Saturday, 20 March 2010

Why do we seek economic growth?

The excellent Mr Stan left a comment last week questioning why so much store appears to be given to the state of the stock market. If you don't know Mr Stan you really should visit his place, he's on fine form.

He started his comment by expressing concern about the perpetual chase for growth, (be it in GDP, revenue or profits) and posited that it is done to try to improve standing in the stock market. He then questioned why the state of the stock market is treated as the most important indicator of economic importance. I don't often disagree with Mr Stan, but I do on this subject. Let me say why.

Seeking economic growth is not just about trying to get richer. Most of the time it is more concerned with trying not to get poorer. Inflation is always with us, so we have to improve our income just to be able to stand still. Some of us remember annual inflation running at between eight and fifteen percent for year after year and look on current levels as light relief from those times, but even at about five percent (my best estimate of the real cost of living increase suffered by real people today) someone with a disposable income of £10,000 must raise it by £500 next year just to maintain his current standard of living. The business he works for cannot just magic money out of thin air, it needs to receive more if it is to pay more, so it must achieve a growth of revenue just so that its employees can remain as they were.

More than that, people have ideas and want to profit from them if they can. Maybe they write a novel, maybe they invent something entirely new, maybe they see a way to improve an existing product or find a way to make an existing product more efficiently. They might be rich, poor or of average wealth but no one will stop them wanting to put their new idea into practice and to profit from it. That is human nature. Economic growth is an aspect of human nature.

That point is worth a few more words, not least because we are constantly beset by bleating greenies who tell us we should forgo material pleasures and commune with nature. How, I wonder, do they decide on the ideal state of affairs? Were they to be forced to live in an Ethiopian village with insufficient food and water for the population and hardly any access to medical facilities, would they jump with joy or would they say "um, actually we don't mean this sort of communing with nature". The answer is obvious. OK, how about sitting them in a bit of rural India where there is plenty to eat and ample fresh water but the homes are flimsy shacks and the food requires year-round hard labour in the fields? They don't mean that either. Do they mean somewhere like London in the sixteenth entry? An astonishing comfortable paradise compared to the Ethiopian village, but utter squalor compared to Victorian London. Do they mean Victorian London before fresh water and mains drainage were the norm? Perhaps that is approaching what they mean, but there is no sense in putting up with the avoidable problems of that existence when those problems are avoidable.

You can't have the benefits of economic growth without accepting that they are benefits of economic growth. You can't stop the clock and say "everything is tickety-boo" because everything is not tickety-boo. The concept is based on a false premise. The false premise is that we have reached a state of affairs that is good enough. There is a certain degree of logic to it because life for most of us now contains no real threat of starvation, malnutrition, death in winter from hypothermia or death at any time from cholera or dysentery. But that is to look on mere existence, mere subsistence, as a satisfactory state of affairs. Yet the definition of mere subsistence today is radically different from what it as a hundred years ago because economic growth has raised the bar.

The greenies who say we have a more than adequate existence today form that view by looking at things today and comparing them to times past. Why not roll the clock back a hundred years and apply the same argument? Life in the most developed countries was viewed as hugely comfortable because it could only be compared to what had gone before. No doubt there were arguments against seeking further comforts because the current state of affairs was viewed as quite good enough, thank you very much. We look at those times and see them as harsh and, in many ways, squalid. Has economic growth since 1910 been a good thing or a bad thing, has it improved the quality of life or merely added unnecessary luxuries? You can live as they did if you want to, but it's not for me. Even the nastiest sink estates contain homes of greater comfort than those inhabited by most British people a hundred years ago.

Economic growth provides real benefits on both an individual and a collective scale. Further benefits will accrue through future growth. They cannot be measured because we don't know what they are, they don't exist yet, but they will exist. Central heating, motor cars, fridges, washing machines and battery operated boyfriends for lonely ladies started as science fiction. Now they are everyday things that make life better. None of them would exist without a constant striving for economic growth spurred on by the profit motive. The same can, of course, be said of the personal computer, without which you would not be reading my meanderings. You see how important it is and how shallow life would be without it?

I doubt that companies seek growth in order to look good on the stock exchange. The stock exchange is just a measure of what other people see as the value of shares in the listed companies. Companies don't collapse because their share price falls through the floor, their share price falls through the floor because the company is collapsing.

Mr Stan is undoubtedly correct in bemoaning excessive reliance on stock exchange indices as indications of the state of national economies. Not only are too few businesses included for them to give more than a limited picture of the state of affairs but they also cover only large businesses and are skewed by fluctuations in the share price of the very largest companies. They are, however, some evidence of what is going on, particularly because the fate of shares in big companies affects such things as the value of pension funds and the premiums insurance companies have to charge. He described the stock exchange as "a glorified gambling cartel". There is a lot of truth in that but it doesn't stop it being a fair indication of the current state of big business.


Anonymous said...

