Economic Growth

[Dufresne]

What is "economic growth"?

I am asking because a colleague has claimed that economic growth above a certain percentage is required to avoid rising unemployment and that exponential economic growth would be impossible after some time and thus unemployment would constantly rise.

[Tom Robinson]

What is "economic growth"?

I am asking because a colleague has claimed that economic growth above a certain percentage is required to avoid rising unemployment and that exponential economic growth would be impossible after some time and thus unemployment would constantly rise.

HÜLSMANN: "Economic growth is determined by two elements, (a) by the available quantities of goods that can be used in the productive process and ( by theadroitness with which these available factors of production are combined."

Entrepreneurship and Economic Growth

What explanation did your colleague give for a decline in economic growth?

Edited April 14, 2005 by Tom Robinson

[Dufresne]

HÜLSMANN: "Economic growth is determined by two elements, (a) by the available quantities of goods that can be used in the productive process and ( by theadroitness with which these available factors of production are combined."

But what does an economist mean when he says that a nation's economy grew by X% in a given year? How do economists arrive at such a number? What does the number refer to in reality?

What explanation did your colleague give for a decline in economic growth?

He talked in very general terms and did not explain why economic growth, specifically, would decline. He said something to the effect that exponential growth in general could not continue indefinitely.

[y_feldblum]

Reisman prefers the phrase "economic progress", since an economy can progressively become capital-intensive leading labor to become more productive, whereas economies do not grow. Of course it can continue indefinitely, so long as science and advances in technology are not forcibly prevented from taking place. Economic progress declines precisely to the degree that capitalism recedes and statism or a culture of irrationality takes its place.

[Tom Rexton]

What is "economic growth"?

I am asking because a colleague has claimed that economic growth above a certain percentage is required to avoid rising unemployment and that exponential economic growth would be impossible after some time and thus unemployment would constantly rise.

When economists in general say that economy A grew at X% in year Y, they simply mean that real GDP increased by X% in year Y. There is a common misconception that GDP is a measure of the "size" economy. It's not. It measures mainly gross consumption expenditures.

Whatever your friend meant by "exponential growth" he was certainly wrong because the West has had "exponential growth" for over two centuries now, and there is nothing in reality to render it impossible now or at anytime in the future except statist ideas and policies. Economic progress can continue indefinitely as long as we are free to use our minds, for until we have reached omniscience, our body of knowledge can always be expanded and applied in new and more productive ways.

[Dufresne]

When economists in general say that economy A grew at X% in year Y, they simply mean that real GDP increased by X% in year Y.

Thank you, that explanation helps a lot.

[softwareNerd]

"Economic growth" measures the growth of an economy. So, the underlying question is how one measures the size of an economy. There are fundamentally two things one could measure:

1) Wealth: A point-in-time quantity of material values; or,

2) Production: The quantity of material values produce in a given time-period

Conventionally, when economists speak of "economic growth", they are referring to the second and speaking of growth in production. Since cars cannot be added to (say) oranges, the measure is usually expressed in terms of money (e.g. GDP).

Two other computations are usually made:

1) Since money does not have a constant value, adjustments are made for inflation. Sometimes, something called a "hedonistic adjustment" is made too, to account for the extra value being produced. (A simplified example: If the same number of computers were produced this year as last, and sold for the same price, but if each computer was twice as powerful as last year's model, then the economy produced more material value this year.) Economists quibble about these adjustments, but -- broadly -- they give one the "price-adjusted" Production (e.g. Real GDP).

2) Since much of this analysis is done to find out if one country is better than the other, the second figure often quoted is the AVERAGE Production per person, i.e. the Per Capita Production. (e.g. the Real Per-Capita GDP).

These figures have various problems in the assumptions made. So, they have a certain range of error. Comparisons across countries are further complicated by different methodologies and different currencies involved. However, even with the margin for error, if the numbers are very different for two countries (say, USA vs. China) then one can be pretty sure the Average material values in one are more than in the other.

Like all averages, such measures can only tell you so much. If one really wants to get a picture of how the Chinese live versus how American live, one has to get into more details. (Then there are some who want to measure "quality of life", not just material values... a different thread.)

