The principle of economic growth has become quite controversial in recent years. While many economists perceived the necessity of growth almost as a dogma, critics have become increasingly numerous. Since the global economies are continuously overexploiting natural and non-renewable resources, the idea of unlimited economic growth seems to be doomed to fail at this point.
Before getting into more detail here, we need to define from what perspective we are looking at the issue. Since we want to explore overall economic growth (i.e. on a global scale), we will use a macroeconomic approach. However, please note that the issue of growth is at least equally important for firms on a microeconomic level (don't worry, we will look into that later). For the following paragraphs, we will define growth as the changes in overall real output (real GDP) of the entire economy over time.
So if we look at the issue, the most basic question is: Do we really need economic growth? To answer this right away: Yes, we do.
Now, let me explain. The conclusion above is mainly based on the following aspects.
1) "More is always better"
As we have discussed in an earlier post, peoples wants are essentially unlimited. They generally want to get as many resources as they can. This may not seem like a convincing aspect as it stands, but it builds the foundation for the upcoming arguments.
2) Standard of living
The economy needs to grow because population grows. If the economy grows at a slower rate than the population, the standard of living will decrease. To illustrate this you can think of wealth as a cake. If more and more people share this cake but the cake itself does not grow, everybody gets a smaller piece.
3) Distribution of wealth
Wealth is distributed amongst the population in a certain way. Some people have more of it and others have less. This is inevitable for the most part, but we should still try and shorten the gap between the rich and the poor. However since the rich generally will not want to give up part of their wealth, redistributing the cake will be easier if we can simply give a greater share of additional pieces to the poor (rather than taking existing pieces from the rich). Thus we need a bigger cake.
4) Technological Development
Last but not least, economic growth also correlates to investment and technological development. More efficient production and new technologies enable new growth opportunities. Furthermore, when looking at the overexploitation of non-renewable resources, new technologies can help improve the situation and lessen the impact of economic activities on natural resources. A good example of this are electric cars, they open up new business opportunities while lowering CO2 emissions of traffic.
It is important to note that this line of argumentation does not mean economic growth should be pursued at all cost. There are many other variables, that need to be taken into account. For instance, wealth and GDP do not necessarily reflect a populations well-being (see also Limitations of GDP as an Indicator of Welfare) and increased economic activity still often has a negative impact on the environment. We will cover some of these aspects in later posts.
In a nutshell:
Economic growth is necessary in our economic system because people generally want more wealth and a better standard of living. Furthermore it is easier to redistribute wealth and advance new technologies while an economy is growing. We must however be aware that after all economic growth is a means to an end and not an end in itself.
Labels: Distribution of Wealth, Economic Growth, Macroeconomics, More is better, Standard of Living, Technological Development