Just About All of Us Use “Economic Growth” Incorrectly

Economic growth is per capita gross domestic product or GDP (referred to as the gross national product until 1992), the total value of all goods and services our society produces. It is growing a larger pie, a chance for everyone to get more.

Simon Kuznets, who eventually won the Nobel Prize in economics, invented the notion of GDP in 1934 to provide government decision-makers—then trying to combat the Great Depression—with a standardized measure of economic well-being.

Kuznets warned, however, that his numbers were a rough measure and nothing more than a rough measure intended to show little more than variations contrasted to a fixed baseline. These numbers could be abused or mis-used, he publically told government officials for decades, in exactly the ways–as we will discuss soon–we continue to abuse them today.

Growth, perhaps not surprisingly, is not always called growth. We often hear words like affluence, wealth, prosperity, development, abundance, and boom-times. An economy that enjoys these traits is “dynamic,” “moving” and enjoying a “rising standard-of-living.”  And then, of course, there’s the new transitive verb “growing,” as in “we need to cut taxes as a way of growing the economy.”

When there are many words for the same thing, or for what is mostly the same thing, this is a good sign our thinking has become fuzzy.

Nonetheless, these words convey value judgments; e.g. “prosperity” is good and represents “progress” (much more on progress soon).

»

Comments

Mayu says:

Beyond our belief in economic growth as a carrier of jobs and prosperity, we have come to believe in the absolute necessity of economic growth as the media and academics alike have jumped on the growth bandwagon.
Distinguished scholars have warned us of the nightmares of a possible lack of growth or the onset of a recession for decades. Economists have touted that global economic growth would mitigate terrorism, while security scholars have emphasized the link between peace and economic growth. Of course, many of these correlational studies have been thoroughly refuted since the events of 2008, but it seems like our mentality is still locked into a growth-only mode with the accompanying growth-hysteria.

Charles Eric Hintz says:

The important point noted by Dr. Swerdlow’s example of Simon Kuznets is that this formula is simply a rough estimate; it can never fully account for all production in a nation’s economy and it is an attempt to quantify economic output. Unfortunately, this quantification, as in many cases, incentivizes production towards the quantifiable measurements.
However, GDP cannot measure certain intangible benefits of, for example, a capitalistic and democratic society. GDP cannot measure the fact that democracy, capitalism, and free markets have developed and propelled the U.S., allowed for everyone to pursue their own aims and goals, to vote for the leaders they support, and have individual American dreams.
I think GDP and other statistical measures (especially ones measuring distribution of income such as the GINI coefficient) tend to too frequently forget this “freedom component” of a capitalist society – capitalism is not necessarily about the accumulation of “more stuff,” but about giving people the opportunity to use their individual talents to benefit society and the world.
GDP and other measures do not fully recognize that a capitalist economy is organic, not mechanic; it is all of us and our dreams and goals aggregated, not a magic force compelling us to obtain more things.
I fear that capitalism is often confused with materialism, drive for prosperity, and inequality, when in reality it provides the opportunity and the chance for anyone to pursue their own American dream.

Joel L. Swerdlow, Ph.D. says:

We should never overlook the point you make: capitalism (and the pursuit of our dreams) need not equate to the pursuit of more “stuff.” We must (and will) explore alternative definitions.

Joel L. Swerdlow, Ph.D. says:

Maybe words about what is most important to us–e.g. “love,” “family” or “happiness”–can be the most difficult to define.
But then again, maybe that’s simply a cop-out. We all want health, justice and peace–and these words are not more difficult to define than any others.
Also, I’ve approached this discussion of “economic growth” without even once (as far as I can recall) using the term “capitalism.” Is that an oversight on my part?

Camden Cornwell says:

I want to push back on Eric’s comment. Statements like “capitalism is not necessarily about the accumulation of ‘more stuff,’ but about giving people the opportunity to use their individual talents to benefit society and the world” poison the well.
Insofar as Eric’s hope for the fruits of capitalism, I couldn’t agree more. It is a short step away from an Ayn Rand perspective, which has its merits.
However, capitalism is, most fundamentally, a framework. It is useful precisely because it theorizes that an economy is mechanical. Capitalism is not ‘confused’ by drive for prosperity; it claims that because the drive for prosperity is a widely observable phenomenon, we can make deductions about what is optimal on an individual, firm, and aggregate level.
Eric states that “it is all of us and our dreams and goals aggregated, not a magic force compelling us to obtain more things.” Indeed Smith does not think it is a ‘magic force’ but rather the tireless pursuit of self-interest that in competition allows a ‘magic force’ (or invisible hand) to allocate finite resources in optimal way.
To say this: surely our society is a complex interplay of many different factors – what I think Eric means by the word “organic” – but capitalism has not the flexibility to accommodate the qualitative aspirations here mentioned.
I will agree with Dr. Swerdlow on the point that we need to clean up our vocabulary. So this idea that “capitalism need not equate to the pursuit of more stuff” is correct in terms of semantics. But capitalism fundamentally assumes the expansion of well-being as principle pursuit. And his theory has been robustly proved. If we remove or relax this assumption, we are no longer actually talking about capitalism.
Finally, I disagree with the whole premise that we use the term “economic growth” incorrectly. We need a new term or framework to talk about what is trying to be communicated here: humans need more than material well-being, and that the constant pursuit of material well-being is not sustainable in the long term.

Thoughts?

Sorry, the comments are closed.