I can agree with you almost entirely on this one Mr FB, especially about Greenies not really understanding the costs of material poverty (Greenies aren't themselves immune to the human instinct for growth, which as you point out, has more to do with avoiding poverty, and enhancing security, their perspective though is that the security is achievable in the long term through a healthier planet). I do disagree though with your assumption that growth must continue in the future, this is an assumption based on faith, there are no natural laws that guarantee continued economic growth, it'll happen if the available resources, including things like technology and economic management, allow growth to continue.

Andrew W

TheFatBigot said...

Yes indeed, Mr Andrew, and how will we know when "things like technology and economic management" no longer permit growth? There is only one way and that is to strive for further growth and find ourselves unable to achieve it.

If that day ever comes, and I doubt that it will, new challenges will be faced. Then the same forces of inventiveness and enterprise that have driven growth and, thereby, improved life expectancy and material comfort will address the new problems.

Anonymous said...

There are many factors or resources that contribute to economic growth, technological advancement is certainly a major one, cheap (meaning easily obtained) energy, food supplies, mineral resources are others, there's also the economic efficiency of the society.

Technological advancement has been a huge contributor since before the industrial revolution, and (with one qualification), it'll continue to contribute into the future.
In your last post you mentioned the trend we've seen towards an increasingly socialist society throughout the Western democratic nations (I could go on at length about the tyranny of the majority) this trend I see as having a negative effect on economic growth, it's also a trend that can be hard to reverse in difficult economic times (as we both know, politicians prefer to borrow and defer the day of reckoning). The reason society has been able to become more socialist is that it has been affordable for it to become more socialist, the greater cost has been covered by the other "factors or resources" primarily that advancing technology, without those advancements we'd be a whole lot poorer and, out of necessity, our society would be less socialist (and conservatives would be more conservative).

Technological advancement is principally (but not exclusively) reliant on things like educated people, energy, and mineral resources.
As long as these other resources remain cheap and available I don't see any problems, but if they're not cheap and available, technology (that which you're placing your faith in) itself is a poor substitute for them because of it's reliance on them.
So what does energy and mineral availability look like in the future? I guess that's where you're confident but I'm uncertain.
The maths I've seen - 9 billion people by mid century, about 3 billion of them trying to squeeze into the "developed" category, questions over oil and other resources - I think justify that uncertainty.
I'm an atheist, I don't expect God to save us, and there's no economic law that I know that addresses the declining marginal returns we've been seeing in resource economics, we've seen nations fall into chaos in modern times, we've seen a severe depression that wasn't (even in part) caused by natural resource constraints, we've seen several recessions that followed on from rises in oil prices, and there are numerous examples in history of civilisations collapsing because of resource constraints.

I should add that I'm certain we could avoid serious negative growth with less government, freer economic policies, serious investment in alternative energy for transport. Where we could get into difficulty is if we get into the same vicious circle that deepened the Great Depression, nations erected tariffs and just stopped trading, which lead to further economic declines. We actually saw signs of this occurring a couple of years ago. Another hazzard is that Governments too often meddle when the economy has problems with the meddling simply exacerbating those problems.

Andrew W

Alex Cull said...

I'm with you on this one, FatBigot. Even the humblest of us live lives far more luxurious than those enjoyed, for example, by early medieval aristocracy. We don't have vast tracts of land or armies of serfs but we do have centrally heated homes, access to the sort of food that could only have been dreamt of a thousand years ago, and mains electricity available 24/7 (for the moment, at least).

Some Greens appear to have lost sight of the fact that economic growth and development have given the vast majority of us (in the developed world) real wealth and leisure that are very difficult to come by in a culture where subsistence agriculture is the only game in town. Growing your own food (especially without the aid of modern technology) is a pleasant hobby but a backbreaking way of life that allows little in the way of other activity, and leaves you extremely vulnerable to blights and bad harvests. Medieval peasants who suffered horribly from famines and plague still dined on nothing but the purest organic produce, and much good it did them!

And yes, nothing stands still. One item of value in matters "green" (among much that is of very questionable value) is the drive towards energy efficiency, and finding better, cleaner and improved ways to do things (modern car engines are a good example of this.) The drive towards enriching ourselves and improving our circumstances can be slowed but not stopped altogether, as long as there are people with bright ideas who have the freedom and the means to turn these ideas into reality, as long as they can communicate their knowledge to the people around them and as long as no large-scale disaster engulfs the human race (e.g., thermonuclear war, asteroid strike or supervolcano eruption.)

The Greens would say that there is just such a large-scale disaster looming (catastrophic climate change), but I find their arguments less convincing with every year that passes. To my mind, there is more danger in stifling economic growth in the name of fighting climate change, which would leave us relatively impoverished and less able to cope with real disasters (including, ironically, the sort of extreme weather events the AGW proponents want to banish.)

Stan said...

Thanks for the h/t FB. I did try to leave a long reply to this yesterday, but the posting failed and I can't be bothered to rewrite it all.