Tweet of the day: Growth, productivity, resources

Economic growth is a much bemoaned topic, but what this tweet nicely illustrates is that the type of growth economists often talk about differs from the type of growth that concerns a number of people. Here we’ll briefly consider how we can understand this tweet.

For an economist there is some set of resources, and they can be combined to create output. This suggests that output = function of inputs.

Technological growth, or growth in productivity is when this function changes. Specifically imagine that we can write the equation the following way:

Where Y is the output produced, f is the “production function”, L, K, and N are labour, capital, and natural resources while A is some technology scaling factor.

Economists will tend to think about growth in terms of an increase in A – namely we can make more output with the same inputs. This mirrors the Productivity Commissions discussion of productivity, and what Arthur Grimes was expressing here.

Many “non-economists” will instead see growth as the product of using more inputs – often with a concern towards non-renewable natural resources.

Both frames are valid, and we do need a conception of the physical limits of our ability to use natural resources. As the blog has argued in the past an economist will often state that there will be innovation as some forms of scarce resources (that are non-renewable) are used up.

Ultimately, this suggests that understanding technology and innovation matter for both growth, and the way we vary the utilisation of resources. When economists state that “growth, innovation, and incentives are what is necessary to ensure sustainability” this is what they mean.

There are areas of market failure – common pool resources, hyperbolic discounting and/or a failure to value future generations. However, an economist would argue that these are the areas that require policy intervention – not an intermediate heuristic like growth.

In the same way that we shouldn’t “target growth for growths sake” we shouldn’t “limit growth for sustainability’s sake” – as many of the sources of growth and increases in the technological frontier may be associated with finding new ways to do things.

The one warning I would give economists when they say this is the following. If there is a better sustainable way of doing things with different inputs, that we can discover through innovation, which would then increase GDP – why aren’t we already doing it? Yes a relative price change incentivises change, but I’m not sure it follows that it generates growth.

In the end I think there is one thing we can all agree on – we want a world that our children and grandchildren can love, one that is no worse than the world we inherited. Lets ask where there may be failures that are preventing us from doing that, rather than fixating on either increasing or decreasing some arbitrary “production” or “growth” measure