More Money, More Problems

GROWTH. It’s something we like to hear when it comes to our retirement account or our business interests. We also like to hear it when it comes to personal growth and getting to read the newest Grow Weekly article, but that’s a bit off-topic for now. Economic growth usually signifies more jobs, higher salaries, and generally an overall better standard of living. If the economy isn’t growing, then we may even run into political and social strife… but what are the potential costs of an ever-growing economy, if any? This week, we’ll take a crack at examining some costs and benefits to economic growth, and we’ll explore an economic idea that may serve as an alternative. 

The Complexity of Economic Growth

It shouldn’t take too much convincing to understand that the world economy has grown significantly over time (based on current metrics), especially during recent history. One way to get a handle on the economy is to take a look at the stock market, although this is perhaps a better measure of our collective confidence in the economy.

Growth in the stock market of various countries over recent history.

Growth in the stock market of various countries over recent history.

Another way that we measure the economy is by looking at Gross Domestic Product (GDP), which includes the total consumption, investment, government expenditure, and net exports by a single country during one year. It is often also explained as the total value of goods produced and services provided in a country during one year. Consequently, average GDP around the world has also risen rather steadily over recent history. 

These are by no means perfect indicators of the state of the economy, but they seem to do a decent job of simplifying things. Seen in each of these indicators is the continuous trend of economic growth over time, as mentioned before.  What are the benefits and costs to this economic growth, though, and what other factors play a role? Let’s take a look at a few topics to see how economic growth ties in. Note that for the rest of this article, we’ll stick to using GDP as opposed to the stock market to measure economic health.

Standard of Living

To start, the human population is still growing (for now). While that is the case, more goods and services are generally needed to provide the same standard of living to more people.

picture1.jpg

We can address this added dimension of population growth by further refining our GDP metric to GDP per capita, where you simply take the GDP of a country and divide it by the population. GDP per capita basically assumes the total wealth of a country is evenly distributed among all people in that country. Using this more refined metric of GDP per capita for examining an economy, we can take a closer look at what happens to the standard of living when we have economic growth. 

One way that standard of living can be measured for a country is the Historical Index of Human Development (HIHD)... excluding GDP, which is usually incorporated into the HIHD. This HIHD metric relies on life expectancy, literacy rates, and educational enrollment in any given country to determine the “standard of living”. Comparing GDP per capita to the HIHD (excluding GDP), there is a positive correlation between more economic output - higher GDP per capita - and higher standard of living - higher HIHD (excluding GDP). 

The point of this comparison is to show that there appears to be evidence that economic growth may lead to higher standards of living for each person. Not a bad thing, right? 

Well, it should be said that just as GDP is not a perfect indicator of an economy, HIHD may not be a great indicator of “standard of living”. For example, how do you measure happiness? Does life expectancy truly capture the quality of life during those lived years? Well, that’s where things get subjective. We can also consider that this is a correlation, so we can’t assume that economic growth causes higher standards of living. 

GDP per capita, as a measure of an economy, has also been criticized for its sometimes misplaced use as a measure of a country’s standard of living. While we have seen that higher GDP per capita generally means higher standard of living, there are certainly negative contributions to a higher GDP per capita. For example, sales of cigarettes contribute to GDP, even though smoking is shown to shorten life expectancy. Additionally, the distribution of money is not captured within GDP per capita (which assumes everyone has an equal share). You could have a growing GDP per capita if only a few already-wealthy people in society accumulate even more wealth, which results in minimal to no increase in overall standard of living for everyone. 

Certainly complex issues to contend with in the realm of economic growth and standard of living, but it’s time to push on to the next topic. 

Technological Development

Just as a growing economy correlates with increased standard of living, growing economies have also been correlated with an increase in technological development. This also seems to make sense theoretically. More money and resources = increased investment in new technologies and processes = technological breakthroughs and greater efficiency. New technologies also sometimes open up new industries with their own set of goods and services that contribute to GDP and economic growth. An easy example here might be seen with Elon Musk, who made a bunch of money developing new softwares (including PayPal) only to then invest it in developing technologies such as electric cars with Tesla and spacecraft/rockets with SpaceX. 

Technological development can certainly be a good thing. Medical technologies and medicines have enabled us to treat previously fatal injuries and diseases. Development of communications technologies such as the internet enabled sharing of information and collaboration that have enabled business and research partnerships to keep the reinforcing cycle of technological development and economic growth going strong. Technological development has some downsides, though, which leads to our next topic. 

Environment

The relationship between economic growth and the environment is not as straightforward as the one with technological development. On one side, economic growth can be detrimental to the environment. An increase in resource usage and production can improve GDP, but the resulting demand for greater resource extraction (e.g., mining for metals, pumping oil, harvesting plants, etc) can result in harm to wildlife and ecosystems. The increase in production also usually leads to greater releases of pollutants to the environment as more waste and emissions are generated. 

