Growth is Good?

Whenever the topic of economic growth is broached, there is a common and understandable reaction along the lines that growth is ecologically unsustainable or socially harmful. Since one of the preoccupations of this blog is demand-led growth, it is perhaps worth pausing to reflect on the appropriateness of the topic. This can be broken down into two parts. Why consider growth as such? And why emphasize the possibility that growth is demand led?

Growth as Such

Economic growth entails an ongoing expansion of output. Output, when defined in terms of National Accounting conventions, is a monetary measure. This is true whether the figure for Gross Domestic Product (or related measures) is reported in nominal terms (at market prices) or in so-called ‘real’ (meaning constant-price) terms. Growth of output, when output is defined in this way, can occur with or without environmental risk and social harm. In this sense, growth is neither inherently good nor bad.

Clearly, the desirability and sustainability of growth depends on the nature of that growth. In principle, if our measure of output is sufficiently broad, an economy geared toward learning (through education, research and development, science and technology, the arts and humanities), restoration and regeneration of the natural environment, provision of first-rate health and care services, construction of quality infrastructure, development of socially harmonious institutions and processes, as well as the fostering of creativity and play, can grow just as well as an economy geared toward military adventurism, plunder of natural resources and the proliferation of social and psychological maladies. When an economy produces more knowledge, for example, with the same expenditure on education, science and research, that should really be counted as an addition to ‘real’ output, appropriately conceived, though of course difficulties can arise in evaluation and measurement.

A key implication of Modern Monetary Theory is the capacity we have, if served by a suitably empowered and accountable currency-issuing government, to select sustainable activities and development paths.

Even so, the question might still be asked, why the need or desire to grow? Why not just satisfy ourselves with a stationary economy, or perhaps even shrink things a little?

Well, strictly speaking, nothing in a consideration of economic growth necessarily requires that we prioritize high or even positive rates of growth. Especially if we are thinking in terms of a future society with a job guarantee, full employment could be maintained with or without positive rates of growth. We can attempt to understand characteristics of an economy’s growth behavior, whether that growth is quantitatively positive or negative. But, having said that, it seems likely that most people will consider growth to be a positive, provided it is the right kind of growth. Ultimately, growth can and should be about the sustainable development of humans and other species in the fullest sense. Such growth might become less and less about the production of widgets and more and more about the attainment of knowledge, peace and understanding, social cohesion, an expanded scope for individual expression and creativity, and so on.

Demand-Led Growth

A motive for considering the possibility that growth is demand led is the implication that this would carry for macroeconomics in general. The central idea of demand-led growth lends credence to a key assumption underlying the Kaleckian or Keynesian view of output determination. In this view, a change in demand is assumed to induce variations in the level of production (real output) more or less independently of changes in (some index of) the price level. A critical assumption underlying this position is that there is spare capacity and spare reserves of labor-power and other resources making it possible for output to adjust to demand in the suggested way.

Demand-led growth theory makes sense of the idea that spare capacity is not merely a short-run assumption but one that is normally valid over any time frame. Arguably, it is even more applicable to the long run than to the short run. The reason – as demand-led growth theory highlights – is that output can respond to demand not only through a fuller utilization of existing capacity but, via investment, an expansion of capacity itself. Modern economies are almost always operating far below the physical maximum capacity. Average utilization rates of somewhere between 80 to 85 percent seem to be typical. In the US, for instance, the rate of utilization has fluctuated between about 67 and 90 percent since records began to be published in 1967.

How is this possible?

It is possible because long before full capacity is reached, firms will find themselves operating beyond the rates of utilization that they consider ‘normal’ – meaning beyond the utilization rates that they consider appropriate to the levels of demand that they expect to face on average – and this entices them to undertake further capacity-expanding investment.

Why do firms want to operate below full capacity?

They want to do this mostly because of uncertainty over what levels of demand they, in fact, will confront at any given time. Planned margins of spare capacity give them leeway, enabling them to respond to fluctuations in demand with variations in output rather than risk losing customers to rivals. In short, spare capacity gives flexibility.

It is not critical to this view of demand-led growth that prices be assumed constant. It is only necessary that real output respond to demand in the suggested way. In the short run, a strengthening of demand may well give rise to temporary price effects in those sectors that are operating nearer to full capacity than others. These price pressures may persist until new capacity has been installed, whether by new firms or through existing firms expanding their operations. As long as, in aggregate, the level of production responds to demand in the supposed way, there is no difficulty for demand-led growth theory, since its focus is on the behavior of real output. At the same time, the possibility of temporary price effects actually makes a working assumption of independence between the price level and output more plausible in the long run than in the short run, because the longer time frame allows for investment to have its full effects on capacity.

Surplus reserves of labor-power are also a normal feature of the system. Partly this is because expansion of capacity is achieved not only through an extension of scale at given technical efficiency but through technical progress that enables the same level of output to be produced with less labor. In addition, it is partly because capitalists can and do exploit previously untapped sources of labor-power located in non-capitalist spheres of the global economy (whether these individuals reside in so-called developed or developing economies). There is also a tendency for the size of the labor force to expand in periods of strong demand due to individual labor-supply decisions. Some individuals who become discouraged in their job search during periods of stagnation re-enter the labor force when prospects improve. As with plant and equipment, which will typically be utilized at different rates in different sectors on the basis of unbalanced growth, the supply of some types of labor-power can dry up before other types. Here, too, there can be price effects in affected sectors. As with spare capacity, the assumption of excess labor-power is actually more plausible rather than less over longer time frames. In the long run, there is time to train up new workers or innovate to reduce the need for certain types of labor-power.

The most pressing constraint is the environmental one. As already stressed, remaining inside the limits set by natural resources requires being cognizant of the type of growth and kinds of activities we prioritize. Here, currency-issuing governments have the capacity to encourage or undertake the right kinds of activity and discourage or proscribe ecologically harmful production.


2 thoughts on “Growth is Good?

  1. Having read the above post was walking on the beach today, thinking that supply, demand and sharing, are a three legged stool. I guess that makes the seat, the skin of the earth and its resources. Saw off one leg or shorten it and the whole thing topples over. I find it odd that people talk about sharing as ‘distribution’: – why not use the human term? And think of sharing in planetary terms; its systems and life forms. All human beings are ‘elite’ on planet earth in terms of Life. Why dehumanise politics and economics when they’re all about humans? They don’t de-animalise biology or de-vegatise plants! Big smokescreen …

    Call it the science of sharing if you have to get off about it. 🙂 !

    Anyway, the beach looked pretty sensible and much less complicated ….

  2. The title of my post-grad dissertation was, ‘Systemic inequality: distributive consequences of market failure’. So it could have been, ‘Unbalanced high jinks: when sharing humans fall off their stool’. 🙂

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