Do we need economic growth in a modern economy?

A look at whether we actually need economic growth in a modern economy.

Readers Question: When I compare my life with my fathers at that time the conditions are near identical in the greater things or life. I work the same hours, maybe more. I have the same holidays. I have a similar standard of material comfort (a washing machine, a car, heating, a beer when I want one) although with a lot more ‘stuff’ in terms of gadgets (TVs computers etc). My father retired at 60. I’ll have to work to 67.

There is much emphasis put on growth in the economy yet over this period a *doubling* in the size of the economy has not given me (and the vast majority of people like me) any major advantages in terms of free time or choice of what to do with my life.

Accounts I read on economic growth don’t address my fundamental question about why we should have a growing economy when such major changes in GDP over the medium term seem to have little effect on real people’s lives.

Increasing efficiency in production should lead to a reduced demand for labour and more free time or greater unemployment but never does. We need fewer people on the land, fewer people in our factories and now fewer people to administer things or even work in shops. Where are new jobs coming from? Are they all ‘make weight’ jobs designed to justify distribution of wealth created by a small section of the populous?

Put simply, other than consumer confidence, why do we need to have more valuable transactions tomorrow than today? It is easy to see why growth is necessary in a developing economy where basic need aren’t met and growth means more food but why do we need it in a modern western economy?

Firstly, it is true that economic growth in a developing (poor) economy can go a long way to improving living standards. When people are living in absolute poverty, they experience a deprivation of basic human needs, such as food, shelter, education, basic health care. Economic growth can enable many of these basic needs to be met – and this economic growth can radically increase living standards amongst those countries.

However, as you point out, when real incomes are already quite high, economic growth can have a very marginal (or even negative) impact on living standards. There is a strong diminishing marginal utility to extra income.

Why then do we need economic growth?

1. Inevitability of growth from technological improvements. Economic growth is driven by technological improvements, which reduce the costs of production and enable more to be produced. (greater efficiency). This technological progress in many ways feels an inevitability. How could you stop this technological progress? Technological improvements have particularly improved the productivity of agriculture and manufacturing. This means we can support ourselves with a smaller % of the workforce on agriculture and manufacturing. Many of new jobs are in service sector. (e.g. people far more likely to eat out, go to a cafe – than 20 years ago. I remember when I was a kid, you just didn’t go out for a meal or get a takeaway every week. But, now it is quite common.

Economic growth has essentially occurred because of technological improvements. The industrial revolution was driven by steam technology. The twentieth century saw the internal combustion engine, assembly lines and greater efficiency from exploiting economies of scale. Post war, we have seen improved transport, computers and recently the internet. This has enabled greater output per person and increased real incomes.

 

More Leisure Time?

In theory, economic growth should enable people to work less and enjoy more leisure time. 100 years ago, economic growth definitely achieved this. Economic growth enabled a reduction in the average working week from over 70 hours plus, to a more standard 45 hours. The Victorian practise of sending 10 years olds down the mine for 70 hours a week was made unnecessary by improved productivity. In the post war period (about 1980s), this reduction in working hours was partially reversed. In some countries, working weeks actually started to rise. This could be

  • Because people actually enjoy working – they get bored with spare time on their hands.
  • With higher hourly rates, people find work more attractive
  • From the 1980s, society  has changed its preferences to maximising income rather than other objectives.

It also depends on the individual. After graduating from university, I chose a career path which maximised leisure time over working. In this sense I’m grateful for higher hourly wages because it means I can maintain my target income on fewer hours. But, many people may not have such a strong income effect (their target income may be much higher than mine) Also, not everyone is so fortunate to be able to choose how many hours a week they work. (BTW: I currently teach 6 hours a week @£23 an hour + additional internet income. 10 years ago, I taught 40 hours @ £12 an hour.

So economic growth can enable more free time, but people have to

  • a) be able to choose to work less
  • b) Be willing to work less.

Again, evidence suggests that from a low GDP per capita, economic growth can make a big impact on reducing weekly hours, but after a certain point of affluence, economic growth hasn’t led to much reduction in average hours worked (in some cases, economic growth has actually been followed by an increased working week.

Note on retirement

You mention, your father retired at 60, and you will have to work until 67. I don’t expect a state pension before I’m 70. But, that is mainly a reflection of increased life expectancy. The number of people who live to over 100 is increasing. If life expectancy increases 20%, it is not unreasonable if pension ages keep pace. At the turn of the twentieth century, the average number of years in retirement was very low. People simply couldn’t afford to retire.

But, again in theory economic growth would enable people to retire earlier, if they are able and willing.

2. Increased GDP offers the potential for higher living standards, but certainly doesn’t guarantee it. You could think of increased GDP as neutral because it ignores distribution and how it is used.

