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It seems the most important factor when measuring how well a country is doing is its economic growth. When a countries growth is = 0%, it is seen as a disaster.

For a country with adequate living standards, why is it so important for its economy to continue growing? Could it not just stay at 0% indefinitely (or perhaps matched to its population growth) and everyone would still be happy?

One theory that I have heard is that it is purely because of the interest payments necessary on the countries debt. That is, the economy needs to grow just to keep up with its debt repayments. Is this really true?

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  • Ya. I'd migrate it back to 'em! :-)
    – Peter K.
    Jun 29, 2016 at 12:51
  • I'm not going to offer this as an answer but I suggest you treat this notion of growth with some healthy skepticism. The government is anxious to report that we are always growing, even if it is just 1%. However, real median household income has actually fallen since 2000 (fred.stlouisfed.org/series/MEHOINUSA672N). So ask yourself, what is really growing? The wealth of the wealthiest, who do not drive the same kind of demand that our shrinking middle class once did? Jun 29, 2016 at 17:17

5 Answers 5

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One of the best answers to this question that I've ever read is in a paper published by Robert Lucas in the Journal of Economic Perspectives. That journal is meant to a be a place for experts to write about their area of expertise (in economics) for a general but still technically-minded audience. They recently opened up the journal as free to the public, which is a fantastic resource -- you no longer need a subscription to JSTOR (or whatever) to read it.

You can read the abstract to the paper, and find a link to it, here. One of the things that I like a lot about this paper is that it strips out absolutely everything even slightly unnecessary to thinking about a macroeconomy, and just discusses what one can arrive at with a very very simple model. Of course, with great simplicity come sacrifice about details. However, it does a great job of answering your question, "why do people care about growth?"

A quick note: the key to understanding the answer to your question is to think about things in terms of "the long term" -- not even looking forward to the future, because we'll be dead by then, but looking back to the past. The key to the importance of growth is that, for the last ~200 years, the US has, on average, had maybe 2-3% "real growth" per year (I'm pulling these numbers out of my head; I think much better numbers are in that paper somewhere). On average, over that period of time, this growth has meant that the quality of life that one has, if one lives in a country experiencing this growth, is enormous compared to countries that do not experience this average growth over that period.

Statistically speaking, growth is also somewhat auto-correlated. Roughly speaking, if it was low the last few periods, you can expect it to be low the next period. Same thing if it's high.

Then, the reason we care about growth right now: if you have too many periods of low growth, pretty soon the average "over the long term" growth will be pulled down -- and then quality of life can't be higher in the future (which quickly becomes someone's "present").

The paper above makes this point with a very simple model.

Of course, none of this touches on distributional issues, which are another issue entirely.

With respect to, "The economy needs to grow to just keep up with its debt repayments," I think the answer is along the lines of, "sometimes countries get into debt expecting that growth will increase their resources in the future, and thus they can pay back their debt." That strategy is, of course, the strategy that anyone borrowing ("taking out a loan") should be employing -- you should expect that your future income will be enough to pay back your interest+principle on a loan you took. Otherwise you're irresponsible. At the aggregate level, production is the nation's "income" -- it is what you have, all that you have (as a nation) to pay back any debt you've incurred at the national level.

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If you have an increasing population but a steady supply of wealth then there will be a perceived effect of decline. As the average person can afford less and less. If inflation is factored in this effect is accelerated as the value of money is reduced but the availability of that money is as well. In this model those who have tend to accumulate as they produce. And those who do not have tend to lose wealth as they consume to fill basic needs, at ever increasing prices, with a declining source of income, exacerbating the effect.

If you control your population, prevent inflation and deflation, and maintain a constant production/consumption cycle that is perfectly in balance then you could have that utopian society. But in practice there is waste. That waste makes maintaining that balance impractical at best. People have different desires and motivations. So while that utopian society that you propose seems possible at the theoretical level when solely looking at the mechanics and economics, in practice it becomes more about managing the people. Which makes the task virtually impossible.

As for the debt issue that is the strategy of many of the western nations. Most of them experienced growth over the last 50 years that was unprecedented in history. Many of them simply assumed it would continue indefinitely and failed to plan for a downturn. In addition they planned for the growth and borrowed based on the assumptions. When the growth slowed several continued to use the same projections for their budgeting, with the effect of spending money they would not take in. So in a way, yes the growth is needed to service the continued growth of debt, unless the government issuing that debt is willing to reduce its expenses.

