© Dr Alexander Moseley
Transcribed with slight adjustments from lectures:

NOTES ON ECONOMIC GROWTH

Economic growth – economies grow in terms of wealth, production – the concept deals with what they can produce and measures whether that production increases over time.

As a concept, economic growth is very new. Until the late 18th C, thinkers did not believe that their economies could grow. There was no such thing as material growth and increasing prosperity for all, for the way that people thought about the world was that there was a set amount of wealth, so that if the French economy, grew, it did so at the expense of the British, so the French grew at the expense of the British. This led to the view that wealth production was a matter of grabbing resources from another country and that power was therefore dependent on being strong and powerful. It is the theory behind the political theory of realism and of the complementary theory of mercantilism

Smith on Economic Growth

When Adam Smith published the Wealth of Nations in 1776, economically minded thinkers could gain new insights into how a nation may improve its wealth. Radically, it was not war or stealing that created growth but an increase in the division and specialisation of labour, so labourers could become more productive: each person could produce more in a given day or year. The WoN was published internationally and a political movement grew up that encouraged free trade – a peaceful movement rather than a martial mode of international affairs.

Smith’s philosophy was not new, but he certainly synthesised it in a way that had not been done before. People knew that if you used machines or tools, it could increase productivity, but they did not connect this to a whole world vision – or a whole economy vision that if everyone did this, everybody would be better off. After Smith there were arguments about whether Smith’s message really meant that all would get richer or whether it would only be some. Some economists could not understand that, for they kept returning to the idea that the wealth of the world was fixed. Imagine a cake being divided up into various segments, so if Britain increased the size of its share, it would be at the cost of the French: France’s share would diminish. So the French have a good incentive to fight back.

There are people who still think like this – particularly politicians, which is why we still have trade wars to grab more wealth for ourselves. Foreign policy even extends to waging war to grab resources rather than trade for them.

Smith’s great insight was that if productivity increased, the size of the cake would grow, so relative shares did not matter as much, since the absolute size could also grow. However, Smith’s reasonings required evidence as much as theory. He himself had seen this in the town just to the north of Edinburgh – Kirkcaldy, which possessed a pin factory. He described how one man would make X pins a day, but if the labourers specialized then they would be able to increase the productivity of each person manifold. It was this that Smith was excited about. If labour productivity could be improved, everybody could become richer – not just the rich.

Consider the division of labour. A is good at fishing, B is good at making tools, C is good at grabbing fruit. By dividing the labour rather than all going fishing and ending up joshing around and not catching any fish, the economy may produce more.

Consider tools: a tool increases our productivity or reduces the time we required to do tasks. Mobile phone example. Various examples – look around, everything is capital, used in everyday life to help us do our daily tasks easier.

Consider the specialisation of labour. When we specialise once we have divided our labour, Smith noticed that the person on the task gets better – or at least has a chance of getting better. For instance in fishing, where to fish, when to fish, what to look for in the water, you start to improve and so specialize in the task. You need to get used to the work and then improve it – which improves productivity.

What is critical here – you have to think about what you do. Thinking. If we do our tasks without thinking, there will be no improvement. But if he thinks, wohhhh this is not working, perhaps I should change…what if new tool was used, or an improved tool? Later economists may not have emphsised this as much as they ought, this is something that should be emphasized. Particularly if we consider different countries or different regions within countries. But how did these areas improve quicker? Somebody had to have thought that this was a good place to trade, or perhaps it was the result of a government plan to build a city or harbour – however, if it had been useless, traders would not have used it. Usually, places grow through human action and rarely human design though.

If you are in a culture which encourages thinking, as long as that thinking is related to business or to reality, then it can encourage specialisation and growth. If thinking is related to philosophical or theological matters, then it may not have direct application to daily tasks such as being able to fish more efficiently or make clothes more effectively. When people turn their lives to the real world and ask can I improve? That’s when we see the potential for growth.

