This post contains an essay submitted as part of student course work for the Planning 100 "Introduction to Planning" course taught by me this year at Planning School, University of Auckland. The topic for the essay is: What is meant by economic growth and how and why has economic growth changed in the past two centuries? Explain the use of GDP as a measure of economic activity and discuss its usefulness. The essay is by Nicholas West, who has kindly given permission for it to be published here.
Economic growth is when there is an increase in the amount of goods and services produced by a nation or economy over time (Stonecash, Gans, King, & Mankiw, 2009). It is usually induced by an increase in the productive capacity of a nation, which encompasses the factors of physical capital, human capital and natural resources. An increase in one or a combination of these factors will bring about economic growth, which is historically associated with increases in infrastructure, standards of living and quality of life.
An example of extreme economic growth occurred in 17th century Britain during the Industrial Revolution. The socio-technological developments in this period brought about not only an industrial revolution but perhaps the largest change in human activity since the beginnings of agriculture; until this point the human condition remained relatively stagnant, with small, incremental improvements only mildly increasing the number of people who lived in subsistence. The advancements in this era were to become the basis of modern western civilisation.
In the 1700’s human quiescence was vanquished when the accumulated knowledge of mechanics and mathematicians in Europe reached a crucial tipping point, upon which a plethora of technical innovations flourished. Combined with the prevailing spirit of change and acquisitiveness this technical innovation led to massive economic growth. As consequence, the majority experienced drastic increases in quality of life.
The driving force behind this explosive growth is widely believed to be due solely to technical innovations; improved iron production, the use of coal as fuel, textile machinery and James Watts’ combustion engine. However, contrary views are expressed by “The Road to Riches” (1999) which posits that values, politics and economic institutions were just as integral to this economic growth. Civilisations prior to this period, such as the Roman or the Chinese empires, showed similar milieus of technical innovation, however shared no other similar traits and ultimately no explosive economic growth. Hence, technical innovations were not the sole force behind the economic boom of the industrial period. The Industrial Revolution was also not quite the explosive change it it is purported to be. It was actually a longer period of gradual revolution. Popular thought dictates the Industrial Revolution abruptly began between 1770 and 1830 however, it has been contested that the revolution actually began a hundred years earlier (“Workshop of a New Society”, 1999). Circa 1670 CE there was a flourishing of rural industries which resulted in a skilled labour force (increased human capital) as well as, most crucially, the creation of a middle class with disposable income - increasing the demand for textiles and other commodities. Thus, the beginnings of the Industrial Revolution can be marked with the creation of this skilled middle class.
However, as technological advancement reached the point where skilled labour was replaced by the unskilled, workforces began to migrate to urban areas. Here, they were jammed into purpose-built, worker towns by factory owners and landlords. These towns were constructed quickly, with little consideration of sanitation, health or safety courtesy of nonexistent regulation. As consequence, while the revolution burgeoned, quality of life began to plummet and disease became rife. Cholera outbreaks stemmed epidemics in 1831-32, 1848 and 1854-55. It has thus been argued that it was the efforts to better these substandard conditions and stem the aforementioned outbreaks which actually resulted in the widespread societal transformation that benefited Western civilisation (“Workshop of a New Society”,1999).
The 350 years post the Industrial Revolution has seen exponential growth of human population, wealth and resource use which has brought about unprecedented increase in quality of life. It has logically followed that today economic growth has become synonymous with quality of life and achieving it has become almost the sole ambition of nations. In order to quantify economic growth, its measure has been standardised into a single figure called the Gross Domestic Product (GDP) and is defined as the market value of all officially recognised products and services produced in an economy in a year. GDP is not only used to measure growth within a nation but also to compare said growth between nations, resulting in the revelation that the effect of economic growth is far from uniform (Chang, 2003).
