Why is economic growth always necessary?

There are a lot of smart people on this forum, and it seems to be the best place to get UNBIASED opinion.

I've never taken any economic classes, and I probably (almost garuanteed) don't understand a lot of things about economics.

But I have ALWAYS wondered this: why does an economy have to "grow". This also applies in business, why is "growth" always so important? I mean, you earn $500,000 one year, you earn $400,000 next year. You hear about big business' that forecasted XXX growth but they only achieved XX. And by earn, I mean net profit when all is said and done. If you are breaking even you are still running the business, paying employees, your bills, and I would assume who ever owns the business money. Is it really bad to earn the same amount of money you did last year? Isn't it good that you are netting overall?

Am I missing something?

Breaking even means no profit.

No profit means nothing for shareholders (dividends) and no new people desiring to invest in (no raising stock price.)

Shareholders have become locked into the idea that not growing=dying.

If your boss came to you and said "this year I'm only going to pay you 90% of what I paid you last year, and I MAY pay you less than that next year....would you want to stay with that company and HOPE your salary doesn't decrease?

Remember that in economics, and capitalism in particular it's a system based on the desire to make profit on an investment.

They don't have to grow, but otherwise what's it in for the investors? Why should I give you money just to continue breaking even?

However, my opinion in national economics is a slow, steady, reliable growth of an economy. While sure, bubble and burst make for faster growth, but they are far more likely to cause social stress than a country that has a stable economy focused around human welfare, rather than economic growth.

Many EU nations are focusing on that concept. We have not. The oil rich nations follow in our footsteps, and their social strife leads to terrorism.

Focusing on human welfare is an economic strategy? Hey Bill, what do you want to be when you grow up? Well Bob, I want to focus on human welfare! Thats not an economic strategy, its one of the factors you consider when creating an economic strategy. Don't get to happy about how wonderful the EU nations are while you are at it. They are stagnant for many reasons, choice isnt really one of them.

I think I've asked myself the same question.

Why isn't anyone happy with steady income, or yearly success, instead of constant growth?

In other words, a solid company with a solid product making a decent profit year in and year out but not 'growing' (I'll admit growing at at least some small rate is preferable).

Maybe a better question is why isn't a stock dividend preferable to rapid stock price growth?

The former seems to be a real measure of success while the latter is largely at the whim of crazy people.

-James

Growth is almost never necessary. In fact, often times it kills a business. Growth is not easy to deal with.

Very few people are able to stay content. Someone who makes $50k and is happy today tomorrow will want $60k. That is a major driver for growth, greed. Be it an individual, a corporation, a government.

Today we have made it worse by expecting growth. A stock that earned 5% last year is expected to earn 6% next year. If it does not, people sell it in pursuit of greater greed. They ignore the profit they did make, demanding ever more profit.

There is also delusionment. Many an individual/company/government believes what they offer is vital, and that the world needs more of it. So they will pursue the expansion of their domain, often to their detriment of even destruction. Seuss gave a superb example of this in his book, The Lorax.

To spin it back to you on a personal level, do you have a job? Able to pay your bills and keep your head above water? Are you able to stay content with this job, or do you expect to advance and get payraises? For if you expect advancement and pay increases, you are a "need to grow". On the other hand, if you can stay content with your lot in life, you do not need growth and expansion. Growth and expansion can hurt you in fact, because it could cost you your job.

if profit were to remain numerically the same but you still had to deal with the year on year increasing variable costs then would you really be making a "profit"... Effectively you would errode margins until you were making a loss and then bankruptcy.

I think to just "break even" each year you would need to grow your business at the same rate that the rest of the economy is growing.. So I say yes growth is needed as long as the economy is expanding.

so thats broad brush macro..

also, I believe that no product is directly impervious to substituties whether perfect or imperfect. So that is why you continually need to innnovate.

Economic growth is completely necessary based on our monetary policy. It is not a necessity for an individual company, but without growth they will be losing money since inflation will be eating away at their revenues and profits. So a small amount of growth is necessary for any company that wants to survive.