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  • Think about a country that can produce, in an absolute sense, one unit of food for each unit of land. Say, fruit growing on trees, and there is nothing else. No more cultivation of the land is possible (since that would be technological/economic growth). Assume you have 50 units of land, and you start out with 25 units of people; each person eats one fruit to stay alive, more to be happy. Every period a new person is born. At first each person has two units of fruit and is happy. 26 periods later everyone has one, and someone starves. As the population increases this only gets worse.
    – Nate
    Dec 1, 2011 at 20:24
  • The only way to feed a starving population after 26 periods is to figure out how to get more fruit. Maybe learn to plow, plan crops -- or hunt. But, then, you've increased production. Economic growth!
    – Nate
    Dec 1, 2011 at 20:27
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Wealth is not distributed equally in any economy. And, even if it were, differentiation between people would lead to different interests being expressed in different ways.

As people either attempt to earn more (to improve their situation) or different people express those interests in different ways (saving money to go on a skiing holiday, or to put a downpayment on a house) people invite new products and services to be created to satisfy those demands.

In addition, there is the problem of uncertainty. People save money today to cope with uncertainty tomorrow (healthcare, pensions, education, etc.). Those savings don't remain idle, but are lent to others who believe that they can make a return through investing in new businesses or ideas.

The point being that any dynamic economy will experience change in the amount of goods available to the people within that economy.

From an economic perspective "growth" is just another permutation. From a political perspective, "growth" implies that people are getting wealthier. If that growth is asymmetrically distributed (e.g. the poor don't experience it and the middle classes don't feel they get enough of it) then that is a problem for politicians.

The emerging markets of the world are trying to raise millions of people out of poverty. Growth is a way of measuring how quickly they are achieving that end.

Growth, in and of itself, is meaningless. There are some people who believe that "we" (as some proxy of society) have enough stuff and growth is unnecessary but that implies that everyone is satisfied. For as long as some people wish to have more wealth/stuff, and have the means to achieve this, there will be growth.

And for as long as there is uncertainty growth will vary.

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  • So you are saying it is largely human nature to always want more that is a primary driver? Makes sense. Dec 2, 2011 at 11:11
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There is an economic principle called "non-satiation," which translated into plain English means "people always want more." (This was best illustrated in the movie, Oliver Twist, "Please sir, can I have MORE?") Over time, most people won't be satisfied with "things as they are." Which is why growth is so important.

Many behavioral economists would argue that it is not the LEVEL of utility, but rather the utility CHANGES (in calculus, "deltas" or "derivatives") that make people happy. Or not.

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  • Are you saying that behavioral economists have a concept of "happiness" that differs from utility proper? I've not heard of that (unless you are getting prospect theory a bit mixed up). Do you have a source for that claim? (that would really mess up the welfare theorems methinks).
    – Jason B
    Nov 30, 2011 at 17:25
  • @Tom Interesting point regarding "changes", but references would be highly welcome.
    – amit kumar
    Dec 3, 2011 at 6:50
  • @phaedrus: Here is a link to "non-satiation." en.wikipedia.org/wiki/Local_nonsatiation
    – Tom Au
    Jan 10, 2012 at 17:14
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  1. The population of most countries is growing. If the economy grows 2% but the population grows 4%, people are getting poorer. This isn't good.
  2. In excess of population growth, a 1% real growth rate means that in a lifetime - 70someodd years - economic output per capita will double. There will be twice as much stuff to go around - and if you think "stuff" and go "oh, materialism, who needs it", know that it's not just all microwaves and iPods: there's a lot of good stuff like health care, college educations, national parks, vacations, arts and music, cathedrals, energy-efficient homes and other measures dedicated toward Saving The Environment... whatever floats your boat.
    • While there is some utilitarian concern about whether income gains go to one part of society or another, it is possible that measures taken in the name of a more equitable society can be taken to the point that not only does overall growth suffer, but everyone suffers. Incentives to save and invest in economic growth may be damaged, and inefficient redistribution bureaucracies may further siphon off money, turning it into useless desk jobs (at best) or outright corruption (at worst) instead of economic output. Exactly where that point is can be contentious. Actually, that such a point exists is more-contentious-than-it-should-be... a number of facile treatments of economics promoting redistribution happily suggest it doesn't exist at all.
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  • Here in Hungary, the population slowly decreases. The economy grows, but people are getting poorer...
    – Calmarius
    Jul 23, 2013 at 10:06

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