I often see statements in the news from economists saying things like “only 0.2% growth reported, which might have bad effects on the economy”. In my eyes infinite growth is simply impossible when we have finite resources, or is that a misconception from my part?
Edit: thank you for all the detailed an in-depth answers! Learned a lot of new things 🙂
In: 96
Let me answer it in ELI5 that most other missed.
Economic growth doesn’t mean you get more physical stuff, like more material – more wood, more food etc. – not anymore.
It means more services and better crafted products – both of which can be automated and ever improved. Using same resources (either peoples time, land, or material) to achieve ever greater things. It will stop once most people won’t be able to spend all their money
Population keeps growing. If economy doesn’t grow at least at the same pace, it means less stuff for everybody, on average.
The biggest reason we need economic growth is because of population growth. If the economy doesn’t grow with population growth, our more, living standards drop. The sad truth is, that won’t happen equally across the board either. So, if the population grows and economy doesn’t, lower class drops to poverty and the wealthy start investing more in businesses they expect to rebound and use tax-friendly savings options for the rest.
The short answer is “because they’ve designed the system that way.” The population of humanity has grown continuously with a couple of blips for all of human history. A larger population by definition means more housing, food, water, and other basic needs for those people to survive Additionally, we’ve grown our standard of living, in general, throughout human history as well. Both of these things are related to consumption of goods, and the system that the Western world, and basically everyone else too, is to pay money for essential goods. So for the producers of those goods, they’ve seen charts of population growth, and they build that into their forecasts for customers. They’ve shown these charts to their bankers, who give them loans based on the future earning potential based on their past performance. And they invest in R&D to outpace the competition to also grab a greater portion of the market share.
As long as the prices of goods are going up, this is an incentive for people to purchase now. If the prices of goods were going down, then people would put off purchases to wait for lower prices in the future. This then creates a cycle of economic losses, and essentially everything that I described above comes crashing to a halt. There would be other ways to structure things, but we have baked the growth into every part of what we call a “normal” economy.
> In my eyes infinite growth is simply impossible when we have finite resources, or is that a misconception from my part?
That’s a common misconception that seems intuitive to many people. You can’t make an infinite number of steel beams and roads and automobiles and tons of corn all at once. Eventually you hit some hard constraints (like the size of the Earth). You can’t have infinite growth of material goods.
However you can have indefinite growth of *value*. And that’s what GDP measures – total value generated in a year.
There are enormous sectors of the economy where huge value is created by a combination of specialized tools (technology) and skilled labor: creative arts, media (books, movies, video games), healthcare, engineering, marketing, legal, education, finance, data and computing. Manufacturing and construction are a tiny part of the overall picture.
Take healthcare, which is notoriously expensive (high value). The main input is lots and lots and **lots** of skilled labor – doctors, nurses, med school professors, lab technicians, research scientists, chemists, designers of medical equipment, etc. And it creates enormous value, at least in quality life years.
How about expensive new weapons for the military? Physical steel and aluminum and chemicals are a tiny fraction. Most of the cost (and therefore value-added) comes from engineers who design and calculate and test and document. Construction costs are mostly the skilled tradesmen and machinists. Sustainment costs again come from labor – skilled technicians performing maintenance.
Or how about movies? It’s silly to ask how much iron ore it takes to make a billion-dollor blockbuster. The value is created by the skilled labor of writers and actors and artists and technicians, again with minimal physical input (besides high-tech tools).
Then there’s the role of technology in GDP growth. Technology allows us to do the same job with less material input, or turn the same material input into something more useful. That lets the economy grow (more value created per year) despite limited physical inputs.
[removed]
It basically means whatever we do today, was cheaper to do yesterday.
Which is bad, because we try to work in a way such that things gets done easier, not more difficult.
Infinite growth is impossible, but growing a lot from where we currently are ought to be possible, since there are still poor people, and it’s often easier to make poor people richer by growing the economy than it is to persuade rich people to pay more taxes.
Economic growth could represent all kind of things – everyone owning their own boat, or everyone having access to the therapy they need. Being able to replace all fossil fuels with renewables would require building a lot of new stuff (like enough solar panels and batteries to power all the new electric ambulances) – all of which requires a ‘big’ economy.
Zero growth is scary because many countries have probably borrowed a lot of money and are paying interest on it on the assumption that they’ll be able to use economic growth to pay it back. However, in theory we could one day achieve a sustainable economy that doesn’t need to grow to survive.
Some wise man said once:
“If you believe in infinite growth in a finite world you are either stupid or an economist.”
And we are ruled by economists.
Growth can come from better ideas and innovation. The invention of the wheel brought growth.
Latest Answers