Anti-intellectual culture: in some cultures, innovation may be disapproved; the power of tradition is critical here and may hold back people’s desire to innovate until they grow up and settle into the traditions. [Benjamin Franklin example – cheaper insurance caught on over the traditions of God’s vengeance].

How can I improve my life has to be connected to social acceptance – people have to encourage or at least pull back from hurting people. Fear motivates others to stop innovation.

Today, we accept economic growth. But we must not accept it glibly – critics rightly point out some of the costs of growth – social, political, environmental, cultural…Some countries like China seek growth while keeping a lid on political change. In Britain, we see economic growth as a political and economic idea; governments try to stimulate growth – sometimes for the entire country, sometimes for specific parts of the country. That is because some parts of the country grow quicker or more usually than others – this is partly due to cultural differences but also the proximity to other markets. SE England tends to grow quicker than NW because of its proximity to Europe.

We are today more accepting of new ideas – especially in the realm of technology, although cultural issues still pull people back, such brakes may be ancient. Imagine if you are a child told not to change things, then the likelihood is that he or she will grow up to not change things: there will be a reduced incentive to change. Consider farming: this is the way we’ve always ploughed, we will always plough this way. Individually and culturally it will hold people back.

Sketch of how economists measure growth: GNP/GDP. Graphs. Business cycle introduction. Cycles are not exact but much more complicated than sine/cosine curves – we are talking about people’s actions and ambitions. Do the people want growth? Do they want to stay poor and miserable? I want more money, I want to expand my wealth and the wealth of my workers, I want to export…
 

Label troughs, peaks, etc.

Why do such cycles occur? That is an exciting area for economists.

Turning to the production possibility frontier:

Imagine a country can produce only two goods – this allows us to grasp the principles underlying the problem. The same principles underlie discussions of millions of products, but this is easier to see!

Compare a linear production possibility frontier versus a quadratic form:

The PPF shows what a country can produce given technologies. It is a useful quick picture – look at D: here is a point of inefficiency, for the country could produce more of both.

What are the factors of production that produce the PPF?
Land – there must be somewhere to produce; even if this a desk or an office. Even in space the machinery or a satellite will take up physical space.
Labour – there must be a producing agent to produce something
Capital – usually there are tools of some kind. Anything beyond the human body, but even here we could see the hands as tools!
Entrepreneur – the “mind” or business person behind putting the other three factors together.

Consider a person seeing a gap in the market – the windows of the town are dirty, so he decides to buy a ladder and a bucket. In this case, he is the entrepreneur and the labourer; he owns the capital (tools), and goes onto other people’s land to offer his services.

At point D, some or all of these factors are not being used efficiently. So there is an unemployment of resources. Applied example: China released people from nationalised industries, millions turned out from work so the PPF falls to a point D. As production alters, the country may then return to the frontier point – except that in reality, there will always be some unemployed through turnover of markets. Only in the Soviet Union was unemployment “prohibited”…that did not mean that people were not underemployed or properly speaking unemployed – only the law prohibited, not the reality of the situation.

At other times, there is seasonal unemployment, so there may be fluctuations in the economy’s ability to produce. During normal market conditions, companies may change – some become bankrupt or lay off workers. Unemployment can be a healthy sign in that respect – for the market is always trying through the price mechanism to get resources to where they should be; hindrances arise when governments stop that function and thereby may create chronic (long term) unemployment.

With technological progress, more land, more resources, more labour, more capital, then the economy can grow and the PPF can shift outwards to the right…a simple diagram but which tells a lot of stories.

Here an economy grows. Where the new point of production is will depend on where resources ought to go, as determined by consumers’ wishes.

The state of marginal substitution (dy/dx) on the diagrams reflects the rate of substitution between the two industries. Consider different curves, and think about the rate by which people and resources may leave one industry for another – compare a linear function with a quadratic function!

We need to look closely at the change: if we reduce car consumption (on the y-axis) in favour of producing one extra computer (on the x axis), the rate of removal of factors from the car industry will begin to increase. Initially, we may take only one or two FOPS from cars to produce a new computer – these resources are more effectively employed (relatively speaking) in the computer industry; but as we want more computers, then we must pull more and more resources from cars to produce one extra computer. This shows the law of increasing marginal rate of transformation in production. It also implies that as we pull increasing numbers from the car industry, we will be employing increasingly poor or unproductive resources in the computer industry.

