Begging the Question

Why does economic growth matter? Isn’t growth just fueled by mindless consumerism? Are capitalism and minimalism like oil and water, or is growth still a good thing, the consumerism that can fuel it notwithstanding?

Economist John Cochrane of the Stanford University’s Hoover Institution has written a very illuminating article that is available for free on his blog. Cochrane’s essay is empirical and well done, but it doesn’t quite answer the questions I’m asking. Throughout his essay, Cochrane makes the tacit assumption that more income is inherently better. This isn’t a particularly difficult assumption to swallow, but it’s worth examining.

The average American is more than three times better off than his or her counterpart in 1950. Real GDP per person has risen from $16,000 in 1952 to over $50,000 today, both measured in 2009 dollars. Many pundits seem to remember the 1950s fondly, but $16,000 per person is a lot less than $50,000! […] If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000. That’s a huge difference.

Cochrane goes on to examine productivity, regulation, and pro-growth policies. It’s a good piece; written in very accessible, non-technical language that everyone should read. But let’s examine that basic premise: median incomes of $50,000 are better than median incomes of $23,000.

It may seem obvious that more income is preferable to less, which is (presumably) why Cochrane doesn’t feel the need to justify this sentiment beyond it being a tautology. But let’s take a few steps back. Is it really a given?

Let’s look at some instances where growth isn’t necessarily a good thing and may be viewed negatively. First, when businesses talk of growth, we often balk. Particularly when that business is, say, an insurance company complaining that they “only” had 15% revenue growth and therefore can’t continue in the ACA Insurance Exchanges. We laugh as Coke and Pepsi continue struggling for a couple tenths of a percentage point more of soda market share, and we don’t feel any sympathy for their concerns about bottled water being just as profitable as soda, but having far less brand loyalty. We think back to the toll the industrial revolution took–and is still taking–on the environment and have to ask, “was it worth it?”

As I’ll argue below, yes I think was worth it, but not in the way most people think. It’s not about the raw income. It’s about the economic dynamism–the number of economic transactions–that truly makes growth such a good thing. This is not to say growth doesn’t have some negative consequences, but growth increases dynamism, which is what makes life better.

Objections to Growth

There are many potential objections to economic growth for growth’s sake. For the sake of time, I’ll just focus on three.  

Environmental Costs

Because of the advanced rate of growth beginning with the industrial revolution, we have unleashed tons of mols of greenhouse gases into the atmosphere. Climate change isindubitably man-made as a result of the technological progress, the resultant economic growth made in manufacturing and mass production, and the consequent exponential growth in the population–humans are, after all, biologic machines that convert Oxygen into Carbon Dioxide.

greenhouse-gas-emissions

It was growth of a sedentary, agricultural society and animal domestication, not the status quo of hunter-gatherer society, that introduced all manner of infectious diseases, both for humans and the rest of the ecosystem. Increased demand for building materials has, throughout history, been met by increased supply of lumber, resulting in deforestation everywhere from the ancient Fertile Crescent (modern day Iraqi desert) to heaven knows how many other localities. Finally, it was the pursuit of growth–rapid growth through controlling the beaver pelt trade–that incited the French and Indian War in the colonies. The list could go on and on, but it’s clear that Economic growth and technological advancement are not without trade-offs, including with regard to the environment–from local ecology to global climate.

What actually is growing?

What has growth brought us? Growth has brought us more medical technology, but also more medical expenses and bankruptcies. We’ve created a wealth of knowledge and ingenuity, but more than that, we’ve created–and purchased–an incredible amount of stuff. Self-storage is the industry predicated on paying more to cover up past mistakes of over-indulgence, and it’s growing dramatically. In the immortal words of Tyler Durden, for many, economic growth and the globalism that came alongside the great moderation means that we are “working jobs we hate, so we can buy shit we don’t need.” Growth has increased our capacity to build and create, and our spending power has commensurately increased. However, our needs–our true human nature and biological needs–have changed remarkably little. Thus, the growth we’ve experienced, the extra $34,000/year, is being predominantly spent on cost increases of some essentials–housing and healthcare–and the discretionary on the superfluous, the non-essential, the superficial, and keeping up with the Jones’s.