Economic growth and its boons has been experienced differentially amongst regions and nations, preferentially gracing Western Europe and its tributaries. This is usually attributed to the advanced technology and resources available to western or ‘More Economically Developed Countries’ (MEDCs). However, scholars such as Ha- Joon Chang (2007) argue that this differential has been exacerbated and even designed by preferential and insidious free-trade policies meant to ‘kick away the ladder’ and in effect, halt ‘Less Economically Developed Countries’ (LEDCs) from enjoying the same successes that developed nations themselves enjoyed in the past (Chang, H, 2003). This is done through the use of large international organisations such as The World Bank and the International Monetary Fund, which preach and enforce ‘free trade’ policies that necessitate liberalization of international trade and investment, privatisation, and deregulation (Chang, H, 2003). These policies have the effect of prohibiting LEDC governments from fostering their own industries and workforces (called protectionism) which historically are the exact methods used by MEDCs to gain their economic advantages in the first place. The Smoot-Hawley Tariff Act introduced by America in 1930 is an example of western protectionism designed to protect American jobs and farmers from foreign competition during the great depression. A similar tariff enacted by an LEDC today would result in harsh condemnation and serious trade penalties from MEDC trade partners (Chang, 2003).
Additionally, facilitated by international organisations like The World Bank and IMF, less economically developed countries are often persuaded to accept large loans with high interest rates in order to build expensive infrastructure projects. These projects rarely benefit the majority of the indebted nations population and historically have not left these nations with an increased economic ability to repay these loans. Instead of providing the indebted country with jobs and what should be significant economic stimuli, these loans are passed directly to large western construction corporations which take all the profit whilst the less developed countries are left with huge debts. These debts are then routinely used as leverage by developed nations to force economic policies favourable to western corporations (structural adjustment policies) at the expense of LEDC populations (Perkins, 2004).
This pursuit of economic growth has created economic policies that concentrate wealth and resources into an elite handful of the largest western nations and corporations, often at the expense of economic development and improvements in living standards in less developed countries. In effect, over the last two centuries economic growth has been manipulated by developed nations in order to maintain a monopoly on economic growth and its benefits. This is not consistent with the economic growth that occurred during the industrial revolution, which was used (or harnessed) to enrich the lives of society as a whole. Today almost half of the world’s population lives on $2.50 per day or less whilst the world’s richest 20% is responsible for over 75% of the world’s consumption (World Bank, 2008). It is clear that economic growth today, instead of having widespread positive societal effects as per the industrial revolution, is only benefiting a small minority.
Economic Growth has changed over the past two centuries due to the ability to define and measure it. While there are several reasons why economic growth is now so divorced from quality of life, one integral factor is the overreliance on GDP. GDP is decent measure of economic activity, or more specifically, production of goods but it is not accurate at accounting for the service industry which now comprises two thirds of MEDC economies (Stiglitz et al., 2010). Services are much harder to quantify than physical goods and it is estimated that GDP significantly undervalues these (Stiglitz et al., 2010). The measure also discounts work done by stay-at-home parents, the benefits of government health-care systems, and barter exchanges. Essentially, this means that current economies can be vastly undervalued. Second and most pertinently, GDP lacks any measure of wealth distribution. Nations with economies of similar GDP are valued equally despite how well wealth is distributed in them. Sweden, for example, has a similar GDP to Saudi Arabia but it’s economic activity is one of the most equitably shared within a nation in the world. In contrast, Saudi Arabia’s wealth is owned by a small elite, and does not benefit the vast majority of the country.
