All Commentary
Wednesday, December 19, 2018

What Is Economic Growth? (And What Is It Not?)

Economic growth means that an economy's ability to satisfy people's wants, whatever they are—that is, to produce well-being—increases.

Image credit: Pixabay

There is severe confusion about the meaning of economic growth.  Many seem to mistakenly think that it has to do with GDP or producing stuff. It does not. Economic growth means that an economy’s ability to satisfy people’s wants, whatever they are—that is, to produce well-being—increases.

GDP is a rather terrible way of capturing this using [public] statistics and is thus corrupted by those benefiting from corrupting such figures. GDP is not growth. 

Well-Being Is the Best Measure of Growth

Likewise, having more stuff in stores isn’t growth. Producing increasing quantities of stuff that nobody is willing to buy is the very opposite of economic growth; it is wasting our limited productive capacity. But note the word “willing.” Well-being is not about [objective] needs but about being able to escape felt uneasiness. It can turn out to be right or wrong, but that’s beside the point. Economic growth is the increased ability to satisfy whatever wants people have for whatever reasons they have them. 

Examples of economic growth aren’t the newest iPhone or plastic toy made in China as much as they are the availability of quality housing, food and nourishment, and the ability to treat disease. 

Economic growth is better economizing, meaning we have the ability—which means we can afford—to satisfy more wants than just the basic needs. 

One obvious example of economic growth since the days of Malthus is the enormous increase in our ability to produce food. The quantity and quality have increased immensely. We use fewer resources to satisfy more wants—that’s the meaning of economic growth. Economic means simply economizing, or finding the better use of scarce resources (not only natural such). Economic growth is thus better economizing, meaning we have the ability—which means we can afford—to satisfy more wants than just the basic needs. 

The beautiful thing with economic growth is that it applies to society overall as well as to all individuals: Increased productive capacity means more ways of satisfying wants but also cheaper ways of doing so. But this does not, of course, imply that the distribution of access and ability to consume is equal and instantaneous. It spreads in stepwise fashion and will reach everyone. 

Growth Does Not Guarantee Equality

Also, increased productivity really increases the purchasing power of all money, including (and most importantly) low wages, thus making it much more ‘affordable’ to satisfy one’s needs and wants. But note that the distribution of such prosperity cannot be equal or instantaneous; any new innovation, new good, new service, etc will be created somewhere, by someone—it cannot be created for more than seven billion people instantaneously. So anything new, including new jobs and new productive abilities, has to spread—as ripples—across the economy.

Perfect equality is possible only by not having growth; by pulling the breaks and not increasing well-being.

As new things are created all the time, it means we’ll never actually get to a point where everyone enjoys exactly the same standard of living. It cannot be any other way because economic growth, and the well-being it generates through the ability to satisfy wants, is a process. Perfect equality is possible only by not having growth; by pulling the breaks and not increasing well-being. In other words, not increasing convenience and living standards and not figuring out how to treat diseases we would otherwise soon be able to cure. 

Those are our options, not the fairytale of “equal access to the outcome of growth.” 

This doesn’t mean, of course, that we should be satisfied with inequalities. It only means we should recognize that some inequality is inescapable if we want everyone to enjoy higher living standards. But we should also recognize that much of the inequality we are seeing today is not of this ‘natural’ kind: It’s inequality of political rather than economic origin. This comes in two forms: inherited from privileges enjoyed by a few in the past—reinforced by contemporary political and social structures—and privileges created today through policies creating winners (cronyism, favoritism, rent-seeking, etc). 

The Political Roots of Inequality

From the point of view of economic growth as an economic phenomenon, policy-originated inequality has effects on both the creation and distribution of prosperity:

  1. Policy creates winners by (a) protecting some from the competition of new entrants and future winners and (b) restricting (monopolizing) the use of new technologies, thereby propping up incumbents. 
  2. Policy creates losers by redistributing value and economic capabilities to those favored politically. 

This means policy has two primary effects on economic growth: It limits the creation of value and distorts its distribution. Needless to say, this inequality is not beneficial for society overall—only for those favored. It is the creation of winners by creating losers. 

This is not economic growth, which is accomplished by better economizing: increased ability to satisfy wants. In a sense, political favoritism and the inequality it causes is the opposite of economic growth since it creates winners (rich) at the expense of others (generally spread out on a larger population). It’s just a redistribution of value already created by introducing inefficiencies in the system at the same time; an allocation of productive capabilities that is not based on the creation of well-being but on political clout. 

Simply pushing the ‘stop’ button on economic growth will only accomplish increased influence by politics over economizing.

Over time, the economy is actually worse off because of this, and so the process of economic growth suffers. It is important to keep these two ‘sides’ of the inequality coin in mind when discussing the problem. Simply pushing the ‘stop’ button on economic growth will only accomplish increased influence by politics over economizing. That’s hardly beneficial, at least not for others than the political class and ‘insiders’ in the corporatist system. 

Rather, a solution would be to get rid of politically created and reinforced privilege and allow economic processes to readjust to reality—to target the production of well-being instead of favors and influence. This will not do away with inequality as such but will significantly decrease it—and will do away with most of its harmful effects. It would mean an economy where entrepreneurs and workers alike would benefit from producing value for others; in other words, economic growth and higher living standards. 

The alternatives are rather easy to understand, yet what’s commonly on the agenda of pundits and political commentators are made-up alternatives—often ignorant utopias—that distort the meanings of both privilege and economic growth. The alternatives we have are the ones stated above, nothing else. Take your pick. Striving to realize impossible fairy tales is a waste of time, effort, and resources. That’s not how we increase well-being and raise the standard of living. 

To me, the solution is quite obvious. Most people seem to pick the fairy tale.

This article was reprinted from the Mises Institute.

  • Per Bylund is Assistant Professor of Entrepreneurship and Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University.