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Thought for this Day: Interpreting Economic Growth

Keith Rankin, 23 March 2015

On Saturday I published a Daily Blog Economic Outlook: Growth or Slowth?. It was essentially about putting the latest economic growth figures (3.3 percent annual growth) in context. It's probably the peak of a cycle, with the long term trend now below two percent; ie slowth rather than growth.

One interpretation of growth is that it represents the ruination of us all, and that its all driven by unsustainable population growth. I made the following comment in response:

While my figures are for ‘extensive growth’, most historical growth analysis focuses on ‘intensive growth’, which is growth per person. By definition, such growth (which is real), is growth per person. So population growth cannot be the only source of economic growth.

The two most important sources of intensive growth (which is one form of productivity growth) are (1) the depletion and (2) the augmentation of resources.

Depletion driven growth arises from such things as consumption of non-renewable resources, failure to account for environmental damage, and working longer hours. Augmentation driven growth arises from improved knowledge, technology, ethics; and sunk capital (eg infrastructure and education). Generally augmentation growth is sustainable, although subject to diminishing returns (especially infrastructure, which may simultaneously augment and deplete).

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Generally the discussion about sustainable growth should focus on inputs, not outputs. Though there is another important dimension, and that’s about the forces that push too many of us into ‘wanting’ things we don’t need and may not really want.

The conversation about population is important. But there are other conversations we need at least as much.

I noted in a further response that world economic growth has averaged 4% per annum in the 10 years to 2014, with world population growth averaging 1.2% per annum in the same period. That leaves 2.8% 'intensive growth' annually, fuelled by a mixture of depletion and augmentation as noted above.

Another reader asked me to nominate five "other conversations we need at least as much". My five, off the top of my head I listed as (in no particular order of importance):

We need alternative conversations about productivity, labour supply, income distribution (not redistribution), the creditor-debtor relationship, and global governance (which includes the taxation of global business activity). As many people as possible should participate in these conversations, and by reaching out to people with different perspectives; we’ve had more than enough partisan stand-offs.

We need to converse about ways of achieving productivity growth by economising on inputs and on the external harm that results from some forms of growth. This in turn can be achieved through new income distribution concepts and practices. (I have written often about 'public equity', which I think is the key to resolving this problem.) So I think the conversation about public equity needs to be promoted as the most important conversation that can lead to a sustainable future.

ENDS

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