Look at the big picture. Where does our money come from? All dollars are loaned into existence. Every single dollar out there represents a debt of some kind. Whether it is from the government trading Treasury bonds to the Fed so they can make some dollars, or whether it is loaned into existence when someone goes to a bank for a loan, or even uses a credit card. Money, in our current system, only exists as a debt.

So, with that being said, and knowing that loans must be repaid with interest it is pretty easy to see why as far as the overall economy growth is so important. We need to make/borrow more money each year in order to pay back the debts already taken out plus the new interest.

It is a silly and unsustainable system. It requires an exponentially growing money supply and if you draw a graph of an exponential function with say 5% growth, after 100 years or so the graph is almost vertical - meaning that the money supply must grow at an incredible pace - this is where we are now and why tripling the amount of dollars in the last year hasn't solved the economic 'crisis'.

Ignorant has it there.

There is no chance that all of the necessary components of business are going to get less expensive (utilities, insurance, wages, material costs) and in order to maintain an even profit ratio regardless of profit level you will need to increase the price to cover the costs.

The issue I see is that some businesses get caught up in the formulas and run themselves out of business. Example: You sell 10,000 widgets per year for $100.00 and make 25% profit while you are are paying your 5 employees $40,000 salary your company profits $50,000 per year. Let's say this happens for 10 years and you have reinvested the profit capital into 5 machines that allow your employees to produce ten times the product during the same work schedule and are now making 100,000 widgets and are still selling them for $100.00 per piece (and people are still buying them up) If you are in the current economic model you are now making $2,460,000 in profit. As a business owner you need to utilize the new capital properly, giving yourself hefty bonusses is fair because your shrewd business skills created those profits.The widget market runs out and some guy making bangles (Which are widget type products with a cool LED flat screen) steals 80% of your customers. Now here is the neat part, you could even survive if that happens if you are smart. The 20% of the market you still own leaves you 20,000 widgets still being produced on two lines and now you can run 2 lines of bangles that sell for $150.00 and now you can add a line of henweighs at 10,000 per year which are like widgets and bangles but add an electronic julienne option that the real players want and you can sell it for $200.00 a piece and the great thing is that ALL of your products can return 25% profit margins! All the while the employees are still making $40K per year after all these years and you are now making millions...your workforce starts to demand more pay and better benefits but you balk because you are not paying it out of your pockets and your workforce leaves. You hire a bunch of American Immigrant laborers in your Canadian plant to avoid the health care costs and pay them $26K/yr hourly because they will take it and your product quality goes down.

Does anyone see where this is going yet?

ignorant wrote: also, I believe that no product is directly impervious to substituties whether perfect or imperfect. So that is why you continually need to innnovate.

Unless you're Microsoft :D

GameboyRMH wrote:

ignorant wrote: also, I believe that no product is directly impervious to substituties whether perfect or imperfect. So that is why you continually need to innnovate.

Unless you're Microsoft :D

not to ruin your snark, but Apple, Google and Mozilla have certainly forced change at the big M

This is a capitalist system... it means that the government serves and protects the money. It makes policy, war, and law based on what is good for the economy. The culture it has created rewards the achiever who "earns". Over time it has educated us all that if you don't earn and grow - you are a loser.

If you would like a nice example of what capitalism does to slackers... google "Trail of Tears".

TJ wins.

I just don't believe what TJ says is correct. I think Pegging our monetary system is needlessly conservative and constricts wealth growth.

but.. it's like the global warming debate.. everyone admits there is something wrong.. but noone really agrees on the causes or way out.

On a more base note, I think that growth is a human behavioral need. We want to grow and expand. I for one will not accept status quo in anything.(nothing is ever good enough) Which means I stress too much about perfect crown moulding corners when caulk will do.

