Is economic growth necessarily the same as "real" growth?

[Dave2002]

I'd submit that economic growth is not necessarily the same as "real" or useful growth. It may correspond approximately, but even then it's doubtful. An example - supposing I'm rich enough, which I'm not. Suppose I have a house built, and then a few years later, well before it has fallen into dilapidation and disrepair I decide to knock it down and build a new one to a different design. That will have an economic growth effect, as it will require new materials, and will keep people employed.

Designing and building a good house ab initio would avoid this, but not perhaps lead to the same "economic growth" benefits. I'm claiming that what we need for "economic growth" may actually be inefficiency - which in my opinion would be bonkers. However, we also hear about wealth creators. One obvious problem is how the "wealth" gets distributed. People in need of, or wanting jobs, may be very happy to work in inefficient systems.

[PhilipT]

I wonder how well you understand how an economist would view your example. Economic growth is defined as a rise in the real rate of GDP over time. GDP is defined in terms of added value. There are three ways of measuring it: output, income, and expenditure, but when measuring output it's defined in terms of (outputs - inputs). It has to be, or there'd be double- and triple- and quadruple-counting as raw materials were converted in steps into finished goods. If I buy land and materials and build a house, there is (hopefully) a net creation of value. If I build a bad house with good materials, there may be a net destruction of value. If I knock a house down and build another one, there may be a net destruction of value, depending on the value of the house I started with. (Mental exercise for greens: Consider the enormous destruction of value involved in closing down nuclear power stations before the ends of their useful lives.)

The question of to whom should go the added value is central to the debate between capitalists and communists. Capitalists argue that the suppliers of the capital should take the added value, because they take the risk of losing their investment, while the owners of land and the suppliers of labour can at least recover the land, or stop working, if they cease to be paid. Marx argued ("the labour theory of value") that the workers should take the added value, and spilt much ink trying to prove that hypothesis.

[Lateralthinking1]

Real growth is moral growth.

Quote - Mental exercise for greens: Consider the enormous destruction of value involved in closing down nuclear power stations before the ends of their useful lives.

You might be misinterpreting the psychology of some greens. Me for example. A thousand bars of gold could be flying out of the nuclear plants hourly and I'd still be against. Here is the reason even though, as always, there was "no danger to the public" -

http://www.telegraph.co.uk/earth/4682666/Nuclear-power-station-had-14-year-radioactive-leak.html

[greenilex]

I don't think that wealth-creation is about money.

Every family creates wealth by nurturing its members, who in turn may do useful work. of course they are also consuming wealth as they go and polluting away meanwhile...but real growth should result if the work is put in.

What's problematic is the emphasis on growth for growth's sake, just to satisfy investors. That cannot be sustained.

[Dave2002]

I wonder how well you understand how an economist would view your example. Economic growth is defined as a rise in the real rate of GDP over time. GDP is defined in terms of added value. There are three ways of measuring it: output, income, and expenditure, but when measuring output it's defined in terms of (outputs - inputs). It has to be, or there'd be double- and triple- and quadruple-counting as raw materials were converted in steps into finished goods. If I buy land and materials and build a house, there is (hopefully) a net creation of value. If I build a bad house with good materials, there may be a net destruction of value. If I knock a house down and build another one, there may be a net destruction of value, depending on the value of the house I started with. (Mental exercise for greens: Consider the enormous destruction of value involved in closing down nuclear power stations before the ends of their useful lives.)

Thanks for your reply. I suspect my awareness of this is about as good as any "normal" person who isn't a technical economist, and probably as good as most politicians who aren't Vince Cable or Ed Balls.

You use the phrase "added value", but this seems to me where one of the problems lies. There is no easy/reliable way of measuring what that "value" is, so I think governments simply add up all the inputs, all the outputs and do a bit of calculation to come up with the GDP. This is, I believe, done on monetary value - whatever that is! The value of a high tech hospital which could have great benefits to society might be pretty much the same as some other much less worthwhile piece of infrastructure. Also, how do you code in events, such as pop concerts, which have, at least in terms of material objects, very limited lasting effect, though those who go to them may claim that they are affected spiritually and emotionally. The same would happen to classical concerts.

Such events (e.g the Olympics) clearly can have an economic effect on a country, though the Olympics have not always had a positive economic effect on countries/cities which have hosted them.

Is it really possible to compare a series of concerts or events with the construction of a hospital? If money is freely available, we can have both, but if it is not, then choices must be made.
Sometimes the choices made do not make sense at all. Sometimes it is better to not do something if it cannot be done properly, but "choices" may mean that instead of eliminating one or more possibilities from choices of action - which admittedly may be a hard decision to take - then instead all of the possibilities are carried on, but done badly, and maybe that is where "real" value can actually go down rather than up.