Increased Expectations

One feature of economic growth and rising incomes is that it creates additional expectations. For example, in 1947, we introduced national health service, but the amount of medical treatments was much more limited. New technologies (and perhaps marketing by medical firms) have created new (more expensive) treatments. One of the biggest sources of rising expenditure in western economies is health care. There are simply more things that can be treated. Also, there is the irony of having to treat diseases of affluence (such as obesity, heart attacks, cancer e.t.c)

In an ideal world, increased real incomes would also correspond with greater sense of personal responsibility and people looking to improve health. But, actually it hasn’t, health standards have often fallen. But, economic growth helps meet these increased expectations and possibilities.

In university education, very few went to university before the war. But, now the government have a target of 50% (a figure we’re struggling to finance – despite economic growth).

Practical Macro economic perspective

From a practical macro economic perspective, economic growth helps deal with a variety of macro-economic issues. It leads to higher tax revenues to fund higher public spending. Economic growth is one of the best hopes to deal with UK budget deficit. Also a positive and stable economic growth rate helps to reduce unemployment. If productivity is increasing 2% a year due to improved technology, a lower growth rate would start to cause unemployment.

 

Do We Really Need Economic Growth?

From one perspective, we don’t need economic growth. Economic growth will not solve the fundamental problems of human psychology / behaviour.

  • Growth will not alter the fact some will always feel much poorer than others. Many people base their well-being on the basis of comparing how they are doing to others. Economic growth can just increase this sense of inequality.
  • Growth will not reduce the incentives to cheat and steal.
  • Growth does not make people more charitable and good natured.

Furthermore, with environmental problems facing humanity, economic growth could exacerbate these issues and reduce living standards.

From one perspective GDP per capita of £20,000 a year is enough to enable happiness. Some of the most content people in the history of the world, got by on a lot less. Some saints have argued they were much happier when they forsook their wealth (e.g. Prince Siddhartha renouncing his kingdom to become an ascetic, attain nirvana and become the Lord Buddha)

Rather than worrying about increasing Real GDP, we could spend time promoting greater social harmony e.t.c.

But, on the other hand, these noble ideals of greater harmony, could just as easily be worked on through economic growth. Nor would negative economic growth overcome these universal human problems. Not many have been able to follow the Buddha’s path to nirvana through renunciation. But, here we start to veer away from economics.

 

Conclusion

Do we need economic growth? Well in one sense – not really. But, if managed well, it doesn’t have to do any harm, and gives the potential to make improvements in our material well-being. Needless to say, economic growth is far from the panacea to make society better. I tend to view it as a rather neutral component of human well-being.

There’s nothing wrong with targeting economic growth as long as you are aware of it’s limitations.

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5 Responses to Do we need economic growth in a modern economy?

  1. alan moon January 31, 2013 at 7:30 am #

    surely some growth is better than negative growth and experts can help the economy by avoiding recessions-which is our downfall.
    When the government struggles with the economy,there must be enough professers
    to assist in making the correct call,and helping the country cope.

  2. Pensive Lama February 7, 2013 at 5:10 pm #

    Tejvan neglects to consider an elemental factor in his answer: not necessarily in answering the question why we ‘need’ economic growth, but why we continue to ‘strive’ for it.

    Greed.

    A greater emphasis on growth that doesn’t cost anything might go a long way to put us on the path to fulfilment and happiness: for example spiritual (not religious necessarily) growth; well-being growth; leisure growth; etc. This demands a transformation in values.

  3. Susan Galea February 17, 2013 at 10:18 am #

    I’m not really understanding what happens without some economic growth. Even if all wealth is distributed evenly and fairly within some agreed ratio or none, we still have the problem of financing R &D for the growing population. If we don’t solve the latter the imperative for economic growth is surely assured? What drives technological advancement if we don’t have the means to produce it? We cannot surely just keep going back to finite resources for replenishment? I don’t understand, in other words, how progress is achieved without the wherewithal to pay for it and the world population…

  4. Maxamillian Shields April 20, 2013 at 12:12 am #

    Your three possible reasons for an increase in working weeks reflects the dream world that many of the more affluent in society live in!

    Because people get bored, they want to work to fill in their spare time? Are you serious? Productivity and corporate profits have risen significantly since the 70s, while wages have generally flatlined. Most people work 40+ hours a week because they have to in order to provide food and shelter for their families. Sure you may have the luxury of only having to work because you get bored, but I assure you this isn’t what it’s like for most people.

    Higher hourly wages make work more attractive? Again, there really is no evidence that wages have increased at the rate everything else has since the 70s. Sure for some people it has, but that just reflects the growing inequality in society.

    Since the 80s we have a preference for maximising income? Most people are just trying to make ends meet, let only maximise their income.

    The point I’m trying to make is that life is a struggle for MOST people in our developed economies, and technology and increased efficiency has not done a hell of lot to fix that over the last 40 years. No doubt there are a few that have enjoyed increased leisure time, but I would say at the expense of the masses.

    It all comes down to the redistribution of wealth. But it’s hard to put fairer policies into effect when the likes of yourself think there isn’t really a problem to begin with.

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