What’s the point of growth?

People sometimes ask me: why do we need growth?

To ask an economist why we need growth is like asking a gardener why they grow flowers. Flowers add value to a garden, and growth in the economy means that more value has been realised through production and exchange. Hence in both cases it is about sources of value, but the mechanisms for realising value differ. In the garden we cultivate a resource to be more valuable to us, but it has not changed its original nature. The same is true when we acquire a skill, such as learning to read, cycle, swim, ski, paint, play an instrument or dance, we cultivate a resource that enables us to derive more value from it.

In the economy, value is realised through production and exchange of goods and services. Production may entail cultivating a resource, such as buying expert advice or going to a botanical garden, but it may also entail exploiting a resource such as cutting down the rain forest. In the case of exploiting the rain forest, which absorb carbon dioxide ( a green house gas) and produce oxygen, the production of ephemeral values is done at the expense of eroding a resource of eternal value, namely the oxygen we need to survive.

Thus when we talk about growth, and whether we want it or not, we need to think about different sources of growth. If the growth is due to cultivating a resource or enhanced resource utilisation, then it is a sustainable source of growth in value. The problems with growth relate to instances where resources are exploited for short term gains.

We also need to be careful with GDP as a measure of growth in value. Whilst Adam Smith is mostly referred to in the context of the invisible hand, another important contribution of Adam Smith was to note that there was a difference between value in use and value in exchange. There are many sources of value that have a high value in use, such as water, but a low value in exchange. Ingvar Ohlsson in his book on National Accounting from 1953 thus issues a word of warning that how GDP should be constructed depended crucially on how it was intended to be used. To analyse trends and effects of public policies, yes, but as an overall goal for society possibly not.

Richard Layard is one of the critics of using GDP as a goal for society. He notes in his book Happiness that despite more than doubling of GDP since the 1950, we are not happier. On the contrary, he comments on rising figures of anxiety, depression and suicide. One contributing factor to this is that whilst growth in GDP indicates more value has been realised from activities that are included in the GDP measure, it does not necessarily mean that people were able to derive more value from available resources. There are sources of value, such as nature and fresh air, hobbies and cultural activities, as well as household production that do not enter GDP.

Thus if growth in GDP merely replaces other sources of value, there may not have been an overall increase in the value that was realised. Thus the fundamental problem of economics which is to create, cultivate and realise value, requires us to identify all sources of value and how they interact. The market mechanism is good for realising value from purely private goods, but for goods with other properties other institutions may be more suitable.

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