The Point of Economic Growth

Over the last half century or so, virtually everyone has become fixated on economic growth in general and GDP growth in particular. The leading opinion - indeed everyone's opinion - is that economic growth will automatically lead to higher incomes for all strata of society and that is "a good thing". A rising tide lifts all boats. However, in all this mania for economic growth come what may, an important question is frequently ignored. What is the point?

At certain levels of development, a focus on economic growth is justified. For example, when an economy is trying to move from beyond subsistence level, there is naturally a focus on economic growth and GDP growth in particular. Indeed this focus is natural as the economy moves into the middle income level. It is at this level and beyond that a blind focus on economic growth (and GDP growth in particular) starts to become problematic in my opinion.

How does an economy grow? Economists can come with all sorts of explanations regarding how economies grow. Most of these will focus on increasing use of some combination of land, labor and capital. Ultimately, economies grow because people buy more things. It does not matter whether these people live within a particular geographic boundary or outside it. Marketers generally distinguish between consumer and business markets. While both have their unique characteristics and require different marketing techniques, in the final analysis, business markets exist because of consumer markets. Businesses only buy various goods and services because ultimately some consumer somewhere is buying an end product that incorporates part or whole of what the business sells. So if economies grow because people buy more things, how do you get people to buy more? In other words, how do you get people living within a particular economy to buy increasing quantities of the goods and services that that economy produces or imports.

Generally speaking, consumption is increased when consumers either buy more of something or they buy that thing more frequently or some combination of the two. When economic development is at a low level, large numbers of people lack basic things like access to housing, water or even basic personal items like for example soap. Economic development is accompanied by a concomitant rise of manufacturing jobs which pay sufficiently well that basic necessities are taken care of and people can think of buying occasional luxuries. At the same time, there is an increase in the demand for and consequently supply of education which enables people to further improve their prospects in the job market. A virtuous cycle is set in motion in which developments like the ones just mentioned engender further economic growth which enables businesses to expand and offer larger varieties of goods and services which increases demand for them and so on. And so the economy gradually rises from a low, generally subsistence level to increasingly affluent levels. Markets expand and consumption increases.

The potential problem arises when growth raises an economy to a middle income level and beyond. At this point, raising consumption starts becoming increasingly harder. This is due to the fact that larger and larger number of people have access to the goods and services that they desire. No one can continue to consume goods and services indefinitely. When this point starts to be reached, then increase in consumption come about partly as a result of population growth and partly as a result of increasing consumption of luxuries.

It is at around this point that the question raised above needs to be asked. Stated in another way, the question is what does a blind faith in unimpeded economic growth accomplish? Does it result in a happier populace? Research seems to indicate otherwise. Does it make for a wiser population? There is no evidence for that. Does that make for a population that achieves great self fulfillment? Apparently not. So then beyond a certain level, exactly what is the point of blind economic growth?

Globalization's Dirty Secret

There is a dirty little secret regarding globalization that almost no one is willing to talk about. The secret is that no matter what developing countries do, they can never hope to attain the same sort of lifestyle for the majority of their people as that currently being enjoyed by the developed nations. Indeed the problem is that even developed countries cannot enjoy their current lifestyle forever.

The reason for this assertion is that our civilization and consequently our lifestyles are based on a throwaway culture. Take an example from Pakistan. An ink-jet printer here costs approximately Rs. 3000 (roughly $35). This comes complete with a black and a color ink cartridge. If you add a mere Rs 100 (a little more than a dollar) to the cost of replacing the black and color cartridges, you can buy a brand new ink-jet printer. With these economics, it starts to make sense to throw away the old printer and simply buy a new one. And therein lies the problem. You end up throwing away a perfectly good and usable printer and unnecessarily buying a new one simply because the way the printer and the cartridges are priced. Multiply this across an economy and the problem emerges. Buy virtually any food item. Almost all come in nice, attractive packages which are designed to be thrown away once the item is consumed. Usually the containers are made of non-biodegradable materials. The result is overflowing landfills and more importantly an excessive use of resources.

Nowadays, we keep hearing of peaks for various kinds of commodities. There is peak oil, peak water and even peak soil. There is a sense that we are taking our the necessary raw materials from the ground at an ever increasing rate. The problem is that once the non-renewable resources are used up, they are gone forever. Once a particular seam of iron ore has been mined, it is gone forever. Even the renewable resources are being used up at a non-renewable rate. The question is why?

I feel that this issue goes to the heart of the problem with today's economic system. Every single one of us has been fed the mantra of continuous economic growth our entire lives. Recessions are bad and to be avoided at all costs. If they cannot be avoided, then steps must be taken to minimize their impact and restart growth at the earliest possible. Growth, growth, growth. At all costs the economy must grow. This is dinned into us from our earliest childhood and reinforced continuously throughout our education. What virtually no one seems to ask nowadays is what is the point of all this growth?

To come back to my earlier point; given the constraints on resource availability, there is simply not enough raw material left in the ground to catapult the majority populations of the developing countries into the kind of lifestyles that the developed countries currently enjoy. This is an issue that will increasingly come to the fore as these countries develop their economies using the same paradigms that the developed countries used at similar stages of development. And as this realization starts sinking in amongst the populations of the developing countries, the potential for conflict will start to increase. Unfortunately, given the myopic leadership that almost all countries currently have (barring a few individuals who probably will not have much impact on the sea of mediocrity that surrounds them), the chances of peacefully managing these conflicts appear to be remote at this juncture.