Economic growth is good, right? And economic contraction is bad. Okay, we’ve reached the limits of my understanding of economics.
This seems to assume that endless growth is possible. Is it, or is there logically a point beyond which growth cannot occur? If so, is that point so far off that, like the extinction of the sun, there’s no point in worrying about it yet, or is it just something that it’s convenient to ignore?
Great question. No one knows. Everyone had gotten quite comfortable with the reality of never-ending growth of national economies and business profits alike. But recent events have shaken many people’s confidence, and we may be facing up to a reality where endless growth is not, in fact, possible, and we may have to learn how to switch to a “sustainable” model.
My WAG is that economic growth is good and possible only for as long as the population keeps growing. If the population levels off or declines, there’s no more room for economic growth.
Also: Economic growth is good, but it has better not be too much or too fast.
We humans are smart. We’re inventing stuff all the time that makes us more productive. The result is economic growth.
If we do not have economic growth above population growth, there must be some force or situation in our society which represses our usual inventiveness. A lack of resources can be such - but we usually figure out a way around the limitations after a while.
I suspect that endless growth is possible. Even with limitations on population and resources, you could imagine a Matrix-like scenario where people are nothing but brains plugged into a very fancy Internet, exchanging money for virtual services and virtual products.
Even with a shrinking population, growth is still possible. Once upon a time, a family shared a single tooth brush. Now, each person has their own, and we replace them every couple of months. There are similar trends with TVs, cars, houses, etc. (both in terms of size and quantity owned). These are all physical products and so there are limits on the available resources to produce them, but if you switch to virtual products that consume no resources, then you open the door for mass consumption that never really ends.
Of course, just because it is possible doesn’t mean that endless growth is actually going to happen.
Note that growth is growth in capacity, not production.
Okay, you’ve exceeded my understanding. Capacity for what?
We currently have two drivers of economic growth: population increase, and technological/social innovations (I actually think the social innovations are more important). The former isn’t sustainable; the latter, at least theoretically, is. So we should expect to see some kind of leveling off–when and how much, nobody knows. It’s pretty much a certainty that worldwide standards of living won’t ever again show the dramatic increases of the 19th and 20th centuries. That could be seen as a good thing, in that the human condition was so wretched for the vast majority of the population back then, and it only really sucks for, say, 3 billion or so people now. Hey, it’s an improvement.
This would be true only if everyone was completely satisfied with their living situation. Even if the population stayed constant, people would still get hungry, or injured, or old, or bored, or horny, and there will additional economic activity involved in creating a situation where those things happen less often. To make a world where zero economic growth will occur, you need to create a world free from want, and given human nature that is unlikely to happen any time soon.
An article on the thermodynamic limits on economic growth was making the rounds about a year ago. The argument of the article is that energy use can’t increase beyond a certain amount without raising Earth’s temperature (this is independent of the greenhouse effect, BTW), and the GDP can’t increase arbitrarily relative to the amount of energy consumed. At current rates, we’ll hit the first limit within a few centuries; the second limit is a little more amorphous, but still seems to argue that GDP can’t grow indefinitely beyond when we hit the first limit.
There’s growth as in - more people.
There’s growth as in - we are all getting richer (or… most of us).
There’s growth as in - something newer or better is available. (Wow! I can have a computer in my home now! It is possible to record TV shows and watch them later!)
Then there are “consumables” - food, entertainment, travel; you watch a movie even if you watched one last week, just like you plan to eat again today.
You can imagine a steady-state economics where there is no inflation, where we essentially are in a replacement economy. New devices, new tech roll out as replacements when the old is on its last legs because nothing is new.
However, technology changes all this - when airliners became commonplace, long distance vacations did too. Automobiles made the suburbs livable for people who worked downtown. Etc. We are seeing the birth of tech services we pay for on the internet - Netflix, Hulu, VoIP phones, photo print services; not to mention free ones like news, facebook, etc.
If we had a steady state, then any new tech or service - cell phones, the internet, air conditioning, pizza delivery - has to take money from somewhere else. We manage this today because of growth and technology. Food is cheaper thanks to automation and chemicals; so our disposable income can go to other things. Telephones are cheaper (over all) because tech means we don’t need a massive workforce to run the phone company, place long distance calls, etc. We junk or destroy obsolete items - cars, TV’s, houses, etc. - because better comes along, even if they still function.
Another part of the probelm is that “steady state” can’t be. Oil is running out. Apparently fracking has bought us a generation or so. Some other resources will be harder to find too. The current tech cannot be sustainable if Africa and Asia join the party; we don’t have enough gasoline or electricity for 8 billion people to live middle-class and drive an hour to and from work in air-conditioned buildings.
So we are in a state of change. Whether you call this growth or shuffling the deck chairs, everything is changing. The only thing that really justifies calling it growth is the population increase.
Even that will be put to the test. We already hear of some places where schools close due to fewer students in the area. As the demographic shift becomes more real, the opportunities for any company to expand will be fewer. The USA has protected itself from this by boosting its population with immigration, some of it legal. As the rest of the world catches up economically, this becomes less attractive.
The biggest advantage of a decent amount of “growth” is that it lubricates economic change. For example, wages are “sticky”. Toss in a little inflation, and you can make it look like wages are going up, even when they are just staying the same. It’s easier to not give a raise than to cut someone’s wage.