Ya'll have made some good points. Also consider population growth. Our country (and planet) has an expanding population. If our population is expanding at 3%, say, then if our economy does not also expand at 3%, we are in fact shrinking. If we don't sell 3% more widgets, that means that everyone gets 3% less widgets, or a 3% reduction in our standard of living.

ignorant, a gold standard for money worked for a long time. Why? Because it prevented the government creating fiat money. Today, we need more money? Practically everyone can create it. Even you. You can rent your used Macro Economic textbook to a new student (sucker) for $50/semester, to be paid over time. You just created $50. You can list that $50 on your balance sheet as an asset. Banks, credit card companies, mortgage companies, the government, car dealers, everyone is creating dollars like this, but the amount is limited except for the government. You only have so many textbooks to rent out. Then you add in the massive dollars the Fed/government create and you get inflation. "Growth" has to be larger than inflation to be growth. It needs to be larger than population growth to be an increase in standard of living.

The dollars created by banks and the mortgage finance companies by this method created the housing bubble. Lets say you have a $100K house you just bought. Now, there are all these organizations creating money by offering to loan it to anyone with a pulse. They loan $150K to an illegal immigrant with no job and a history of not paying his debts. He gives you $150K for the house. That extra 50 large is now available for a new Elise and represents "growth" in the economy. As long as the construction job holds out for the illegal immigrant and he feels like paying his mortgage, everything works out fine. Now, in order to get The O elected, George Soros runs up the price of oil in dollars through various means and the oil companies and Pavement Challenged are sucking all the dollars out of the economy. Noone has money to buy a new house, the documentation challenged immigrant looses his job, stops paying his mortgage and the whole thing colapses.

Personally, I maintain that money represents time/labor. Gold worked as money because it took time (labor) to aquire it, thus representing time. I think we should have a finite amount of money, based on the amount of labor available/performed. Gold doesn't have to be the standard, just anything preventing the free printing of money, expecially by the government (massive amounts). Energy is a currency of money, as energy is needed for everything.

The reason growth is necessary is that if an individual company is not growing, then it is a poor investment of capital. If I can get 4% in a CD, but my company is only growing at 2%, then if I want to make the most money, I will shut down my company and put my money in CD's. Hey, but there's this geek in Seattle that can beat my CD of 4% with a company that is growing at 10%. Woohoo - even better.

It all boils down to return on capital. A company that is static, while it may have a completely viable profit structure, still isn't as good of a return on capital as a company that is growing.

The way to change it is to change ideals on what is valuable. If you value stability over capital growth, then you can make the individual decision to allocate your resources that way. An example of this is my spending on housing. While it makes better capital growth sense for me to allocate my resources in growth sectors and minimize my spending on housing, I've decided that a paid off house is more intrensically valuable to me than higher growth of my dollars, so I am working to pay my house off quickly. I acknowledge that it is not the best capital decision, but I place non-monetary value in a paid for house.

Some really insightful and thought provoking comments here. My $0.02 (adjusted to today's dollars) will be very simplistic.

"Breaking even", is for practical purposes not possible. Things never balance out in such a tidy fashion. Therefore you will either have to have growth or retraction. Of the two, growth is preferable.

Economic growth increases wealth and improves standards of living. The opportunity to create wealth inspires creativity and innovation - I'll cite modern medicine as just one example.

Retraction causes the opposite - a decline in standards of living. I would suggest that it is part of the human condition to want our lives to be better, not worse.

Even if breaking even were possible, I invite you to pick a period in history where you would say - "there, that's where we should have stopped." Would you be okay with giving up all of the advances in science and technology since that point? (I'm sure we would all be willing to give up SOME of them, but you don't get to pick and choose.)

I think one way to look at it (and maybe answer the question) is that if the country (world?) had NO inflation and NO population growth (both of which may are at the least highly unlikely) then no growth is not really a problem.

You can also say a no growth company is completely viable as long as you correct for inflation (company is growing in pace with inflation, which is actually no growth)

Oh, and kudos to Dr. Hess for his completely unnecessary addition of a political dig into is explanation.

Hi HiTempguy,

In terms of publicly traded companies, what others have said about the “greed” factor is spot on…the most commonly used metric for stock valuation is PEG “price – earnings – growth” which basically estimates the ROI a given dollar allocated to a given stock is likely to yield over time. Ultimately what happens is that stock prices move up and down as traders balance the PEG values between publicly traded companies…when a CEO comes out and revises earnings estimates upwards as a result of some favorable event the PEG value of the stock becomes higher than average and investors run up the stock price which pulls down its PEG value until it normalizes with other companies; same thing happens in reverse for downward estimates.

