Why does the economy need to continue to grow, especially in countries such as Japan where population is declining?
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What *is* the economy? It’s people earning and spending money by providing each other with things they want/need. So, if the population is growing, and people’s standard of living is increasing, then you should expect the amount of money spent and earned to also increase.
Now unfortunately, growth doesn’t exactly reflect these underlying goals we have as individuals, because the measures we use to quantify growth are derivative measures, not the measures themselves. You could argue that everyone’s standard of living would go up if we can cut the 40 hour work-week to a 30 hour work week, without a significant impact to productivity. After all, everyone would have an extra two hours per workday to relax, spend time with friends and family, and enjoy life.
The reason you hear about economic growth is that politicians want to take credit for it, in spite of the fact that they have little to no actual control over it.
In the specific case of Japan, you’re right, slowing growth or even recession is not necessarily all that terrible, provided that Japan’s pension system is funded properly.
You have a lot of answers already, but none of them seem to directly answer the question “why does the economy need to continue to grow?”
The short answer, which you got, is that it hypothetically doesn’t.
The longer answer, which I didn’t see, is that our current economic model relies on infinite growth. It’s built into the idea of capital, and capitalism is an economic system based on the concept of capital.
What is capital? In short, it’s growth. Capital is whatever you can invest in to expect a greater return later. Traditionally, that’s land through the promise of rent (which capitalism inherited from feudalism, as landlords are a feudal practice). Capitalism expanded this to natural resources, human labor, currency, intellectual property, and essentially everything else at this point. Today, you can invest in just about anything (or nothing, as is the case with imaginary assets like crypto and NFTs) in the hopes of a future return. That future return is the expectation of growth, and without growth, you don’t have capital and thus you don’t have capitalism.
So, in short, not all economies require infinite growth, but our economic system (capitalism) either grows infinitely or collapses. To have an economy that doesn’t require constant growth would require an alternative system to capitalism, and that’s been the main barrier to achieving that.
This is an inherent feature of capitalism, not of markets or the economy in general. With the way that capitalism works, more and more money will be funneled to a small group of people. This causes income inequality which puts more strain on social safety nets. Those social safety nets have to be paid for by a “strong” middle class, or otherwise they will not have the funds. While in theory the rich should just pay more taxes to fund these safety nets, it does not factor in the lost capital of being processed by all the middle men. It is far more economical for the system to put money directly into the hands of the working class instead of first into the rich, then into the tax bureaucracy, then into the hands of working people.
Now with that said, how does population play into this. Well if we understand that money will be funneled to the few inherently within the system, how do we make sure there is enough left for the “strong” middle class? Well the economy has to continue to grow. If it stops growing, the upper class will not stop their consumption of assets within the system. So eventually they will self-cannibalize their own economy, leaving no one to consume their goods.
TLDR: Dragons will always take gold, so gold for normal people has to come from somewhere else.
EDIT 1: To expand on this, it is not just with individuals, it can apply to entire countries working within the global economy. A country must continue to grow or otherwise they will no longer have the capital to compete against the larger foreign economies for hoarded goods.
I studied economics and have family ties and lived in Japan.
A lot of the answers get something tremendously wrong:
No, GDP growth for a country with a shrinking population is strictly speaking not necessary.
For wealth of the citizens only two things are important: GDP per capita (meaning overall GDP decreasing while population decreases even faster is no problem) and the gini coefficient showing that the wealth is at least distributed well.
Japan had a rough couple of decades but things have extremely improved lately and a lack of young people also means a lack of skilled workers which leads to much better treatment of said workers. Overtime is at an all time low, maternity leave is amazing, switching jobs easy and high tech jobs pay well.
Also due to a decreasing population many places in Japan are fairly cheap to live in and even Tokyo now offers some of the most affordable housing of any metropolitan area in the developed world.
Aldo many middle aged people inherit a lot of money.
When their parents die.
The only issue is transitionary – who cares for the old and how can retirement benefits be paid.
Edit; oh and the Japanese themselves lament the “death” of certain rural areas where simply nobody will live anymore…
“The economy” is a measure of all the things that people do.
So if you look around you, is there more of anything you want? More healthcare, more housing, scientific research, anything? Increasing that means increasing the size of the economy unless you get rid of something else. Nobody wants their stuff destroyed or taken away (even if you could transfer it from one purpose to another), so you grow or else.
Economic growth means things (hopefully life) get „better“. Say if food production doubled, it means on average you spend less time securing your daily food (say from one workhour to half a workhour). You can either still spend a full hour on your food, getting better quality, or the less time spent and invest the saved time somewhere else.