As GDP per capita rose over the past few decades, so did the concentration of particulate matter (PM) in the air, which isn’t the best for our lungs.

As GDP per capita rose over the past few decades, so did the concentration of particulate matter (PM) in the air, which isn’t the best for our lungs.

Additionally, certain environmental disasters such as the Deepwater Horizon BP oil spill in the Gulf of Mexico have even increased the GDP due to all of the cleanup activities involved... but I’m sure that’s not a way we would WANT to grow the economy.

On the other hand, economic growth can have a positive impact on the environment at times. For example, “green” technologies such as hybrid vehicles or pollution control equipment (such as particulate filters) may bring about economic growth while also lessening our impact on the environment. Another area that might see both economic growth and positive environmental impact is recycling or reuse of products. Instead of throwing plastic into a landfill, that same plastic can be reprocessed and made into a new product that then gets reinserted into the economy. Now, we do have to account for the fact that this recycled plastic might replace new plastic production that likely benefits the economy more through the extended supply chain, but you also might be able to get creative with finding novel local markets or uses for the recycled plastic. 

If we look at the relationship between GDP and concentration of PM in the air by country, we see that GDP can actually go up as PM concentration decreases (as in Norway).

If we look at the relationship between GDP and concentration of PM in the air by country, we see that GDP can actually go up as PM concentration decreases (as in Norway).

In the case of the environment, economic growth and environmental quality aren’t directly correlated, but they can certainly influence each other. 

…

There seems to be a theme that economic growth can certainly be good, but it maybe needs to be mediated to ensure that it occurs in positive ways. That’s my two cents… we’re all certainly entitled to our own opinions, though, especially considering that we may each have a different perspective on the overall goals of society. 

Alternatives to Continuous Growth

So… what else would we do if we didn’t have continuous growth? Well, ideas have been proposed such as steady state economy or, similarly, doughnut economics.

Steady state economics entails a stable or only mildly fluctuating economy as opposed to a growing one, although this definition may vary based on how we define “steady state” ( there’s even a discussion of the differences between the hyphenated “steady-state” and unhyphenated “steady state”). This type of economy depends on a stable population size where birth rate is close to death rate and the amount of production is equal to the amount of depreciation. It also relies on a relatively constant pool of capital with which to tap into. Theoretically, this form of economy would still allow for technological progress in the form of increased efficiency that would yield more or more highly valued goods and services. A primary motivation of this steady state economy is the idea of sustaining our limited supply of natural resources that we currently use at increasing rates due to economic growth. 

This idea is similarly expressed in an economic model that takes the shape of a doughnut as proposed by economist Kate Raworth. 

I don’t think Krispy Kreme sells this type of doughnut.

I don’t think Krispy Kreme sells this type of doughnut.

The “doughnut” includes an inner circle (“shortfall”) where the economy has shrunk too much and can’t support a decent standard of living for people. Around this is the green band of what would be considered an optimal economy that we should aim for. Having the economy grow too much results in an “overshoot” that coincides with harmful effects to the environment and unsustainable resource extraction. Reaching a form of steady state within the green zone theoretically provides a sweet spot for the economy. Kate Raworth describes her concept in this TED video:

One thing to keep in mind here is that the lack of growth means that new wealth is not added to the economy. With economic growth, it is feasible that everyone might receive more wealth, both rich and poor alike (though the actual distribution of new wealth isn’t very even in real life). In the case of a steady state or non-growth economy, though, wealth would be capped and would have to be redistributed in order to fulfill each person’s needs and provide a good quality of life for all. This ends up being a sticking point for those in the upper echelons of society who may not be as willing to part with their wealth so easily. Also consider as the basis for redistribution of wealth that the average income in the world today is close to $15,000. We also would need to figure out what level of economic activity would be considered optimal with minimum allowable standard of living and maximum allowable environmental degradation. This would reasonably also result in a fair amount of disagreement. 

Evaluating economic growth demands a finer-grained analysis into the various factors at play. It also requires us to develop a shared objective or end goal for what we’re trying to achieve as a society with an economy… which is the real challenge. In the country of Bhutan, the leaders adopted the idea of Gross National Happiness for measuring success as opposed to using GDP. Measuring happiness seems rather difficult, though. Maybe we can all at least agree that money doesn’t always buy happiness. Thankfully, there are no drawbacks to continuous intellectual or personal growth, so I see no issue with reading as many Grow Weekly articles as possible.

To think about…

  1. How have you personally benefitted (if at all) from economic growth?

  2. Try to reflect on the relationship between politics and economic growth. What types of policies encourage economic growth, and which ones limit growth? Is economic growth always seen as a positive thing in politics?

  3. If you had to determine an “end goal” for society that balanced a minimum standard of living and a maximum natural resource extraction, what would that society and economy look like? Does everyone receive the same amount of resources?

  4. How would current economic tenets, such as compounding interest, be affected by a steady state economy?