November 9, 2022

How growth became the goal

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Economic growth – defined as income and output increasing indefinitely – has been thought of as the natural state of the economy ever since the late eighteenth century. Earlier writers discussed improving living standards and increasing wealth, but economic growth itself was not something that came up until then. Modern scholars always have growth as a concept in the background of their work, whether explicitly mentioned or as a presence that doesn’t need to be acknowledged.

Nowadays, it is becoming clearer that growth is a two-edged sword. While growing economies are necessary to create wealth and employment, and provide for the basic needs of underserved populations, this growth has an impact on the planet’s natural resources and, if allowed to continue for an indefinite period of time, self-destruction is inevitable.

Hence, growth is being challenged as the main economic goal of the economy. It needs to be viewed from a holistic perspective within our ecosystem and society. There’s an interdisciplinary push by academics, scientists, regulators, entrepreneurs, and advocacy groups nowadays to shift the focus from growth to a more sustainable future.

Growth as the natural state of the economy

Growth had become a central idea in economic theory by the time Adam Smith’s Wealth of Nations was published in 1776. However, this work consolidates the ideas of Hume, Quesnay, and Turbot, among others. Economic growth isn’t explicitly defined in the text, but it’s definitely one of its biggest themes. Smith implicitly constructs a definition that emphasizes the division of labor as the source of society’s capacity to increase productivity, and capital accumulation as the conduit for output growth.

The economy, in Smith’s mind, was a machine powered by human nature and trade, and an invisible hand keeps it in shape so that it continues to grow. That is, as long as governments don’t interfere with the competitive system, preventing it from realizing its benefits. Through this invisible hand, the common good would be served whenever people acted out of their own self-interest. In the nineteenth century, after the publication of The Wealth of Nations, economists continued to build upon the notion of growth. They included Malthus, Ricardo, Mill, and Marx who provided extensions and corrections to Smith’s original propositions.

The first significant extension to Smith’s ideas came from Malthus’ Principle of Population in 1978. His argument that natural resources were scarce on the planet resonates strongly with our concerns today. A key part of Malthus’ theory is finding the right balance between industries, agriculture, and public spending that will increase growth at an optimal rate. A lack of concise conclusions on Malthus’ part allowed David Ricardo to carry forward the concept of growth to its later stages. Ricardo was able to synthesize an account of the underlying forces that produce economic growth, and how they influence wages, profits, and rents.

Technology, in the form of machinery and mechanization, is already mentioned in Ricardo’s 1817 Principles of Political Economy as a factor that influences growth; John Stuart Mill in 1840, and Karl Marx in 1867, both argued that mechanization could continue indefinitely, so keeping the demand for labour from going up, while profits increased, if only temporarily.

The time of classical economists came to an end with Marx. He diagnosed capitalism as a terminal illness that would collapse under the weight of recession, unemployment, and social tensions.

Marshall and his 1920 Principles of Economics are considered the foundation of Neoclassical economics. By picking up where Smith and Ricardo left off, they worked towards reconciling the theory of growth with the empirical facts of the time. For Marshall, continued growth meant increasing internal economies of scale, which depended on individual firms’ resources and organization, as well as their ability to market their products. This idea echoes Smith’s proposition that the division of labor is limited by the extent of the market.

As Marx predicted, the first half of the 20th century brought with it recession, unemployment, and social tensions. However, capitalism didn’t die. In that context, John Maynard Keynes rose as a shining star in the field of economics. He proposed a revolutionary model, in which the economy would not right itself towards a state of equilibrium. Fiscal and monetary policies would be necessary to mitigate the effects of a recession.

Joseph Schumpeter’s Theory of economic development was originally published in 1911 and revised and translated into a 1934 edition. As one of the most influential books on capitalism, it focuses on capitalism’s growth propensity, opposing Keynes’s need for government intervention. In Schumpeter’s view, growth comes from innovation, disrupting the equilibrium of circular flow, where growth can’t happen.

Spontaneous and discontinuous change in the channels of flow, disturbance of equilibrium which forever alters and displaces the equilibrium state previously existing”

Joseph Schumpeter, Theory of economic development, 1934

In the context of innovation, the author highlights a key figure in the growth of the economy: the entrepreneur as the disruptive innovator, who creates new combinations motivated by a mix of a desire for profit, to conquer, and the possession of a unique set of skills not seen before.

Schumpeter’s reflection of the business cycle can be best summed up with the idea of Creative Destruction. The embodiment of the dynamic model of an economy that continuously destroys and reinvents itself resulting in increased economic growth. He did, however, seem to agree with Marx in his understanding that capitalism could not survive.

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