Duncan Wilcock


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Tuesday, June 20, 2006

On Growth

Economic Growth that is...

I've been wanting to write on this for a while - not just on this blog either. I've had a file on my desktop that i've been working away at, but this seems like a much more motivating environment.

So here's where i'm starting from: Growth - GDP Growth in particular - is a desirable economic quality. A lot of good comes from Economic growth. Growth Target's in most western countries are between 2% & 4% year on year. But what is "Growth"? Why is it important? In what ways is it good? In what ways is it not good? How else can one think about growth? It's a topic I first remember contemplating several years ago - with an econmics amigo from India - Anup Thomas.

Let's start with What is Growth: Growth can be whatever you define it to be, but in the current economic system, growth is defined (more or less) as the percentage increase in the number of dollars (or which ever currency unit you use) which is generally thought to represent the progress in a given economic division. In short, if the economy of the UK grew at 4% for 2004, if everyone put their pound-notes together in a pile, there would be 4% more of them in 2004 than there would have been if everyone had done this in 2003.

Heckling disclaimer - obviously there aren't enough pound-notes printed to do this & the calculation is way more complex, but i like this as a nice simple picture, that is more or less valid.

Note that the choice of units of measurement (dollars or other currency units) is fairly arbitrary, as is the definition of progress or improvement as an increase - from a strictly philosphical perspective.

So Now - Why is it important?

Well- Psychologically, growth is important - because it represents a measure of improvement of one year on another. I don't know about you, but if I don't feel like i'm making progress, I can get very frustrated & angry - and eventually depressed. That's what growth is all about - measuring some kind of "progress" so that we can feel happy. I'm pretty sure that we were genetically selected for this type of emotional response, but i'd be interested in some comments - particularly from some of my friends from different cultures on what tends to bring the deepest, most sustainable happiness most human lives.

As well as the psychological arguments it is generally accepted that economies with strong growth tend to be doing well, and economies with less growth don't do as well. If an economy starts to contract - as Japan's did through much of the 1990s - one risks inflation hitting zero or becoming less than zero. Negative inflation - called deflation - isn't good for economic systems as they currently exist. Goods get less & less expensive with each coming day (kind of like electronics currently do, but on much bigger & more important things like houses & buildings)

If things are getting cheaper day by day, there is no sense in buying them today, so one might wait until tomorrow, next week, or next year to buy something. While this isn't a bad thing in one or two cases, in theory one might postpone all of one's spending indefinitely. This would quickly become unsustainable because everyone would stop buying from everyone else, goods and services & eventually the only transactions would be about urgent needs - like eating. This doesn't sound like a completely wrong things to me - it might be representative of hunter-gather economics, but it is very alien to current economic practice & I hope you can see that negative growth would be quite calamitous to us at present.

So positive growth is important because it probalby staves off economic catastrophe.

I think that's enough for today, I'll come back to What's good & bad about growth tomorrow perhaps.