A Capital Idea Part 105: What is "Economic Growth?"

"Economic growth" is one of those terms I have heard in news reports over and over again since I was young, that was never explained, much like other economic terms such as "unemployment rate" (which only counts people who are seeking work it turns out) or "jobs," (as though the type of job and what it accomplishes doesn't matter). I just checked definitions of "economic growth" on the internet, and as I expected, this term represents multiple and often misleading definitions. The basic reason I am doing this, aside from self-education, is because economic growth ultimately relates to capital, standards of living, and whatever potential limits or lack thereof to growth and human potential exist. This is also an extension of my previous post, "The Sky is the Limit."

The most succinct definition of economic growth which takes describes its various permutations, is as follows from a website called investopedia (http://www.investopedia.com/terms/e/economicgrowth.asp#axzz1kxr3g8EJ):

"Definition of 'Economic Growth'
An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.

Read more: http://www.investopedia.com/terms/e/economicgrowth.asp#ixzz1kxsvoVLl"

Thus, economic growth could be defined as the growth in the total output of an economy without reference to inflation or deflation, or total population. This is the definition I suspect that nations typically use and is reported in the news, which tends to inflate (speaking of inflation) economic growth figures, since population usually increases and prices usually increase due to inflation. However, better measures of true economic growth can be calculated, which take into account inflation or deflation, as well as per capita measures which take the total population into account. The only true measure of economic growth is both per capita and inflation/deflation adjusted.

The next point from investopedia indicates that true economic growth (per capita, inflation adjusted), generally results from technological advances. In other words, human capital, in particular, intellectual capital, is the main driver of economic growth. Intellectual (also called cognitive) capital in turn, largely depends upon a nation's educational system. In fact, since natural resources are limited, and have basically been largely utilized already by the world's huge human population, any real economic growth in the future must essentially depend upon increases in human capacities to work productively, which means increasing intellectual, creative, nurturant, or any type of capital which increases the capacity of humans to live productively and contribute to the well-being and actualization of humanity.

Here is the quote: "Investopedia explains 'Economic Growth'
Economic growth is usually associated with technological changes. An example is the large growth in the U.S. economy during the introduction of the Internet and the technology that it brought to U.S. industry as a whole. The growth of an economy is thought of not only as an increase in productive capacity but also as an improvement in the quality of life to the people of that economy.

Read more: http://www.investopedia.com/terms/e/economicgrowth.asp#ixzz1kxw5RGAm"

Wikipedia has a long and very informative article about economic growth (http://en.wikipedia.org/wiki/Economic_growth). Essentially, this article makes many of the points that I summarized above regarding true economic growth. (There must be actual progressives writing for Wikipedia despite any efforts to "conservatize" this intellectual resource.) First, the article points out the necessity of defining ecnomic growth as per capita and inflation/deflation adjusted. The article also discusses various theories of economic growth, the history of the concept as well as historical sources of economic growth. Rather than going into these, I will present points relevant to needed economic reforms and reformulation of the concept of capital.

First, in discussing the evidence relating to theories of economic reform, a point is made which is similar to my empirically based post in which I found that higher tax rates result in better economies. Here is the quote: "Perotti (1996) examines of the channels through which inequality may affect economic growth. He shows that in accordance with the credit market imperfection approach, inequality is associated with lower level of human capital formation and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. In contrast, his examination of the political economy channel refutes the political economy mechanism. He demonstrates that inequality is associated with lower levels of taxation, while lower levels of taxation, contrary to the theories, are associated with lower level of economic growth." Got that? In other words, lower taxation rates result in less "human capital" -- that is, less education resulting in less intellectual, nurturant, or creative capital, etc. -- which results in higher birth rates, and less economic growth, CONTRARY TO THEORIES! Most economic theories, other than perhaps some newer, more progressive ones, are built by rich capitalists and serve their interests by coming up with rationalizations which are used to predict that lower tax rates (as captialist, "free-market" loving Republicans so love) should help the economy long term. This analysis apparently did not look at economic regulation levels, but my guess is that similarly, lower economic regulation levels (again, as capitalist, "free-market" loving Republicans so love) result in worse economies long term.

The Wikipedia article also has some additional information about the growth of human capital. According to Wikipedia: "In order to measure human capital more accurately, Eric Hanushek and Dennis Kimko introduced measures of mathematics and science skills from international assessments into growth analysis. They found that quality of human capital was very significantly related to economic growth. This approach has been extended by a variety of authors, and the evidence indicates that economic growth is very closely related to the cognitive skills of the population." Thus, specific empirical evidence demonstrates that the more people learn, the better economic growth becomes. The article goes on the state that economic growth correlates with happiness at the lower per capita GDP levels, but once per capita GDP levels rise above $15,000 per year, the relationship seems to evaporate.

Finally, we go to the downsides of "economic growth." Among these are consumerism, resource depletion, environmental impact, wealth inequality, and global warming. The problems involving environmental destruction -- resource depletion, environmental impact, and global warming -- are such serious challenges and potential threats to the future of humanity and future economies, that it is difficult to overstate them. Regarding global warming, the article states that there have historically been close correlations between carbon dioxide emissions and economic growth, but that this is clearly a trend which cannot continue. In fact "The Stern Review notes that the prediction that "under business as usual, global emissions will be sufficient to propel greenhouse gas concentrations to over 550ppm CO2e by 2050 and over 650–700ppm by the end of this century is robust to a wide range of changes in model assumptions". The Stern Review was published in 2006, and also suggests that an investment of 1% of GDP globally be invested in combating the worst effects of climate change, although the effectiveness of these efforts depends upon how well technological interventions yet to be invented or utilized, work.

The article also has an interesting graph regarding the world's predicted capacity to produce petroleum over the centuries, which shows peak production about now, with production levels dropping drastically to about 1/7 of its current level, by 2100 (only 88 years from now), and to near zero by 2200. (Sorry, I don't think I can reproduce this graph here, or I would.) Of course, various other resources, both living and nonliving, are being similarly depleted, although economies depend on none of these others as they do on petroleum. Obviously, we need to develop a "green economy," and the sooner, the better! Regarding environmental impact, I have one final quote from the Wikipedia article: "Canadian scientist, David Suzuki stated in the 1990s that ecologies can only sustain typically about 1.5–3% new growth per year, and thus any requirement for greater returns from agriculture or forestry will necessarily cannibalize the natural capital of soil or forest. Some think this argument can be applied even to more developed economies." In other words, according to at least some environmental scientists, there is a true limit to both the growth of ecologies, and that of economies, which is consistent with what I have been advocating all along in the sense that we should treat economies as ecologies. Otherwise, we will act as parasites of the ecology -- which arguably we already are -- and will essentially compromise its health to such an extent that our economic activities will not only threaten our host, but also, ourselves. Once the host dies, so do the parasites.

True economic growth in the future is possible, but only if we advance it equitably -- in ways which benefit everyone and prevent oversized wealth disparities -- and work in concert with this planet's ecology to sustain a healthy ecosystem. Furthermore, any future economic growth will depend on the development and actualization of human potential, rather than increased exploitation of natural resources, since these have already been overexploited. In other words, the way forward -- not only socially, but economically -- is the progressive model. Any other approach will result in stagnation, or worse, degradation of the human condition.


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