When I took Econ the professor started by saying it was about scarcity, which is the gap between needs/wants and the ability of people to satisfy those needs/wants. Population growth clearly increases the total needs of the larger population. Technology and production capacity by themselves do not, unless the match needs and help to satisfy them. So as leahcim said, there is room for growth until all needs are satisfied. But that will never happen.
Growth can be higher in poorer countries because the gap is bigger. Can be - not necessarily is, of course.
I think I’m almost understanding here, but I’m missing something. Growth, to me, is the measure of the change in the gap between needs / wants and goods / services satisfying them. You seem to be suggesting that growth is just the continued existence of such a gap, not the rate at which the gap is growing or shrinking. So, if I’m reading you right, even if we’re satisfying 99% of our needs and wants, the economy is growing, and since it can never hit 100%, it can grow forever.
I think you’ve basically got it, but I’d add one more thought in there. While needs may be finite (a certain amount of food, a certain amount of housing, etc.) wants are essentially unlimited. Look at the number of people today who classify cell phones as a “need” when they were considered a luxury good just 30 years ago, and phones were nonexistent even 100 years ago. And we might say that a person “needs” 200 square feet of living space, but who wouldn’t like to have 500? or 5,000?
Since everyone’s wants are virtually unlimited, there is no real limit on potential consumption. The limit is whether we can provide a product at a price people are willing/able to pay.
I think that a steady-state economy would be very functional except that human nature will be very unhappy with it. Even if all his needs are met, a person is simply not going to be happy if he doesn’t have more today than he had yesterday. The drive to have more is perhaps even more fundamental than the drive to have sex. You can’t teach it out of us; you probably can’t even breed it out of us.
You might have to take into consideration the difference between real and nominal growth if you use GDP as the benchmark since the federal reserve has made it clear that it has to target an inflation rate of 1-2% to keep that rate stable.
It can’t go lower due to structural inefficiencies in the economy apparently. I’m not sure I remember what that means but I think it has to do with certain effects becoming difficult to control when you dip below that and deflation becoming a significant danger.
So from the point of view of nominal GDP, that is guaranteed to grow regardless just based on fed policy.
Yes, endless economic growth is possible.
Consider cars. There are limits to how many cars the earth can produce (though those limits are really high, since if metal becomes rare, we can use plastic or even ceramics). But the quality of a car can be increased endlessly. I’m not just talking about speed. Imagine cars with better stereos, smoother rides, etc.
Economic growth doesn’t just encompass the weight or volume of stuff. It also reflects technological improvement. So it doesn’t have any limits. The point is not pedantic: the most interesting parts of long run economic growth concern technological change, not bigger factories or higher numbers of workers.
That aside, there are interesting questions regarding the proper measurement of economic growth. And not all enhancements to human welfare are reflected in GDP numbers (the in-practice measure of economic growth).
I’m not sure about this analogy. Once you’ve used up the metal, plastic, and ceramics, how can you increase the quality? You might be able to imagine it, but you couldn’t realize it.
I guess where I get stuck is that if I think the root of our economy is the exchange of {goods + services + entertainment / ideas}, there’s still a finite amount of time any human being has to spend creating and exchanging. In other words, if there’s any tie to human beings, there must be some notional limit of productivity. No?
Presumably, the physical material does not actually vanish from the material plane. We can rearrange the material to our hearts’ contentment, in ways which are ever-safer, better looking, more comfy, etc.
No.
Productivity is no more than the amount of wealth being generated per worker in aggregate - whether that worker is a mad scientist, a ditch digger, a banker, or even a politician*. Doesn’t matter if that guy’s dozing at a control panel occasionally glancing to see what his army of miner-bots are doing. Technology, culture, new businesses and ideas - these all act as multipliers on the time and labor we put into the economy. There is no hypothetical upper limit on productivity because its value depends on the value we give it - if we all wanted tulips, and our vast galaxy-spanning empire thought them worthwhile enough, then tulips from the best growers could be worth entire stars or planets.
You are still partly correct in that at any given point in time, we are limited by out current resources and knowledge. But there’s no upper limit beyond the laws of the universe itself.
*In economic terms, politicians and bureaucrats can potentially have negative value. In theory, politics and government act as multipliers to productivity. In practice, well, we all have our own opinions about how much administration is too much.
Economic productivity has three basic components:
(1) Specialization.
(2) Technology and skills.
(3) Willingness to work more.
The first is still the most important, by the way, and all human history we’ve seen tendencies to increase it. People do jobs more and more specialized compared to their ancestors. There are now, for instance, virtually no subsistence farmers left in the entire world. A century ago, that was the predominant form of labor among all but a handful of western nations. Two centuries ago, it as the dominant labor everywhere.
We already covered technology in brief.
But the third is an odd duck, because it’s actually a negative modifier to productivity. In shirt, all business and labor is conducted at the margin - a shorthand for saying we do the most critical work first, then the less worthwhile, then the stuff which is useful but not important, and then the trivial stuff. So the more you’re willing to work (and get paid, etc.) Americans have very high productivity individually, but usually come out below nations where people work less, because if you only have 30 hours to work in a week you do the more useful stuff, whereas if you have 50 hours of work you can fit in less important stuff. Your total value will be greater in the second instance than the first, however.
Just a small point. There are at least 1 billion human beings who still rely on subsistence agriculture. Rather than list their geography it’s easier to say where they do not live - the USA and Europe. Indeed look across the border at Mexico.
All I’m saying is in the First World we tend to forget the billions for whom an armchair discussion of economics is incomprehensible. They are focused on how to eat tomorrow.