Tuesday, September 21, 2004

Growth economics

There is a branch of economics called growth economics. The aim is to explain why some countries are quickly getting richer and richer while others remain poor. It aims to study these countries in the very long run (at least more than 10 years, and some even say at least half a century). It’s interesting to get to know what is the main measure of the ability to grow? Is it the Gross Domestic Product in itself? (Gross Domestic Product is measured in volume. Let’s forget about inflation and monetary concerns for the moment).
Some people worry about giving job opportunities to all workers. It’s a fair concern when one knows the huge social damage and waste of “human resources” that is unemployment.
Many “radical” thinkers have often blamed technology and widespread machinery for destroying jobs.
I definitely disagree with this idea. I think Schumpeter was one of the first economist to underline the role of technology in growth.

(1) GDP = (GDP/Jobs)*Jobs
(2) GDP = ((GDP/Jobs)/Working-Time)*Working-Time*Jobs
(3) GDP = (GDP/(Jobs*Working-Time))*Working-Time*Jobs

(GDP/(Jobs*Working-Time)) is called “Output per worker-hour” and commonly defined as labor productivity.
Therefore a country can achieve high economic growth with:
à More and more people working in the country
à Someone working in the country is willing to work harder and harder year after year by working more time during the year.
à Someone working in the country is managing to be more productive because he benefits from more infrastructures, or a better and better technology and knowledge.

Someone who says: “more technology means less jobs” would argue GDP remains the same over time and the only way to give enough jobs for all the labor force is to cut down on either technology or working-time.
What is definitely wrong in this way of thinking is to fail to understand GDP as a dependant variable from each worker’s productivity, the time this person works and how many people works. Instead it considers that employment depends on the total volume of production (GDP), workers’ productivity and their working time. Then it would seem reasonable to cut on working-time and on productivity by barring access to technological change. In other words, as the goal of the society is to ensure everyone has a job (everyone who wishes to have a job), best thing to do is to come back to stone-age technology and ask workers to work as little as possible (less working-time).
Off-course, the consequence of such a decision is to make people poorer as the whole production of goods and services are not enough to fulfill basic needs of people.

A more positive approach for allowing technological progress is to acknowledge that a more productive worker allow to decrease the price of what is sold (benefit to the customer), or increase profit (benefit to the owners/shareholders), or increase wages (benefit to the worker).
Actually, all of these events are likely to occur. The first one will be the decrease of prices due to returns of scales allowing for competing better and attract more customers, increasing profits and increasing wages to keep knowledgeable workers among the staff.

Economic growth appears to me like a sum of microeconomic events. That makes it much more human and more realistic to me.

The same way of thinking applies to standards of living by adjusting the size of the economy by the size of the population.

(4) Living Standards = GDP/People
(5) Living Standards = (GDP/Jobs)*(Jobs/People)
(6) Living Standards = ((GDP/Jobs)/Working-Time)*Working-Time*(Jobs/People)
(7) Living Standards = (GDP/(Jobs*Working-Time))*Working-Time*(Jobs/People)

The key difference between growth of an economy and growth of standards of living is that it is not having more and more jobs that matters, what matters is that the number of jobs increase faster than the number of people.

A general conclusion about all of this:
People need to have some rest. Increases in working-time will reach a point when it will affect health and productivity. Therefore, working-time is not a “sustainable” factor of growth.
What about increases in the number of jobs compared with number of people? Too young people won’t work. Too old people won’t work either. Are women able to work?
Demographic trends matter!
Obviously, increasing life expectancy benefits growth. If people have a longer life, they can have a longer education and work longer… the society has both better educated workers and better experienced ones.
One major issue in a country with a longer and longer life expectancy is that people still want to retire at the same age than before.
Therefore, it increases the ratio of retired people compared with workers. It decreases the ratio of jobs/people.
A necessary social change is an increase in retirement age that matches the increase in life expectancy.

Just like working-time, having more jobs for the same total number of people is a limited tool for growth. What is left?
Labor productivity is the key to growth of standards of living. It comes from:
-Having more infrastructure (factories and machines) available per each worker
-A better technology and more skills used by each worker

The first contribution to labor productivity is “Having more infrastructure”:
Are people able to save their resources in order to finance these infrastructures?

The second contribution: Technology and more skills:Do people have incentives to spend resources on research? Education of people?


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