Benefits and costs of economic growth

Most governments aim for high economic growth, believing that this will lead their countries to higher standards of living. Through monetary policy, the government attempts to influence aggregate demand by controlling spending and the availability of credit. Consider the main arguments that support the benefits of economic growth and the arguments that warn against it.

Most governments aim for high economic growth, believing that this will lead their countries to higher standards of living. In addition, governments seek to achieve national prestige. To achieve these goals, governments use the instruments of monetary and fiscal policy. Monetary policy is implemented by changing the amount of money in circulation.

By conducting monetary policy, the government tries to influence aggregate demand by controlling spending and the availability of credit. The effectiveness of monetary policy depends on the elasticity of investment and the elasticity of money demand with regarding the interest rate. Here we can formulate the following two rules.

1. The less elastic the demand for money is with respect to the interest rate, ceteris paribus, the more effective monetary policy will be.
2. The more elastic investment is with respect to the interest rate, ceteris paribus, the more effective is monetary policy.

The government also has another way to increase the quantity of money: through the printing press: it can simply print additional bills. Under conditions of perfect competition, this only leads to higher prices. In a real economy, due to the fact that buyers and sellers react with delay to new conditions, an increase in money in circulation actually leads not only to higher prices, but also to some economic growth.

Fiscal policy is carried out by the government in an effort to influence aggregate demand by changing the volume of government spending and regulating taxes. This policy becomes more flexible if the government does not strive to maintain a balanced budget. It is perfectly acceptable to have a budget surplus if you spend less than you take in taxes, or a budget deficit if you spend more than you take in taxes. In the latter case, the additional costs can be covered by loans or by printing new money.

The effectiveness of fiscal policy depends on the elasticity of money demand with respect to the interest rate and the elasticity of investment with respect to the interest rate.

With the goal of high economic growth, those in power must keep in mind that growth brings benefits and costs. It is necessary to correctly evaluate both, so as not to make wrong decisions. Consider the main arguments that support the benefits of economic growth and the arguments that warn against it.

1. Economic growth leads to higher standards of living. Since economic growth means an increase in per capita income, it implies that more or better quality (or both) of goods and services can be made available for everyone to consume. Of course, it may also be that economic growth does not lead to actual, but only potential, growth in well-being.

2. Economic growth can limit poverty. The view that economic growth makes it possible to limit poverty is debatable. There is no consensus on what poverty is: if it is an absolute or relative concept. If this is a relative concept, then poverty under the current income distribution system will always exist, regardless of whether there is economic growth or not. For example, if everyone’s income increased by one hundred rubles, the poor man will remain in the same relative position in which he was and will remain poor. It should be noted that the poor are the part of society that benefits least from economic growth.

3. Economic growth offers the opportunity to improve equity in income distribution without making anyone worse off.

Now let’s name the costs of economic growth. It is they who make some economists doubt the desirability of continued economic development.

1. Economic growth implies change, from which many benefit, but some suffer. For example, technological advances can create many new jobs, but at the same time make existing jobs obsolete and redundant. The need to move to find a new job or retrain to learn new professions imposes significant costs on those who have been deprived of a job by progress.

2. Economic growth has an opportunity cost. When growth has been the result of the investment of resources in capital, the opportunity cost of growth is the current consumption that, in the absence of investment, could generate profit. The more resources a country devotes to the production of capital goods, the higher the rate of economic growth that can be expected and the more consumer goods that can be expected in the future. Whether it is worth sacrificing current consumption for this depends on how much additional consumer goods are planned to be produced in the future and how much will have to be sacrificed.

3. Economic growth is associated with the accelerated consumption of natural resources. Continuous growth cannot be eternal. Earth’s resources are limited and often irreplaceable. It is believed that for this reason, at some critical point in the future, growth may stop. Regardless of what discoveries are made, the resources used may eventually run out, and the higher the growth rate now, the sooner the critical date will arrive. Therefore, we can talk about the convenience of limiting economic growth in order to limit the rate of expenditure of resources.

4. Economic growth generates negative externalities. Rising real national income can impose costs on society in the form of pollution, noise and overcrowding. If these costs could be correctly estimated and included in the value of the real national product, it would turn out that existing ideas about the gains from economic growth are markedly exaggerated.

Although economic growth brings with it benefits and costs, until now development has been subordinated mainly to the desire to maximize national income. In this direction, the advanced countries are moving quite rapidly. on table 1. shows how GDP has changed in the most developed countries in the period from 1870 to 1985.

Table 1. GDP growth. Relationship between the results of 1985 and those of 1870

It should be noted that income data does not provide a complete picture of how people’s standard of living has changed. First, GDP includes spending on military, security, and police services, which have little effect on well-being. Over the last hundred years, these expenditures have increased as a percentage of GDP, while the share of consumption has probably decreased. To assess well-being, it is better to use the indicator of personal consumption of goods and services. Second, well-being depends on people’s stock of free time. According to this indicator, the situation has improved significantly.In the United States, for example, the work week in 1870 was more than 60 hours, but now it is less than 40. Over the last hundred years, the amount of free time has increased significantly. Finally, thirdly, well-being depends on the quality of the environment, and GDP does not reflect the cost of preserving the environment. During the last hundred years, the volume of production has multiplied and the amount of pollution has increased more than 8 times.

One more observation should be made. The table shows the results of comparing the costs of goods and services produced. But over the past hundred years, the products themselves have changed a lot: products have appeared that had no analogues in the past. What can be compared with modern computers, televisions, passenger planes? From what has been said, it follows that estimates of long-term changes must be approached with caution.

As a conclusion, we observe that the degree of satisfaction of people with their life also depends on their relative position in society. With the same level of average per capita income in different countries, there may be different patterns of income distribution and different assessments by people of their status. In industrialized countries, in recent decades there has been a move towards a more equal distribution of income, and in relatively poor and underdeveloped countries, on the contrary, the difference between the income of a narrow circle of rich people and the main mass of the population the population remained very large and even grew.