The more people you have in your tribe, the more people you need to work in order to keep everything running smoothly.
As people are born, the tribe grows, so you always need more people doing work. This means more total work hours are being done. Look at that last part as economic growth.
Now, in a declining population, you may not need as many work hours to keep things running smoothly (this may not be true though because you may have made things while your population was at peak that your declining population struggles to maintain. Think of Rome in it’s decline as it’s people sort of let the ruins that we discover today fall to… ruin.)
But the problem with Japan is that in addition to theri declining population, they also have an *aging* population. This means that as people in the tribe get older, people retire, and there are less workers. But there is still the same amount of people, so the tribe still requires the same amount of work hours to be done, but there aren’t as mamy people of working age to do them.
There are already great economic answers here, but there’s a political dimension, especially about inequality.
If the economy was static then for any given person to benefit more that means someone else would have to have less. It would mean a very difficult conversation and societal disruption as we come to terms with this, one in which those who have the most wealth and most power have the most to lose. While there is growth, the life of ordinary people can improve, without that there is either revolution or repression.
Debt is a large driver behind the endless quest for growth. If I am a country, and my economy has grown by 3% every year I might leverage that to get loan.
At first, I would only pay the interest on the loan. So if I got a loan for $100 dollars and it had $3 in interest, I would pay $3 and still have $100 in loan left. This means that next year, I would have to pay $3 again.
But my economy grew! So now, I’ll pay a little more than $3 dollars, and next year I’ll hopefully be able to pay even more and start reducing the principal by greater and greater margins. It will start going down, $99, $98, at an ever faster rate.
But what happens if my economy shrinks? The opposite happens. The loan gets bigger every year, and I have less ability to pay.
Modern countries are leveraged like this, and it typically isn’t a bad thing. Because they can pay off their loans with future growth, they can afford to use them to inject cash where it is needed. This can protect citizens in a crash, or fund new investment that drives growth.
But that debt requires those countries to grow, and countries took that debt expecting future growth.
People have unlimited wants and needs, but the Earth has limited resources. Economics is ultimately the study of how living organisms deal with this fact of life.
Most organisms can’t directly affect the world. If there is more food in the summer, the deer population grows. If there is less food in the winter, some of them starve. They have no ability to affect things in the short term. Over the long term, they evolve through natural selection.
But humans are different. We have evolved the ability to use tools. Instead of hunting and gathering for food where we have to scavenge 10 units of land to find 1 unit of food, we invented farming. Now we can grow 1 unit of food per 1 unit of land. Then we invented more tools. These include shovels, wheels, fire, animal husbandry, irrigation systems, fertilizer, pesticides, tractors, GMOs, etc. Now we can grow 100 units of food per unit of land.
The total amount of land, water, sunlight, etc. didn’t change. We just innovative ways to increase economic efficiency. The technology/tools I mentioned above allowed humans to grow more food per unit of land using the same number of resources as before. The reason is that we waste fewer of the resources. The Sun has limitless energy. But only 0.1% of the sunlight that hits plants is converted to edible plant matter. Most sunlight just heats the Earth or bounces back into space. All the tech I mentioned above is ultimately about converting ever so slightly more of that sunlight into food. If you can convert 0.2% of the sunlight into plant matter, you just doubled the wealth of the planet.
Technological innovation is the true source of human economic growth. Population growth is a byproduct of that economic growth. The economy doesn’t *need* to grow. Living organisms don’t *need* to exist at all. But if there is new technological innovation, then there is potential growth available. The limiting factor is how fast the technology filters out to the rest of society.
Say there are 100 farmers on Earth that grow 10 units of food per unit of land each. There’s 1000 units of food on Earth. Then I invent the tractor which allows them to grow 20 units of food per unit of land. When all the farmers start using tractors, we’ll get 2000 units of food total. But if only 50% of them have tractors and 50% don’t have tractors yet, then we only have 1500 units of food.
Right now humanity is expecting 2000 units of food. This is completely achievable. Now we need the economy to grow from 1500 units of food to 2000 to match our expectations. It’s a problem when there are unexpected events like a global pandemic that shut down tractor factories though. This slows down the adoption of tractors by farmers, and delays this growth. This is a problem, but a fixable problem.
As a last point, in Japan the population is declining, but people are living longer. This means fewer young people need to do more productive work to support more elderly Japanese people. This is fine if you get the new tractor that doubles your productivity. But it’s bad if the tractor delivery is delayed.
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