Unequal distribution

“A rising tide lifts all ships.” At least that’s the rhetoric that’s used. And to a degree, it’s absolutely true: innovation is knowledge, and knowledge is a non-rival good. The rising economic tide increases innovation and the body of knowledge available to society. However, economically, some ships are lifted more than others. While the income distribution of households is becoming (relatively) flatter, the income distribution of individuals is more skewed. Inequality in-and-of itself is not, in my view, inherently a bad thing; I want to live in a world where Bill Gates and Sergey Brin are filthy rich after creating products that improve the lives of billions. However, if growth benefits primarily the haves and the have-nots only see the downsides, is growth such a good thing for the majority? What good is growth, then, if it benefits many, but leaves many more desiring and building up credit card debt in pursuit of more, because they can, even when they don’t need to?

Why Growth is Still a Net Positive

Economic growth is often thought as a unidirectional thing. After all, we see GDP growing over time on an x-y scatter plot.

real-gross-domestic-product-st-louis-fed
(Source: FRED
)

But what composes that GDP can change dramatically over time. Preferences shift, societal needs change, and the pie-charts that show the composition of the workforce and goods and services can change dramatically. Growth can be multi-directional and multi-faceted.

For example, what is a normal good? By economic definition, a normal good is one where the demand for that good increases with income. The classic example for normal goods is high-quality foods: as we make more money, we want more of the meat half of the meat and potatoes diet. This is not to be confused with a luxury good, where quantity demanded increases with price–as we see with wine, fashion, and yachts. As Cochrane points out, some non-conventional normal goods include things like civil rights, environmental conservation, and self-determination.

Environmentalism as a Normal Good

Next time you see someone working hard at minimum wage, ask (or just think about, for the shyer among you) if s/he buys energy-efficient lightbulbs or just the cheapest ones available. If they’ve done the math (and most people on that tight a budget have), they’ll probably tell you that they buy whatever’s the cheapest, which is probably not the energy efficient bulbs. When you’re living at the poverty line, you’re not particularly interested in the environmental consequences of your actions; your interests focus on putting food on the table. Concern with the environment and expensive products that are more “environmentally friendly” are normal goods: demand increases with income.

By all accounts, the Industrial Revolution was horrendous for the environment. However that fact does not attenuate emerging nations’ desire to reproduce the same thing in the least. It’s worth noting that John Muir and the Sierra Club didn’t emerge until after the Industrial Revolution had done its work: both in terms of economic growth and damage to the environment. Caring for future generations will, by human nature, always be secondary to caring for the humans alive today, in whatever form that takes. Only when the humans alive today are well-taken care of, will the focus really begin shift to future generations, because caring for nature and future generations is a normal good.

Anti-Consumerism as a Normal Good

What about Palahniuk’s indictment that growth is just fueling that which truly does not matter? As previously posted on this blog, I have a general sympathy of sentiments with the Minimalist philosophy/movement. Given that consumption spending makes up approximately 70% of GDP, minimalism would, on the surface, be diametrically opposed to growth for growth’s sake. But when you dig deeper, it’s not.

What is consumption? When you look at the formula for GDP, we have this monolithic ‘C’ for consumption in Y = C + I + G + NX, where Y is (nominal) GDP, C is consumption, I is investment (which includes corporate capital outlays and residential mortgages), G is government spending (not including transfer payments), and NX is net exports (exports minus imports).

Minimalism is about living a meaningful life. The focus of minimalist thinkers like Joshua Becker, Joshua Fields Millburn, Ryan Nicodemus, Leo Babauta, and others is that mindless consumption of stuff gets in the way of self-actualization. And this is (in my experience) true. However, part of this claim is that experiences are more important than stuff, which is also true–when is the last time you thought about Christmas traditions with your family and when’s the last time you thought about that high-school yearbook you’re inexplicably holding onto? So what about that ‘C’ part of GDP? Consumer purchases are built up of two things: Goods (stuff) and Services (experiences).

Suppose that tomorrow, everyone were to become a diehard minimalist. The Goods part of that identity would fall, but the services (read: experiences) would compensate. Minimalism isn’t just about cutting spending; it’s opposed to unnecessary spending on “shit we don’t need” and replacing that with life experiences–preferably free, but more importantly meaningful.

From the perspective of economic growth, this is great. Growth is about productivity increases, and Minimalism makes people happier, and therefore more productive (in the general sense, not necessarily in the corporate human resources sense). More to the point, when looking at growth in Y (GDP), Investment and NX can, and should, rise, holding C and G constant. So growth does not necessarily–even if it historically has–increase consumption. The more important pieces is I: Investment. Less frivolous spending means more saving. This means more  money available for investment, lower interest rates for firms looking to expand (particularly expand their non-frivolous divisions), and higher standards of living in retirement (including more consumption). According to the Solow Growth model, increased savings will, indeed, cause a short dip in GDP, but increases growth and growth potential in the long run.

