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Why does the economy have to grow?

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Sphairon posted on Sun, Dec 9 2012 1:35 PM

Whenever I'm debating the merits of capitalism with someone, at some point, they usually bring up the "fixed resources vs unlimited growth" talking point.

I usually respond to this by saying that a market economy could function perfectly well in an equilibrium scenario where we have a fixed, non-growing annual amount of resources to work with and the only changes that occur would be more efficient producers replacing less efficient ones.

However, the empirical evidence seems to contradict me. Every metric of resource use has been exploding in the last 100 years and whenever the economy actually does stagnate, economic hardship seems to ensue.

Is this a side effect of the still growing global population? That is, does the population growth fueled by relatively easy access to resources lead to even more resource consumption? Or is there some growth imperative behind the market system that I somehow don't understand?

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whenever the economy actually does stagnate, economic hardship seems to ensue.

Because of resource misallocation, not because it meterly stagnates.

A huge amount of peple need to get laid off and capital needs to be reshuffled.

If the malinvestment had never taken place, then the correction would not have had to happen.

Though I suppose there could be other problems in limited-resource scenarios.

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The economy "grows" because of population growth and capital accumulation. Human desires are infinite, so no one has a real desire to stop growth.
Keep the faith, Strannix. -Casey Ryback, Under Siege (Steven Seagal)
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idol replied on Sun, Dec 9 2012 2:57 PM

Per capita growth indicates our standard of life is improving. The three main components of growth are capital accumulation, human capital accumulation, and technological progress. While I do agree that there is a finite amount of capital that can be accumulated based on resources, resources do not hamper human capital accumulation (also known as education or intelligence) or technological progress. Thus, growth is possible insofar as the human mind continues to improve and create.

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Here is an older similar thread which got some good answers: Is growth a necessity in capitalist economies?

If it comes up in a debate, first thing to ask is how they're defining growth.  If they're claiming that growth is somehow a necessity under capitalism, the burden of proof is on them to say why.  And empirical evidence is of no use to them here; this is economics.  (And certainly evidence from the past 100 years is irrelevant, because in the past 100 years we have not had capitalism.)

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1. Economic growth has stopped a while a ago in western countries. Officials though are under significant pressure not to tell the truth over it. That means growth figures have been subject to serious manipulation.

2. Capitalism can sure work in the absence of growth. However return on investment will naturally be low, thus interest rates (i.e. risk free capital income) must be low too, basically zero.

3. Alternatively zero growth (in the long run) means no capital accumulation, as any kind of additional capital would mean growing output potential on the other hand. But that would be contradicting the basic assumption of no growth.

4. Accordingly there would be an environment in line with no investment incentives, hence zero interest, that brings us back to point 2.

5. Positive (risk free) interest rates in the absence of economic growth are impossible to maintain. In the effect, the promissed interest can not be earned, the financial markets are doomed to fail. Btw.. this is just what is going on right now.

6. Steady economic growth may appear impossible to some, because of the scarcity of ressources f.i., but is generally a function on technology. As long as technology and know how are increasing, there will be economic growth in gerenal, regardless of what so ever other restrictions may exist.

7. In the real world, economies are not isolated. A not growing economy is badly competed by any growing economy an the capital market. In fact the growing economy would be sucking up all investment, as it promisses an interest rate above zero, in contrast to the ailing one.

8. That will not just leave the weaker economy stagnand, but will eventually lead to a complete impoverisation. The outflow of capital will send growth rates below the zero line, thus adding momentum to the decline and to the outflow of capital.


But all these are highly hypothetical reflections. The question in first place must be, why an economy would stop to grow, especially when others still do. If a people is unable to reproduce itself, when there is unfree trade with manipulated exchange rates, or when there is increasing political corruption and a down turn of democracy, such theoretical considerations become negligible...


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Bert replied on Fri, Dec 14 2012 9:08 AM

Diminishing value of goods over time to the consumer, production of new goods over time, diminishing utility of goods over time in an objective manner (light bulb goes out, food becomes eaten), increase of individuals who need new goods, and the infinite though process of human creativity.

Why do we have to keep making new music and writing new literature when we have the amount we have now?

I had always been impressed by the fact that there are a surprising number of individuals who never use their minds if they can avoid it, and an equal number who do use their minds, but in an amazingly stupid way. - Carl Jung, Man and His Symbols
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@Leitwolf: no capital accumulation does NOT mean no investment. All capital needs to be renewed from time to time.

The Voluntaryist Reader - read, comment, post your own.
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Neodoxy replied on Fri, Dec 14 2012 11:29 AM

Economies do not have to grow. This is perhaps one of the most nonsequitur claims socialists make especially since they say it while deploring stagnant living standards.

There is no inherent reason why the change in the value capital stock could not ultimately be approximately zero over time. While it will never be perfectly in equilibrium in the real world, the only reasons that it has continually been increasing is due to changes in savings, the positive effects of existing capital, advancements in technology, and increases in the supply of the original factors

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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