None of this addresses the more important issue:

... a colleague has claimed that economic growth above a certain percentage is required to avoid rising unemployment and that exponential economic growth would be impossible after some time and thus unemployment would constantly rise...

As a mathematical computation: if % growth of material values is lower than the % growth of the population, then the per-capita material values will be lower. However, this does not imply that there will be unemployment. It just means that each person will produce less than before (on average). Think about that. Which is the horse and which is the cart?

If -- on average -- every individual who joins the economy (to be counted in the divisor) adds at least the same as the average individual already being counted in that divisor, then the average remains the same.

(Ofcourse there can be demographic changes etc. However, that is a different topic.)

[DavidV]

“Economic Growth, Can it continue indefinitely?”

Viewed from a philosophical perspective, economic growth is an increase in wealth, which means an increase in the range of values that man can attain or achieve. Man interacts with the universe by a causal and volitional means, so the course of action he can take to achieve a value is limited only by the facts of reality and his mental abilities. This means that while man can never reach omnipotence, the progress towards mastery of the universe is limited only by our imagination.

From an economic perspective, economic growth implies a more complex capital structure and an accordingly greater division of labor. This means that humans become more, not less “employed” in the sense of relying on the productive capacity of others as a means to maximizing their own productivity.

[Felix]

He talked in very general terms and did not explain why economic growth, specifically, would decline. He said something to the effect that exponential growth in general could not continue indefinitely.

I guess you mean my post. Just ask me directly. I don't bite. I even gave you a reference where everything is explained.

I'll try again.

What does it mean for an economy to grow?

It produces more than it did before. That's what growth means.

The questions at hand now are:

How does this happen? And why does it happen so well under free capitalism?

My explanation for this was that capitalism either grows or breaks down which may have been what has puzzled you.

In economics most production is pre-financed. That means that the entrepreneur doesn't have the money for production costs himself but has to borrow it from someone else. Just look at the business report of any company.

The problem for the entrepreneur begins right at that point. He has taken on debt. He has received money and now he has to pay the money back (which he could) AND pay back the interest on that money (which he can't). Therefore he has to produce goods (which was what he has intended to do in the first place but now he is forced to do so or he goes bankrupt) and sell them over production costs. Companies have to sell over production costs because production is pre-financed. So just to break even he has to "make a profit" (even though this profit goes directly to the lender).

Now the money available in the market is limited. Let's say:

There is an amount of X $ available.

Now every company tries to make a profit, or at least to break even. But to do any of this, the company has to take more money out of the market that it put inside in the first place.

And here's where the fun starts:

X $ is the amount of money previously put into the market.

Let's forget state deficit spending and we see that all money was put into the market by previous companies. These companies all want to take more money out - just to survive. They cannot all do that due to simple math. X$ does not equal X$ plus interest (let's say X$ * 5%).

Where in the world do these 5 percent come from? They don't exist - yet.

This is the fundamental problem in every economy. There is a lack of money, generally called a lack of demand.

No matter how productive all these companies are, some of them would lose out if the amount of money was fixed.

Now where does the money come from?

It comes from other companies just starting. They take on new debt. They put new money into the market and the old companies can pay off their debt, interest and even make a decent profit.

Now the problem is on the new companies' shoulders.

And this goes on indefinitely. There is no end in human imagination. And there is no end in his demand for hot new products. The only problem is that there is not enough money to buy all that stuff. This amount of money only grows steadily and along with it grows the amount of goods because all companies have to produce to pay off their debt. So there is no inflation because every cent of new money is backed up by new products that are actually sold (and therefore have real value to someone in the marketplace).

The problem starts (as always) when the state appears. Not only does it make life harder for entrepreneurs, by taking away their money, which forces them to produce even more, which is a fact very well criticized by the members of this forum.

The real problem is the state deficit. This is the cancer of this credit system.

A company borrows money to produce and it intends to pay it back (and it is likely to do so or the bank won't give any money).

