What is economic growth and how does it create more money?
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Economic growth is not always the *creation* of more money but the creation of more goods and services, allowing for more *movement* of money. Keep in mind, the same dollar can be spent more than once by more than one person, so having more dollars is not the only way for more people to have money and get the things they need or want.
When you have a job and get paid a good wage, you will spend that money not only on necessities but also “extras” or luxuries like newer or better clothes, vehicles, high speed internet, smartphone, or computer. All those companies have their own workers who get paid too, then they spend money themselves, possibly at the company where you work – which allows you to keep receiving your wage so you can buy the things you want and need.
In a healthy economy money always moves so each dollar is spent *many* times. In an unhealthy economy maybe you are worried you would lose your job, so you decide not to buy a new phone this year, so the people who make phones are now worried *they* could lose their jobs, but this means your company has fewer customers and you are more likely to lose your job… when everybody is more cautious and spends less, the movement of money slows so the same number of dollars are not being put to work to actually get people the things they want and need.
People produce stuff. Stuff leads to increased living standard, leads to more people producing more stuff.
Technology! Higher stuff production per person. Surplus stuff is traded with other nations, more money.
First and most importantly, LET GO of the notion that money and economic growth has anything to do with each other. This is super important and what confuses people most of the time.
Let us imagine an economy without money. We go back 10000 years to the beginning of civilization. A bunch of cavemen start planting crops. In the first year, there are 100 people. They each produce 10 units of wheat. Bam! That’s your GDP right there! 1000 units of wheat.
The next year, some guy has the bright idea of sprinkling water on the wheats. You still have 100 people, but due to improvements to production methods (sprinkling water on wheat), each guy now produces 12 units of wheat for a total of 1200 units of wheat.
That’s economic growth: your economy now produces 20% more than the year before. If you denominate your economy in wheat, you just experienced a 20% real growth.
The third year, someone realizes if you mix your shit in the dirt, the wheat grows better. Congrats! You just improved your land with fertilizer. Now, each guy can produce 18 units of wheat for a total of 1800 units of wheat (50% economic growth).
Now imagine, in the fourth year, our guys not only plant wheat, they also raise pigs. The pig farmers realize that exchanging pigs for wheat is troublesome. After all, most days, they only want a little wheat, but it’s not like they can give a little pig without slaughtering the whole hog. So, they hit on a bright idea: why not use shells as a medium of exchange? So if a pig farmer wants to buy wheat, he doesn’t have to slice up piggy anymore. He can just give wheatguy some shells.
Let us assume that in the fourth year, half the guys produce wheat (but there was no new cool ideas that improved economic growth), so they yielded a total of 1800/2, which is 900 units of wheat. The other half became pig farmers and raised 90 pigs. And for simplicity sake, the guys collected 1800 shells to use as currency.
Now have a currency denomination for our economy! In this economy, we can understand that each unit of wheat would cost 1 shell, and each unit of pig would cost 10 shells.
To recap, in year 4 we have 1800 units of shells (money), 900 wheat, and 90 pigs. Each wheat cost 1 shell, each pig cost 10 shells.
What happens in year 5 if we improve our productivity again? Say, by 100%? If that happens, we now will produce 1800 wheat, 180 pigs.
Now imagine, we decide not to print anymore money (collect new shells). We will have 1800 shells for 1800 wheat and 180 pigs. In effect, each wheat will now cost 0.5 shell, and each pig cost 5 shell!
Now imagine, we collect another 1800 shells for a total of 3600 shells. Viola, the price of wheat and pigs remain the same, at 1:1 and 1:10 respectively.
And what happens if we increase the number of shells even further? Say we increase shells by 5400 to a total of 7200 shells. That means we now have 7200 shells chasing 1800 wheat and 180 pigs. That means the new price of wheat is 2 shells, pigs is 20 shells!! Holy heck, that’s a 100% inflation!!!
Do you see? How much I change the money supply has no bearing on how much stuff the economy actually produces! (Simplifying a bit here) no matter what, in year 5, I produce 1800 wheat and 180 pigs! The price of the goods is dependent on how much money I print.
When economists talk about GDP growth, they usually refer to real growth, which means how much more stuff are we actually producing, regardless of how much money supply is increasing or decreasing. There is also nominal growth, which is growth in pure monetary terms (even if that figure is large due to inflation).
So to answer your question, economic growth is humanity’s ability to produce more things because we improve our land (mixing shit with dirt), technology growth (discovery of sprinkling water), bigger population (more babies = more eventual manpower to make stuff), better tools (we decide to get a cow to till the land instead of breaking our backs), and enterprise (some prehistorical slave driver asking people to stop singing kumbaya and go out and kill mammoths, therefore starting the very first 5 day work week).
Economic growth does not create money. People create money. Ideally, we create as much money as there is new stuff, so the price of stuff will always remain the same. If we create more money than there is stuff, price goes up. If we create less money than there is stuff, price goes down. It’s a lot more complicated than that, but generally, that’s how the economy works.
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