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What is not Economic Growth: Consumption and Destruction

Now that we have some idea of what wealth and economic growth are, let’s look at some examples of what is not economic growth.  When Tony slaughters a cow and eats it he has consumed some of his wealth.  He has one less cow, but he has food in his belly that he needs to live.  Is he wealthier now?  Well he needs food to eat in order sustain his life.  If he starves to death, he is certainly not wealthier.  However, Tony now has less of what he needs to sustain his life in the future.  Wealth is the surplus above what one needs to live today.  Consumption is not wealth.  Interestingly, being overweight was traditionally considered an indicator of wealth.  The excess fat meant you could sustain yourself without eating for longer because you could not find food, or because you were sick and could not hold food down.  In fact, it was fashionable for women and men to be overweight in the 1700 and 1800s.  Fat was an indicator of wealth, both because the person could sustain themselves without food longer and because it indicated that the person had plenty of food, compared to the calories they consumed.  In societies that live on the edge of starvation or what is called the Malthusian Trap, being overweight is a source of wealth.

               The Malthusian Trap is named after Reverend Thomas Malthus (1766 -1836), who postulated that human population would always grow faster than the food supply, dooming humans to subsistence living, i.e., living on the edge of starvation.  Oddly enough Malthus was correct until about the time he died.  The advent of the Industrial Revolution changed this situation; first for the people of England and the US, then the West and today for at least half of the world’s population.  The economist Gregory Clark has shown that policies to alleviate human suffering in a non-Malthusian Trap economy just result in additional misery in a Malthusian economy.[1]

Another example of what is not economic growth, but our present GDP measurements do count as increases in wealth is known as the broken window fallacy.  This was first explained by the French economist Frederick Bastiat (1801-1850).  The fallacy is explained by this story.  A window to your house is broken by a windstorm and you hire window installer to fix it, the window installer and the person who makes windows have additional work and income.  The window installer is wealthier, but is this economic growth?  The house is now in the same position it was before the window was broken, but you are out the cost of the window.  The amount of profit the window installer has made is less than you paid, because window installer has costs, such as the cost of the gas to get to your house, the cost of the glass.  Even adding up the profits of all the people the window installer paid does not add up to the cost you paid for the window.  The reason for this is we have to consume food and other resources to stay alive as we discussed above.  What this means is that your broken window has actually resulted in less wealth not more.  This is not surprising.  If our fisherman, Randy’s boat is damaged he is not wealthier.  Even after he fixes his boat, he lost out on time he could have been fishing.  Destruction does not create wealth, it reduces it.  Unfortunately, you will hear politicians and economists talk about natural disaster causing economic growth all the time.  An article in NPR discussing Superstorm Sandy that hit the U.S. northeast in 2012 stated:

But there may be a silver lining to all that destruction: Some economists argue that reconstruction from Sandy could help stimulate the national economy in 2013.[2]

The reason economists are confused about whether destruction causes economic growth is that our measurement of the GDP does not count the destruction of property and life.  This is like the gambler who only counts his winning.


[1] Farewell to Alms: A Brief Economic History of the World, by Gregory Clark, Princeton University Press 2000.

[2] Could Post-Superstorm Sandy Rebuilding Energize The Economy?, by Joel Rose, NPR, December 31, 2012, http://www.npr.org/2012/12/31/168363901/could-post-superstorm-sandy-rebuilding-energize-the-economy.

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November 8, 2013 - Posted by | -Economics | , ,

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