Societal problems arise when GDP is used as an indicator of standards of living and well-being. This is because GDP does not include any indicators of societal health such as literacy, infant mortality, life expectancy, education, physical, mental, or social health. GDP is utterly myopic with regards to societal health indicators - these are not commonly measured yet are extremely important. Neoclassical economics assumes that an individual with more income has a higher ‘utility’ and that with a higher utility an individual can buy the products and services required for a high quality of life. However, many societal attributes that contribute to a high quality of life cannot be bought (considered non-market realm). As Robert F. Kennedy said of GNP (GDP’s predecessor) “...It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the...safety of our streets...It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials...GNP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile”. GDP is a measure of monetary transactions, and it is assumed that all monetary transactions in an economy are positive. Yet GDP can also mark the breakdown of social structure as a profit if social decay becomes bad enough that it requires intervention. For example, crime increases national GDP by billions as crime increases the need for prison buildings, police protection, and repair of property damage (Lietaer, B., & Belgin, S. 2001). Psychological counseling, social work, and addiction treatment, all efforts to stem social decay, increase GDP and are therefore also considered national gains.
Despite the inadequacies of GDP it is still used as the primary measure of a nation's wealth & well-being. Political parties and politicians are elected and judged primarily on their management of GDP. This has led to economic policies that champion increases in national GDP over the actual health and well-being of the populations and ecology living within them, as well as the sustainable use of its resources. Policies that raise GDP in the short term are chosen over those that contribute to widespread increases in health, education and well-being in the long term. The results of these policies have been an increase in global poverty and a dramatic widening of the wealth gap between rich and poor nations, as well as between the richest and poorest within even ‘developed’ nations. If economic growth is to better serve us, it needs to be realigned with the goals of increasing standards of living and quality of life for everyone. For this to occur, measures of economic growth such as GDP need to include more information such as wealth distribution. Measures of economic growth should also be discouraged from being used as indicators of living standards and actual measures of living standards and quality of life should be made more prominent in political discourse.
Distributing the benefits of economic growth equally is important for the health and sustainability of society and the environment (Wilkinson & Pickett, 2009) but Heinberg (2011) raises the point that our economic system is an infinite growth paradigm on a planet of finite resources. Sooner or later, he argues, economic growth will end, and we will have to find ways of increasing standards of living and quality of life for an ever growing population in a contracting global economy. It is hoped that governments soon learn to differentiate economic growth and living standards so that attention can be focused on the challenges of life after economic growth.
In conclusion economic growth can be defined as increases in production of officially recognised products and services. The Industrial Revolution is considered the period of the most accelerated economic growth and paved the way for modern western society. During this period economic growth improved the standard of living for the majority, yet today the benefits of economic growth are experienced by an ever smaller proportion of society, at the expense of the majority. Whilst no single factor can be held responsible for this, a significant cause has been the reductionist measures of economic growth such as GDP as well as a confusion between economic activity and quality of life. To rectify this our definitions of economic growth and quality of life have to be clarified and improved. Furthermore, the supposed causal relationship between economic growth and quality of life needs to be questioned so that high standards of living can be achieved in a contracting economy of the future.
Chang, H. (2007). Bad Samaritans: The Guilty Secrets of Rich Nations & The Threat To Global Prosperity. London: Random House Business Books.
Chang, H. (2003). Kicking Away The Ladder: Development Strategy In Historical Perspective. London: Anthem Press
Lietaer, B., & Belgin, S. (2011). New Money For A New World. Boulder: Qiterra Press.
Perkins, J. (2004). Confessions of an Economic Hit Man. San Francisco: Berrett-Koehler Publishers.
Stiglitz, J., Sen, A., & Fitoussi, J. (2010). Mismeasuring Our Lives: Why GDP Doesn’t Add Up. New York: The New Press.
Stonecash, R., Gans, J., King, S., & Mankiw, N. (2009). Principles of Macroeconomics.Melbourne: Cengage Learning.
The Road to Riches. (1999). The Economist: Millenium Special Edition, December 31, 10-12.
The Workshop of a New Society. (1999). The Economist: Millenium Special Edition, December 31, 15-16.
Wilkinson, R., & Pickett, K. (2009). The Spirit Level: Why Greater Equality Makes Societies Stronger. London: Bloomsbury Press.
The World Bank. (2008). Poverty Facts and Stats - Global Issues. Retrieved from http://www.globalissues.org/ article/26/poverty-facts-and-stats.