Economic growth is a key economic objective. Not only does it affect living standards, it affects productivity although there is discussion about whether productivity causes growth or vice versa. It is linked to the balance of payments with export-led growth being an ideal way of achieving two objectives yet growth can worsen the balance of payments in both the short and long term; in the short term countries often have to purchase machines from overseas and build up raw materials and components and in the long run, particularly in the UK which has a high marginal propensity to import, higher incomes associated with growth cause significant increases in imports. It provides a fiscal dividend for the government, allows for a redistribution of income by channelling the rewards of growth towards low income earners and can allow the economy to expand in a non-inflationary manner by shifting the long run aggregate supply outwards although it is also associated with demand pull inflation when aggregate demand increases more than aggregate supply.
When analysing the causes of growth, economists differentiate between short run growth, usually associated with increases in demand, and long run growth which emphasises supply side policies. However recently there is a view among some economists that the developed world might be entering a period of prolonged stagnation. This was an idea first espoused in the 1940s but refuted by the post-war boom. Today the OECD are predicting growth of below 3% among its members compared to 6% before the financial crisis and there is increased interest in the very long run.
Some suggest that today’s technological advances focus more on improving the quality of life and have a smaller impact on productivity than previous advances. However this is difficult to quantify since major developments, such as the internal combustion engine and electricity took over 50 years to work through the economy.
Another possible cause of the slowdown, if indeed we are entering a prolonged slowdown, is the fall in birth rates and increasingly ageing population which impact on the supply of workers and, possibly, on the development of new ideas. As well as the supply of labour being an issue, there are also concerns over increasing difficulties being faced in extracting raw materials as the world is having to use increasingly marginal sources. In the 1950s, one could extract the equivalent of 100 barrels of oil by expending 1 barrel while today the ratio is 20 to 1.
Some economists also suggest that not only are gains in long run aggregate supply increasingly difficult to achieve, old-fashioned reflationary policies are having a smaller impact than in previous years resulting in a weak recovery post 2008 throughout the developed world with the exception of the USA.
Does slow growth matter? Does faster growth and higher incomes bring greater happiness? Do the environmental advantages from a move to a lower growth path outweigh the benefits?