Obsessing over Economic Growth

Written by: De Villiers Neethling

This is a response to an op-ed about economic growth that seems extremely confused about what economic growth is in the first place. The glaring overall errors have been dealt with on Daily Maverick, but I would like to deal with this piece as it stands.

The author claims that economic growth is a fuzzy concept, not clearly defined, but anyway it’s something that has undesirable side effects, particularly on the environment.

Contrary to the author’s claims:

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms.

The author deals with GDP, but not with GDP per capita, and as a result does not deal much with the concept of economic growth in this piece.

Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced in a period.

The results are that the cited examples are either patronising to the extent that they are too reductionist to provide any clarity to the layman, or they testify of plain ignorance of the topic. I shall deal with a few examples here:

If I sell my kidney for some cash, then the economy grows. But if I educate my kids, prepare and cook food for my community, improve the health conditions of my people, growth doesn’t happen.

If you educate your kids and their earnings potential increases, GDP would grow. Why is this? Because GDP is merely concerned with the final market value of all products and services. Someone with a degree has the potential to earn more, and there is a clear correlation between earnings potential and obtaining degrees.

There is a catch, though: you have to have a useful degree, which means one that is valued by the market. Useful in most markets means a STEM degree. Though an increase in GDP does not necessarily indicate an increase in earnings potential, which is why economists also employ GDP per capita as an indicator. This is not fool proof, but it does give a better indication of where individuals lie within the overall system.

But what about the environment? Well, if you want to tackle environmental concerns, you would be in even greater need of STEM skills. Otherwise, you’re going to hurt your own cause by going about it like Greenpeace.

Conversely, you can only grow the economy with organ harvesting for as long as you have organs to harvest.

If a country cuts and sells all its trees, it gets a boost in GDP. But nothing happens if it nurtures them.

It depends on your time period. There are countries which do rely on nurturing their trees and it does show up in the GDP. Costa Rica, Ecuador, Nepal, Kenya, Madagascar and Antarctica are but a few which rely greatly on eco-tourism for their GDP.

Besides, by cutting off all your trees, you would merely boost GDP for one year. Unless you’ve cut off your trees as part of a broader plan to boost products and services in the long run, you’d just see one lonely spike in the GDP of your country for one year, and nothing more.

This example makes no sense when compared with the lucid concept of growth, which is per definition over time.

If a country preserves open spaces like parks and nature reserves for the benefit of everybody, it does not see this increase in human and ecological well-being reflected in its economic performance.

Only it does. GDP includes both private and public products and services.

Preserving our infrastructure, making it durable, long-term and free adds nothing or only marginally to growth.

Yes, yes it does. That’s exactly how Ireland started the Celtic Tiger: With public infrastructure spending on borrowed funds from the EU that added more than marginally to its growth.

The Celtic Tiger is not without its problems, but it did help Ireland to move from one of the poorest countries in the EU to one of the richest.

GDP is not without its issues, but it’s a far less problematic measure than say the Gini Coefficient. Its problems are known to economists already, though as noted economists tend to opt for GDP per capita, and then combine it with notions of standards of living and spending power to alleviate the known concerns with GDP.

It’s healthy to be sceptical of often repeated yardsticks, but this piece is a straw man argument against GDP. Not to mention that the fuzzy concept of well-being economics stinks of the kind of woo worthy of Deepak Chopra.

Author: De Villiers Neethling is a software developer making biltong out of sacred cows. He can’t fix your computer but he can restart it to see if it does it again. You can hurl abuse at him on Twitter (@gargunzola). He likes it.