My point is that the "value" of something to society is not necessarily the same as the monetary value, on which I believe GDP measurements are made. Please feel free to elaborate, correct me.

[Lateralthinking1]

I respect the good intentions behind these points and questions. However, let's get real. Any economic prediction during the past year and more would have been more accurate coming from 100 guesses put forward by forum members than 100 economists. Isn't it way past the time that economics should be seen widely for what it is, ie far closer to astrology than science?

Russell Grant and Jonathan Cainer would have managed the western economy better than the (hundreds of) thousands of pseuds with economic models. I am completely serious about this and would challenge anyone to come up with evidence to the contrary.

[PhilipT]

I do take your point. The answer to the question "Is Xxxx growth the same as 'real' growth?" is always going to be the same - "It depends what you mean by 'real'". I can't help you there - only you know what you mean by the word. All I can hope to do is improve your understanding of what economists mean by "economic growth".

I'd like to pick up on two phrases in your last post: "If money is freely available, we can have both, ..", and ".. the monetary value, on which I believe GDP measurements are made." Again, I wonder whether you know what you mean. It is a truism in economics that goods and services can only be paid for by goods and services. Expand the money supply, and the result is that prices will rise, not that more goods and services will become available. The recent quantitative easing has pushed up, or at least supported, nominal GDP, but also pushed up inflation, so not real GDP. Something I glossed over in my earlier explanation of GDP is that in doing the calculations, inflation is factored in via something called the "GDP deflator", which may not have the same value as the RPI or the CPI - it's just a different measure of inflation.

As for the value of something to society, societies make decisions about what they want, sometimes through the ballot box. If society wants health and education services free at the point of use it will vote for them and pay its taxes. (There are, of course, people who regard such services as a 'right', and paying taxes as optional. Perhaps you can guess at my attitude towards such people.)

Keep those cards and letters coming. At this rate I'll be explaining "deadweight cost" and "comparative advantage" before Christmas.

[teamsaint]

real growth or some economic statistic?

i like to think in terms of "people who do something useful", lets see, um, production workers, engineers, teachers, supermarket workers and managers, musicians and footballers(at a sensible rate of reward), sales reps, bus drivers, nurses,farmer workers, and so on and so on, and, on the other hand utter parasites who do nothing but take at other peoples expense, like investment bankers, commodities dealer, landowners with anything over 50 acres,, most large scale landlords, the monarchy,politicians, etc etc.

If we had more of the first group, and the second were taxed till it hurt like hell, the world would be a much better place, and we would get real economic growth that actually benefited most people.

"In 1649, to St Georges Hill.........."

[Dave2002]

I do take your point. The answer to the question "Is Xxxx growth the same as 'real' growth?" is always going to be the same - "It depends what you mean by 'real'". I can't help you there - only you know what you mean by the word. All I can hope to do is improve your understanding of what economists mean by "economic growth".

As for the value of something to society, societies make decisions about what they want, sometimes through the ballot box. If society wants health and education services free at the point of use it will vote for them and pay its taxes. (There are, of course, people who regard such services as a 'right', and paying taxes as optional. Perhaps you can guess at my attitude towards such people.)

Boy, so now you're using "real" and "nominal" to distinguish between concepts you understand! I take your point about quantitative easing. So it's basically a technical trick which does very little (perhaps) to affect the underlying "real" economics.

It's also interesting to note your remarks about value to society. I don't know what a starving man or woman would actually prefer, if given a choice between food, drink and listening to Beethoven's 9th. Perhaps if such a person was really ill, and maybe about to die anyway, their best choice would be music. Otherwise I figure that most people in that kind of situation would go for food and/or drink, though according to scientists drink is often more important.

There are situations where such decisions are seemingly obvious, but in the wider scale of things choices are harder to make, and not always exclusive. Would you rather have concerts than football matches? I'd rather have concerts, but clearly many prefer football, and there are actually people who like both.

The way much economics is presented is as a technical subject, where real world "values" and decisions based on evaluating such options with value judgements seem largely to be pushed to one side. Indeed, as one other respondent has commented here, many economists appear to ordinary mortals to have little clue about how to run a society effectively, which unfortunately leaves us with politicians, many of whom seem almost equally clueless.

In the so-called developed world, many governments now seem to think that value decisions can be left to "the markets". I am not at all convinced that is sensible.