Imagine pulling a car enthusiast to work on a computer – lower productivity, unhappy chappy. There is usually specialisation in work (something Marx ignored) – that some of us are more productive in some jobs than in others: this is a critical principle for economics!

If I produce more in a shorter time, then I am free to either increase my overall (absolute) production, or I may wish to spend my time doing other things, or just to relax. If making a table took me a week and then I buy a new plane or carving machine then I may get it done quicker, so I can produce more tables or enjoy using my time elsewhere. Principle: work less, more pay: this can only happen if we increase our productivity.

Sometimes unions may aim for more pay and less work but without working for it as it were – what is important is that the workers increase their productivity to enable them to earn a higher return.

Think about productivity with your own work: when you are revising, do you have the internet on? When are you more productive?? But then consider companies that allow their employees to play or to surf the internet for a proportion of their time – the employees may enjoy their work more and so their productivity may increase.

The number of workers can also help shift the PPF to the right (economic growth). More babies being born today will lead, all things being equal, to more workers in the future. This is if the children do eventually enter the working population – some may prefer to remain unemployed or to become students (still “unemployed” from a production point of view!). On the other hand, a growing population may lead to famine or war, for the resource base required to sustain the growing population does not increase – here, we look for obstacles to resource exploitation such as government intervention, high taxes, wars, etc.

A country’s population may also grow with immigration – workers coming to the country to offer their services. These act to expand the pool of factors of production (labour and entrepreneurial skills) available. Compare this with emigration – workers leaving the country. DATA on country’s migration figures.

Capital:
If the availability of capital increases, then this usually leads to economic growth. For example, we invest more in machinery, this can increase labour productivity.

Applied: hundreds of tractors sent to Ethiopia to help with the famine – found they were not used. You can’t just buy someone a tool and think that it will increase production for they have to “know how” to use it as well as having a service industry to look after the machines. Politicians tend to like their pictures being taken in front of big machines – looks good, but economically a waste of resources.  On the other hand, a dynamic, complicated economy helps to secure the services which are required to increase labour productivity. There is a context within which capital growth is useful for growth – a complicated area of economics. JOKE: put me in a 747 – press buttons, get the engines going…hmmm, oooh! We’re moving!!! Or even the buttons on the calculator – what do they mean unless there is a “know how” of mathematics behind the machine. Consider a future archaeologist finding a mobile phone – what the heck was it for??

Efficiency

How efficient is a factor of production? Energy in, energy out – but what kind of energy do we want here? Think of the example of the car’s engine. We can have a more efficient engine, but it may not turn wheels, no headlights, no heat in the cab, no music…We choose between different outcomes therefore. We have to be careful in discussing efficiency – efficiency is a relative idea, dependent upon our values.

I have an incentive to reduce my electrical consumption in many respects, so I may turn lights off in the house in rooms I’m not using. But if I want to give off the appearance of many people in the house for security purposes, I may choose to spend more money on electricity in favour of a feeling of greater security. Alternatively, I may prefer a less efficient light bulb (a filament type) over a more efficient so-called eco-bulb which I find ugly. Aesthetics should not be ignored in our choices!

Consider in the workplace: a drive to efficiency may upset workers, give them greater stress and hence produce a higher turnover of staff – “failed” to get a work quota for instance. There is therefore a trade off between our values and “technical efficiency” – I may prefer to give up technical efficiency over being relaxed!

We can also analyse the complicated area of political versus economic freedoms. Some people argue that economic freedom is more important than political freedom, while others argue the opposite. Why not merge the two? Historically, the two tend to go in hand – as people become richer, they want more political accountability, likewise a politically free nation may want more economic freedom.

[Alex note: philosophically this reflects a Western division between mind and body, which is not always defensible or coherent.]