State of Innovation

Patents and Innovation Economics

What is economic growth?

What is economic growth?  We all think we know the answer to this question.  It’s when GDP (Gross Domestic Product) is growing or positive, would be a typical answer.  That is an abstract answer for most of us.  We tend to focus more on the likely results of a growing economy, such as there are more high paying, high quality jobs; you are more likely to receive a raise above the inflation rate; you are more likely to have more money in your bank account; your access to education, health care, quality of food, etc. generally increase.  But if population growth is 5% and GDP growth is only 2% then none of these good things happen.  What we are interested in is real per capita increases in wealth.

              But what is wealth?  Is it the number of digits in your bank account, how many dollars you have in your pocket, how many dollars your 401K is worth?  The people in Venezuela have seen a huge increase in the number of digits in their bank accounts, and the number of dollars (Bolivars) in their pockets have increased, however they are getting poorer.  So did the people in the Weirmar Republic in the early 1920s, many of whom were billionaires (in Marks).  Wealth cannot be confused with the amount of currency (Dollars, Bolivars, Marks) one has.

Using currencies to denote wealth often causes confusion.  Let’s look at some examples separate from currency.  Image a farmer, we’ll call him Tony.  Tony has two cows, a dirt house with a thatch roof and no running water or electricity.  A year later Tony has ten cows and running water.  Clearly Tony is now wealthier than he was a year ago.  In fact, the quantity of livestock one owns has been a traditional indicator of wealth in many societies.  Wealth means having more of the things necessary to sustain one’s life.  But people in the US and the West are not like Tony, most of these people have more than they could possible need to sustain their life –right?  Actually, no.  A rational person, let’s call him Randy, does not just worry about whether they have enough food for today.  Randy’s a fisherman and just because he catches enough fish to feed his family today, does not mean he should stop fishing.  What if the fish are not biting tomorrow?  What if there is a storm tomorrow and he cannot fish?  What if his boat needs repairs and he cannot fish for a week?  Because Randy is rational he keeps fishing even after he has caught enough fish to feed his family that day, if there are fish to be caught and the day is not over.

But the average American, call him Sam, is not like Tony or Randy.  Sam has so much to eat he is overweight.  He is wealthy beyond the wildest dreams of Tony or Randy.  He lives in a nice house, has running water, electricity, three televisions, five cell phones, why should Sam care about being wealthier?  Well what if Sam gets sick and can’t work, what if he loses his job, what if his car breaks down, what if his child gets accepted to Harvard?  Only the uber wealthy have enough wealth to meet all their needs for the rest of their lives.  When you consider that a prolonged hospital stay can cost over million dollars, it would require a net worth in today’s economy of around ten million dollars or more.  All except the uber wealthy have a rational desire for economic growth (i.e., increasing wealth) and even the uber wealthy benefit from the new technologies and opportunities provided by economic growth.

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October 7, 2013 - Posted by | -Economics | ,

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