The principle of economic growth has become quite controversial in recent years. While many economists perceived the necessity of growth almost as a dogma, critics have become increasingly numerous. Because most economies are overexploiting natural and non-renewable resources, the idea of unlimited economic growth seems to be doomed to fail at this point.
Before getting into more detail here, we need to define from what perspective we are looking at the issue. Since we want to explore overall economic growth (i.e., on a global scale), we will use a macroeconomic approach. However, please note that the issue of growth is at least equally important for firms on a microeconomic level (don’t worry, we will look into that later). For the following paragraphs, we will define growth as the changes in overall real output (i.e., real GDP growth) of the entire economy over time.
So if we look at the issue, the most basic question is: Do we really need economic growth? To answer this right away: Yes, we do.
Now, let me explain. The conclusion above is mainly based on the following fundamental economic assumptions and aspects.
1) “More is always better”
As we have discussed in an earlier post, people’s wants are virtually unlimited. One of the fundamental economic assumptions is that people want to get as many resources as they can. This may not seem like a convincing argument as it stands, but it builds the foundation for the upcoming arguments.
2) Standard of living
The economy needs to grow because the population grows. If the economy grows at a slower rate than the population, the standard of living will decrease. To illustrate this, you can think of wealth as a cake. If more and more people share this cake, but the cake itself does not grow, everybody gets a smaller piece.
3) Distribution of wealth
Wealth is distributed among the population in a certain way. Some people have more; others have less. This is inevitable for the most part, but most people agree that the government should at least try to shorten the gap between the rich and the poor. However since the rich generally will not want to give up part of their wealth, redistributing the cake will be easier if we can give more of the additional pieces to the poor (rather than taking existing pieces from the rich). Thus we need a bigger cake.
4) Technological Development
Last but not least, economic growth also correlates to investment and technological development (see also Dynamic Efficiency). More efficient production and new technologies enable new growth opportunities. Furthermore, when looking at the overexploitation of non-renewable resources, new technologies can help improve the situation and lessen the impact of economic activities on natural resources. An excellent example of this is electric cars; they open up new business opportunities while lowering CO2 emissions of traffic.
It is important to note that this line of argumentation does not mean economic growth should be pursued at all cost. Many other variables need to be taken into account. For instance, wealth and GDP do not necessarily reflect a population’s well-being (see also Limitations of GDP as an Indicator of Welfare) and increased economic activity still often hurts the environment.
In a Nutshell
Economic growth is necessary for our economic system because people generally want more wealth and a better standard of living. Furthermore, it is easier to redistribute wealth and advance new technologies while an economy is growing. We must, however, be aware that after all, economic growth is a means to an end and not an end in itself.