Having said this, the “greed” factor actually represents a very small portion of the need for growth…the 400 Lb gorilla is what both TJ and Dr. Hess eluded to…replacing the gold standard with what’s known as marginal lending to create a debt based financial system has resulted in an absolute “grow or die” situation. Advancements in agriculture, medicine, mechanization, process engineering, information technology, etc have allowed us to grow fast enough to avoid death since we went off the gold standard…you could make the case that our current financial crisis is the result of their being no sufficiently remarkable, growth generating breakthrough on the horizon.

Imagine what would happen if we didn’t have growth. Take for example the basic dynamics of borrowing money to purchase a home for 500K with a 30 year mortgage. At the end of 30 years you will have spent about 1M total between principle and interest. The house is still the same house that’s “worth” 500K but 1M has been spent on it…where does the other 500K come from??? We absolutely must have sufficient growth to cover our interest expenditures or there will be no recourse but foreclosure. And foreclosure in and of itself doesn’t even solve the problem, it’s the resulting reduction in value that gets the job done.

This is why I’m so discussed with the whole lender-E36 M3 head borrower-big three bail out dribble we’re currently being fed. Economics 101…the system is inherently flawed & the voice of the process is clearly telling us that it disparately needs to correct. What do our leaders do…meddle with the process with the guaranteed result that the intensity and duration of the correction will be exponentially more painful than it would be if left alone all the while punishing the responsible people and rewarding the bad people.

In case you haven’t heard, the tab for the currently committed bail out money comes to $26,000 for every man, woman, & child in the US and by the time we’re done, it’ll be at least twice as much. Of course, our politicians are absolutely loven’ this new found power to pretty much make or break anyone they want by deciding who gets the money and who gets the bill.

Datsun1500 wrote: I can't take you seriously when you can't do math and just repeat what someone else said...

Perhaps you should do your math again, you know, so that we can trust you again...

...oh wait, it looks like you already did it.

Bailout tally approaches $7 trillion

RX Reven' wrote: This is why I’m so discussed with the whole lender-E36 M3 head borrower-big three bail out dribble we’re currently being fed. Economics 101…the system is inherently flawed & the voice of the process is clearly telling us that it disparately needs to correct. What do our leaders do…meddle with the process with the guaranteed result that the intensity and duration of the correction will be exponentially more painful than it would be if left alone all the while punishing the responsible people and rewarding the bad people.

Amen!

aircooled, you can't look at macroeconomics without studying the politics behind it if you really want to know what is going on. Just as microeconomics is a very interesting study in non-existant market conditions (except game theory, maybe and colusion), macroeconomics is also primarily a study in how many angels can dance on the head of a pin without looking at the big players. I the 1800's, they called them "Rober Barrons."

While I would tend to agree, I just don't see how a conspiracy theory about swinging an election by creating high gas prices has anything to do with explaining how inflation creates a need for (in some cases perceived) constant growth.

I guess because it clearly was not a political thread, I saw no reason to make it one.

In short: Capitalism.

It takes money (capital) to start or grow a business. The idea is that the business will make more money for you than you initially put into it. Most people do not have this initial capital lying around. So, they get a loan. Of course, the bank doesn't actually have cash for all the loans they give out, only a certain percentage, but they're large enough to absorb a few failed ventures.

So you get money, that didn't used to exist, for a business. The business makes you money, and you are able to pay back interest on the capital the bank gave you. So the size of the economy expands.

You have more buying power now. So you buy more. So value on goods goes up because there is more wealth in the system.

Other people expect raises because as they get more experienced because, the economy is inflating, and their time is becoming more valuable as they gain experience.

That last part maybe doesn't matter as much, because people are retiring, and younguns are entering the workforce for the first time. Except that people are retiring later and the population is expanding.

So, yeah. Capitalism essentially requires an expanding economy. If you wanted the economy to remain totally constant, you'd need a different economic system.