Why does economic growth have to happen?

[Tosh5457]

Why do economies need to grow? If a country has a narrow social inequality, a high GDP/capita, why does that country's economy need to keep growing? And isn't that insustentable? Do we have the resources necessary to keep increasing the production of goods every year?

 

[talk2glenn]

I believe your reasoning follows from a set of bad premises.

No one in modern macroeconomics believe that economic growth is resource-dependent (a so-called Malthusian model, formulated around the turn of the 19th century). Since approximately the mid-1930's, economists have lived in an exogenous-growth world, formalized conceptually by the Solow model; growth comes from paramters outside the model. That is to say, holding other factors constant (the supply of labor, capital, etcetera) we still observe output growth.

To put another way, economic growth is not resource-dependent. Ergo, any finite supply of inputs is sufficient by definition to produce an infinite pattern of long-run economic growth. Why this is true is the subject of considerable debate - the general consensus is that technology increases the efficiency of factors of production, but technology alone is not sufficient to explain all observed delta in productivity. See http://en.wikipedia.org/wiki/Productivity.

The empirical evidence is certain. Altering internal factors (savings rates, capital production rates, population rates, etcetera) can produce disequilbria in the model, but in the long-run the observed data converges on a steady-state of exogenous growth consistent with the rate of change in productivity. This is a post-industrial phenomenon, of course; Malthusian resource-dependent growth models were sufficient to explain observed economies for the great majority of human history. But no longer.

 

[SteamKing]

Why don't you want an economy to grow? Would you like to be poorer, sicker, and hungrier in the future than you are now?

 

[Tosh5457]

I believe your reasoning follows from a set of bad premises.

No one in modern macroeconomics believe that economic growth is resource-dependent (a so-called Malthusian model, formulated around the turn of the 19th century). Since approximately the mid-1930's, economists have lived in an exogenous-growth world, formalized conceptually by the Solow model; growth comes from paramters outside the model. That is to say, holding other factors constant (the supply of labor, capital, etcetera) we still observe output growth.

To put another way, economic growth is not resource-dependent. Ergo, any finite supply of inputs is sufficient by definition to produce an infinite pattern of long-run economic growth. Why this is true is the subject of considerable debate - the general consensus is that technology increases the efficiency of factors of production, but technology alone is not sufficient to explain all observed delta in productivity. See http://en.wikipedia.org/wiki/Productivity.

The empirical evidence is certain. Altering internal factors (savings rates, capital production rates, population rates, etcetera) can produce disequilbria in the model, but in the long-run the observed data converges on a steady-state of exogenous growth consistent with the rate of change in productivity. This is a post-industrial phenomenon, of course; Malthusian resource-dependent growth models were sufficient to explain observed economies for the great majority of human history. But no longer.

I see, so what would happen if productivity stopped growing?

 

[danjohnson10]

talk2glenn provided a good answer, but only half the answer to your question.

I would say inequity in wealth distribution is one reason. There will always be a wealthy class and a poor class struggling to catch up. But even if there was complete uniformity of wealth there will always be a social competition - that's what nature is all about. People will always compete for more resources (or as talk2glenn pointed out, ways of getting more out of a constant amount of resources) as it enhances their and their family's fitness and security. And that would translate into economic competition and drive growth.

 

[EntropicLove]

It ideally wants to become as efficient as possible, so efficient in fact, that it is able to produce or extract goods/services that can be sold at a higher than production cost to other countries increasing it's income.

BTW GDP is not a valid indicator of a countries prosperity; It's missing a lot of important details.