $100 million (50 million pounds ~ $100 million), and the $100 milion after it, and the $100 million after it -- you've stripped the world's ability to make more $100 millions and concentrate it in a place that's easy to redistribute, specifically due to the ability of someone with a lot of money to concentrate it towards a certain goal that will be successful and will create 'actual wealth' in the form of a growing economy. (And don't pass the argument that the schooling and food handouts will do that -- you won't educate the elders of the children you're educating, which means that you will have to continue this for at least 50 to 100 years to expunge the previous cultural hangups -- the violence, the tribalism, the social superstition -- that caused the society to be a poor one for economic growth in the first place. Plus, we've already tried this. It's called the American Indian Reservation. Worked real well, didn't it?!)

And as we've already discussed above, a non-growing economy will tend to backslide unless there are other balancing forces in place... balancing forces that we haven't discovered yet.

So while redistribution is all noble and good in theory, it's not a sustainable practice, and it's not likely to meet your noble goals. But it's great to talk about when you're high on pot.
posted by SpecialK at 9:54 AM on April 19, 2007

SpecialK: The problem then becomes, once you've redistributed that $100 million (50 million pounds ~ $100 million)--

The Oxfam figure is $50 billion, actually, not £50 billion or £50 million.

you've stripped the world's ability to make more $100 millions--

Why? The rich countries produce about $30 trillion in goods and services each year (US GDP is $12 trillion, the EU's is $13 trillion, Japan's is $5 trillion). If $100 billion in goods and services is redistributed to the poor countries each year (which is roughly the amount of total foreign aid), that's only about 0.35% of the total production of the rich countries.

This isn't going to solve the problem of world poverty, but it can help with problems like public health.

Why isn't it possible to do redistribution on a larger scale?

1. We have effective national governments, so we can do large-scale income redistribution within countries--governments have the ability to levy taxes and spend money. But we don't have an effective world government which can levy taxes, and we're not likely to get one any time soon (or ever, IMHO).

2. In a world of independent national states, a country like India or Indonesia isn't going to accept a position of indefinite dependence on handouts from rich countries. It's not just a matter of pride, it's a matter of power--dependence on foreign aid means vulnerability to a cutoff of foreign aid. Hence a poor country with a functioning government that's able to pursue long-term goals will seek to end its dependence on foreign aid, most likely through economic growth.

3. Conversely, while taxpayers in rich countries are willing to fund a certain level of aid for development, in order to help people in poor countries help themselves, or for relief, in case of short-term disasters, they're unlikely to be willing to pay to feed and house people in poor countries indefinitely.
posted by russilwvong at 11:31 AM on April 19, 2007

you've stripped the world's ability to make more $100 millions and concentrate it in a place that's easy to redistribute, specifically due to the ability of someone with a lot of money to concentrate it towards a certain goal that will be successful and will create 'actual wealth' in the form of a growing economy.

1. Rich get rich
2. Trickle-down effectMagic
3. Poor get rich

So. How's that been working out so far?

Rich people can't be rich without poor people. Your money has value only to the extent that you have more of it than other people. The wealthy are wealthy because they like it, and they're not going to voluntarily do anything to even the scales.

Or, to put it another way...

all noble and good in theory, it's not a sustainable practice, and it's not likely to meet your noble goals. But it's great to talk about when you're high on pot.

Indeed.
posted by poweredbybeard at 11:51 AM on April 19, 2007

poweredbybeard - sure, the rant was a bit of a derail, but thanks for the backup :)

SpecialK - I'm not advocating just taking the money and handing it out - of course that's nothing more than a band-aid. But $2 trillion equates to a lot of infrastructure, education, land improvement etc. The real thrust of my point was to expose the nonsense trotted out during every discussion of wealth inequality, wherby the apologists of the rich try to make out that they don't have that much money. They do. And it's wrong.

In the context of economic growth, the point is that in theory, yeah it's great, you get more buck for your bang, so to speak. But as it's been practised in the US/UK economies of late, the net effect has been to polarise the wealth distribution. The Gini index of these countries has increased significantly in the last 25 years due to the application of the trickle-down theory.

As poweredbybeard pointed out, the only way to address this is by wealth redistribution, both within nations and between them. This happened to some extent in the UK during the publicly-spirited Victorian era, although I suspect that there was a large element of potlach in those public works. Nowadays, in the absence of such largesse, we need to be more active in our efforts to redistribute the wealth. Only then will the populace at large experience the benefits of economic growth.
posted by Jakey at 4:05 AM on April 20, 2007