The state borrows money but it doesn't produce, that is: it doesn't try to pay it back (plus interest). No politician would ever do that. He would have to raise taxes and in the end take more money out of the market that the state put in initially. Soon nobody would allow the state to do this. But the state has a trick. Well, actually it has a gun. Government bonds of so-called trustable states all have triple A ratings, the highest rating there is saying that this is one of the safest investments you could make. Why on earth does anyone trust money to a state? Because of the gun. If you give your money to a company, it has to get that money (plus interest) back by means of free trade. The state doesn't have to rely on this. It has a gun and can raise taxes. It can - in the end - legally steal the money back. This make it a secure investment. But the state never pays back for said reasons.

In Germany, for example, since western Germany had its birth, public debt was rising at an exponential rate. And it only can do this if the state doesn't pay back but pays old debt with more new debt (to pay the interest).

This drives interest rates way up. Why give it to a company for 4% with risk if I can give my money to the state and get 5% with no risk? Keynes always calculated with 2% interest for state bonds. This was before his stupid theory was implemented.

All this capital bound in state debt (which is lost in consumption) means that this money has not been used by entrepreneurs (usually the only way to make more money "without work"- I know it's still work!). Therefore it didn't create jobs. It didn't create products corresponding to the rise in available money. This means we have a rising amount of money but no rising amount in goods. This is inflation.

And it only appears if there is a debtor who doesn't pay - the state.

You can look at the unemployment rate and the debt rate of any country and see that the curves look remarkably alike.

The only countries where this is not the case is USA (and maybe Japan - haven't seen them). Here you have no rise in unemployment even though Bush spends more money than he (could and therefore) should. The reason for this is the breakdown of Japan's economy and the downfall of interest rates down there (meaning that nobody is stupid enough to borrow money at any rate). The only people borrowing money buy american bonds with it. So the American state deficit is worsening Japan's economy even more but it keeps the US from having to deal with the unemployment.

Of course reality will fight back. And this is what I fear. Since you can't fuck with reality without being punished, all this debt has to be paid. This can happen in two ways:

All states on earth return to the gold standard by changing the value of the dollar accordingly and paying back all their debt with all the gold they have and stay out of the finance market. This won't happen.

Therefore the second possibility will become reality. That is deflation. Usually this deflation happens piecewise. First a small inflation because the entrepreneur puts money in the market, then a small deflation because he puts up products to sell, causing a little deflation. Now we had an inflation for about half a century.

Imagine what happens. A little hint: It's not good.

So that's my theory in short. Hell, I think it's long enough so I don't want to explain what deflation will result in.

I hope anyone reads this (and replies) since I am eager to hear your opinion on this.

[softwareNerd]

As an aside, I do not understand this...

I guess you mean my post.

How could what you quoted (from April 2005) be a reference to your post, when you joined up this month. Just wondering if you cut/pasted the wrong person's quotation.

[Felix]

As an aside, I do not understand this...

How could what you quoted (from April 2005) be a reference to your post, when you joined up this month. Just wondering if you cut/pasted the wrong person's quotation.

OOPS! Seems like I picked the wrong quote.

But the comment still fits.

[softwareNerd]

Felix, There is a lot in your post, but I want to focus on the first item that struck me as I read it:

... he has to "make a profit" ..."

I agree that a business has to break even in real terms to remain in business. However, you seem to imply that a business has to (not just in today's environment/economy, but more generally) break even nominally (i.e., in monetary terms).

Am I reading you correctly? If so, why do you make that assumption? Do you assume that nominal and real interest rates must both necessarily be non-negative in a growing economy?

[Felix]

I agree that a business has to break even in real terms to remain in business. However, you seem to imply that a business has to (not just in today's environment/economy, but more generally) break even nominally (i.e., in monetary terms).

Am I reading you correctly? If so, why do you make that assumption? Do you assume that nominal and real interest rates must both necessarily be non-negative in a growing economy?

Not only non-negative, but positive. Who borrows money at negative interest rates anyway? (well, the government, of course) That's a sure sign of a decaying economy.

I understood 'real interest rates' in the way that you create an improvement in a way that you take something useless and turn it into something useful.

Something like actual wealth without regarding money.

Did I get that right?