[Dave2002]

real growth or some economic statistic?

i like to think in terms of "people who do something useful", lets see, um, production workers, engineers, teachers, supermarket workers and managers, musicians and footballers(at a sensible rate of reward), sales reps, bus drivers, nurses,farmer workers, and so on and so on, and, on the other hand utter parasites who do nothing but take at other peoples expense, like investment bankers, commodities dealer, landowners with anything over 50 acres,, most large scale landlords, the monarchy,politicians, etc etc.

If we had more of the first group, and the second were taxed till it hurt like hell, the world would be a much better place, and we would get real economic growth that actually benefited most people.

"In 1649, to St Georges Hill.........."

I'm kind of with you here. Did you see Question Time on Thursday? There was a Business person - not sure who - who was ranting on about wealth creation and business. He came up against a lady who suggested that teachers were creating value, but then we hit the cyclical argument - "But who's going to pay for the teachers? They're paid for by the REAL wealth creators!" To which the lady then replied "But who's going to provide the education for your people ..." Etc., Etc." Wealth is surely not just about products. It will include services, which may be anything from concert promotion to prostitution, to law enforcement, to hairdressing ...

Wealth should perhaps not just be about "stuff/concepts" which can be valued monetarily. What about just being nice to your neighbours for example, or helping people out when they are ill, or passing information and perhaps advice to friends? In some ways DC is right about his Big Society ideas, but on the other hand why should we have a system in which those who only value money exploit those who are prepared to offer their goods and services for - in monetary terms at least - very little reward?

PS: Thanks for reminding us of the Surrey Diggers - http://en.wikipedia.org/wiki/Saint_George's_Hill

[burning dog]

Most 'Real' Jobs are services now, so I don't see the difference with teaching. If schools were all private they'd be identical to the other service workplaces, economically speaking. Aren't Driving Instructors, Care Assistants and Poets "Real"?

The paucity of manufacturing and skilled manual jobs compared with our over reliance on Financial Services is a slightly different debate. I could understand the use of the term 'Real Jobs' in that context

[PhilipT]

.. on the other hand utter parasites who do nothing but take at other peoples expense, like investment bankers ..

Well, not completely. A little reading of the history of, say Goldman Sachs, might prove instructive. The original Goldman started off as a middleman between commercial banks (who had large amounts of money to invest and wanted a return), and small businesses (who needed capital to invest in their businesses). I hope it's clear how a shrewd judge of risk who knew his customers could do that and provide a valuable service and still turn a profit. Where things started to change was when the bank began trading on its own account to make use of its knowledge of the trading flows it saw going through the system. I don't deny that much of the current economic mess can be blamed on investment bankers losing their sight, crucial in the early days, of the connection between the money they were handling and what it was actually going to be used for. Far too much money was put at risk, not to help grow productive businesses, but to help poor people with dodgy credit histories buy homes they couldn't afford, thereby inflating a property price bubble that made the loans look good when they weren't. But please don't lose sight of the original, valuable service investment banks originally existed to provide.

[MrGongGong]

"In 1649, to St Georges Hill.........."

I hope you have made an application to the police for permission ?

[teamsaint]

Well, not completely. A little reading of the history of, say Goldman Sachs, might prove instructive. The original Goldman started off as a middleman between commercial banks (who had large amounts of money to invest and wanted a return), and small businesses (who needed capital to invest in their businesses). I hope it's clear how a shrewd judge of risk who knew his customers could do that and provide a valuable service and still turn a profit. Where things started to change was when the bank began trading on its own account to make use of its knowledge of the trading flows it saw going through the system. I don't deny that much of the current economic mess can be blamed on investment bankers losing their sight, crucial in the early days, of the connection between the money they were handling and what it was actually going to be used for. Far too much money was put at risk, not to help grow productive businesses, but to help poor people with dodgy credit histories buy homes they couldn't afford, thereby inflating a property price bubble that made the loans look good when they weren't. But please don't lose sight of the original, valuable service investment banks originally existed to provide.

Naturally we need mechanisms for deciding where resources such as money for investment goes.

Just not the model we have now.(especially since businesses are endlessly complaining about inability to get credit, and the commodities markets seem to serve only to impoverish ordinary /poor people).

[Dave2002]

Interesting that Evan Davis picked up on different kinds of growth the other day on Today. He referred to "bad" growth and compared it with "good" growth. Mentioned creating holes and then filling them in. Reminds me of a joke - which I think had the punch line "We usually work with Ivan. He brings the trees."

I'll patch in the link to the correct Today slot later.

This is the link - http://news.bbc.co.uk/today/hi/today...00/9650600.stm from Today, Tuesday 29th November