First Principles: Adam Smith

Investment includes, among other things, increasing employment. Going back to first principles in Book 1 of An Inquiry into the Nature and Causes of the Wealth of Nations, when a resource is scarce (i.e. Demand is higher than supply) employers are willing to pay more for that resource, including labor. When the economy is in the upswing of the business cycle, employees (excluding public employees) get raises. More importantly, when the economy is growing, employers compete for employees, meaning that workers can change jobs (relatively) easily, and find a job that helps them to thrive–reaching self-actualization by challenging and growing them as a person. Workers can find the “right fit” of a job much more easily as a result of growth.

As a corollary, Research and Development is a normal good, and when firms are growing they are more likely to boost investment in this division. Similarly, startups–i.e. the the drivers of innovation–are able to get funding and capital during times of growth, much more so than during the trough of the business cycle. Moreover, startups are more successful–and therefore more influential–during times of growth. When the economy is growing, we’re learning more. We’re developing new technologies, new products, new processes, and increasing the pool of societal knowledge–even if, for a time, some of that knowledge is proprietary; knowledge never stays proprietary forever.

Dynamism

In short, growth means dynamism. The Oxford English Dictionary defines dynamism as the quality of being characterized by vigorous activity and progress. Economic activity really just means transactions or interactions. When the  economy is growing quickly, the number of potential interactions increases:

  • number of job openings, and the number of applicants willing to apply
  • Venture capital availability and appetite for risk
  • New products and services, and new consumers

When the number of interactions increases, the potential for mutually beneficial or euvoluntary exchanges necessarily increases.

When these exchanges are in goods and services, we benefit a little–new services, experiences, and useful tools. When these exchanges are in the labor market, we benefit a lot. People who are happy in their jobs are more productive, meaning increasing future growth. People who are happy in their jobs are (generally) happier in their lives overall. The extra monetary income we see from growth is nice, but money isn’t everything. More important than real income is the availability of opportunities for personal growth, advancement, thriving, virtue, and self-actualization. You can’t buy any of these things, no matter how high your income is, but they are still normal goods, and a higher income allows you to shift focus from merely surviving to truly living.

Dynamism isn’t just about increased sales or incomes, it’s about increased opportunities for change. Workers stuck in a dead-end job have more opportunities to find a new job when the economy is growing. New products emerge. Some of these are superfluous and engender the kind of mindless spending minimalists hate, but some legitimately make people’s lives better off–for example, digital pills to monitor drug regimen compliance, side-effects, absorption, and effectiveness. Dynamism is about new ideas bouncing off each other, about new people coming into contact with those ideas, and about competition doing what competition does best: forcing everyone to implement new technologies to provide better goods/services at a lower price. Economic dynamism is how we go from the abstract economics to the concrete improvements to people’s lives. And growth is what makes dynamism possible.

Concluding Remarks

Among the works of man, which human life is rightly employed in perfecting and beautifying, the first in importance surely is man himself.

Ultimately, the goal of Economic advancement is human thriving. Economic growth and the dynamism it creates is the most effective way of increasing human thriving sustainably. Yes, it can have downsides. But ironically enough, more growth can also be the cure for downsides from previous growth. Admittedly, this is a little like saying that more alcohol can cure a hangover; it sounds a little insane, but enter the Bloody Mary. Also, would we ever have widespread solar and biodiesel energy without innovation? Economic growth has afforded us the opulence to care about the environment, the well-being of the poor in other nations, and other things that were far from the minds of our forebearers. The benefits of growth are agnostic to where that growth comes from. If we continue to “grow” by buying “shit we don’t need,” then growth will remain lackluster, and even if it doesn’t, we will remain lackluster. If, on the other hand, we grow the economy by growing ourselves, making ourselves more productive–and more interesting–then that will have very different outcome. Economic Dynamism comes from growth, and is what allows us to reinvent–or just tweak–ourselves to become happier, healthier, wealthier; without adversely affecting our fellow human.

 

Bibliography

I originally wrote this with footnotes, but they didn’t copy over from Google Docs to WordPress. I may add them back in later, but here’s the list:

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