The myths (and realities) of economic growth

Growth is overrated. Growth does not matter so much as employment. They are two sides of the same coin, yet I believe a semantic shift would help focus minds.

The economy grows as productivity increases. Consider a fixed population size for now. If productivity increases and yet the economy does not grow, this reflects the fact that people have gone jobless. What matters here are the individual tragedies of people loosing their jobs (and not finding another one), not the headline growth figure.

This distinction matters. A politician's short-term aim should be to oil the wheel of the economic machine, helping people adjust and find new jobs when productivity increases put them out of employment. (I believe this adjustment is always more painful than economic science allows for.) Take care of employment, and in the short term growth will follow, mechanically.

Regarding population size: Comments tend to focus on headline growth figures for countries, and forget about per capita income, the true measure of wealth. In 2004, The Economist ran an excellent article demystifying European and American growth figures. Yet they themselves sometimes loose sight of such subtle distinctions in their editorials.

Growth rates can also be misused when looking at developing countries. Think of the high growth rates of emerging economies: China now, Asian tigers in the 90s, Japan in the 80s, Germany in the 60s etc. Sometimes people forget that these countries are catching up. (Not that catching up is easy, some countries seem to never do so.) It is however much easier to catch up, following an established model, than to explore uncharted economic territory and innovate.

Think of the Soviet Union. Back in the 60s, Khrushchev boasted that, based on current growth rates, the USSR would catch up with the US at some point in the 70s. As Krugman showed, growth in the USSR was not so much based on increasing productivity as on resource mobilisation (forcefully putting people to work, producing capital goods rather than consumer goods). Of course, once the country ran out of resources to mobilise (literally ran out of peasants to send to factories), growth slowed, and we all know the end of this story.

Back to growth: There are indeed a few reasons to seek growth per se. One is the miraculous dynamics of debt accumulation. In an expanding economy, if growth rates are higher than the interest rate paid on the debt, the level of debt can be kept under control without ever repaying it. Another significant benefit of economic expansion is military (or diplomatic) expansion. In a world where countries seek military power (our world, last I checked), the larger your economy is, the more you can spend and invest in the military.

Therefore, governments do have an interest in the absolute size of their economy. And indeed, I do not know of a single government that is not actively involved in matters such as productivity (innovation) and population size. However, remember that what matters for well-being are per capita income and employment rates. And if emerging economies are growing at much higher rates, it is because their per capita income is much lower. At least in theory, you are better off living in a rich country with a low growth rate than in a poor country with a high growth rate.

At least in theory, because last but not least, growth seems to have a soothing social effect. A growing economy gives people a sense of purpose, gives them hope of a better future for their children. It seems that human minds as well as economic systems are better equipped to cope with growth than stagnation.