Economic Growth

Ah, the mystical unicorn called Economic Growth, the one the professors told you about in Econ 101 and assumed you knew what they were talking about.  Yes, we all learned how an economy grows, or sort of.  We produce more widgets and consume more widgets.  It all sounds rather obvious.  Supply and demand, two sides of the same coin.  But does that really tell us much about this mythical beast, economic growth?

Perhaps we need to back up a bit, look at some general history.  Back when we were hunters and gathers we depended on nature to supply our needs and our own energy to search, secure, and then consume what was available.  Nature was a boundless supply as long as our numbers were low and we inhabited a high output area.  But as populations grow and shift to other areas we began to farm and herd animals.  The ‘free ride’ nature provided was over for so many of us.  We expended more energy growing food crops that were based on seasonal growth periods, weather determined those seasons of growth and fallow.  Our animals were also ruled by seasons.  The spring brought offspring and new growths of grass for grazing.  Our herds could be selectively harvested during the year.  So it was that most of our efforts went toward food production.  But as we learned to invent and produce various tools and machinery to aid our work we found that we could create a division of labor.  For not everyone had the skills needed for the production of effective tools.  And while we could build hovels, not everyone had the skills to build really good hovels.  Basic carpentry and brick making became learned crafts.  This distribution of labor meant that the population could only support a few craftsmen, the rest were farm laborers, wives, and children.  Economic growth came with an increase in population.  Then a few hearty souls started wandering around with trinkets, food stuffs, and other products to trade.  This meant an increase in that division of labor for someone need to make the trade goods and someone needed to do the travel and trade.  There was no money and no credit.  The exchange was goods and services.  I build a hundred farm implements each year and you give me a food for a year.  I work in the field and receive a food for my labor.

Eventually we start land ownership and house ownership and tool ownership and all the trinkets that we have enough food or services to exchange.  And will find a standard for exchange.  Gold or silver will do for it is very portable and can be refined to a high state of purity.  Food is perishable, houses can’t be moved, and services must be rendered when needed and available.  As for credit, will, when I harvest my food crop I expect a surplus and you may have an extra mouth or two to feed.  So make me a plow or a rake or build me a barn and I will pay you from my surplus and give you a little extra for waiting.  This is how credit was born, the future payment for a good or service now.  Well, how do I know this will be a bumper year for your crops?  What if you only harvest half what you expect?  If I take my due you and your family may starve the rest of the year.  Remember Moral Hazard?  Promising more in the future than you can deliver means there is a hazard to my giving you credit.

Remember, land back then was relatively free for the taking.  Once ownership was established and defended by the community the price of land increased.  Yes, sometimes the ruler owned the land and you, his subjects, did the farming and gave him a share of your crops.  And sometimes his share was quite large since he had a large staff of servants and advisers to feed and house and none of them did any real work.  Sounds like our government today.  Well, that does bring in the problem of just how does one count goods and services in an economy.

If I prune or fell trees on my own land instead of hiring someone that provides that service does that mean I have produce a service even if I consumed it?  Did I deny an individual some income by doing my own work?  Should we include in labor statistics the work that a housewife or house husband does when they cook, clean, and provide childcare?  If we pay individuals to provide these services then this is added to gross domestic product statistics.  Should the mortgage I pay for living in my house be counted as rent paid?  What if I help my neighbor build a deck or repair his roof.  Should that be counted as work and if so, at what price?  Does my helping my neighbor reduce economic growth?  The questions pose a puzzle for the economist.

Well, if I travel to a foreign shore and either convince the locals to sell their raw resources cheaply to me or take the ownership by force, have I, in bringing those resources back to my country for use in manufacture properly accounted a true growth metric?  For centuries we often referred to economic growth as true growth when we were often as not stealing from others.  Our growth came at some other individual’s expense.  And it doesn’t stop there.  The economic silly season declared that inflation boosted growth.  Why just two percent a year of inflation would cause GDP to rocket to six percent or better.  But why only two percent?  I mean, if two percent is good then ten percent must be great.  And why stop there?  I can see that twenty five percent would make us all millionaires.

The real truth is that a population, whether it be local or world wide, can only consume so many cars, radios, iPods, and the like.  I have seldom seen anyone who can use two laptops at the same time.  I don’t need a new car each year and certainly not at today’s prices.  Nor do I need twenty cars in an oversize garage.  I don’t need and can’t afford a five thousand square foot house nor would I be able to afford the property tax.  I, like most every one else, have a limited income.  and even if I had a million dollars in the bank I still would not need to buy all the junk one sees for sale in stores and on television.  There are limits to growth and it is really determined by population.  This is what the professor can’t tell you.  He dare not accept this argument for in doing so it would undo all his learning.

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