An individual laborer is more productive and worth more when they can more efficiently turn resources into valuable goods and services.
This could be everything from a farmer improving crop yields to a hockey player selling more tickets and jerseys. When a whole group of economic actors can produce goods and services more efficiently, it's known as economic growth. Growing economies turn less into more, faster. This surplus of goods and services makes it easier to achieve a certain standard of living. This is why economists are so concerned about productivity and efficiency.
It's also why markets reward those who produce the most value in the eyes of consumers. There are only a handful of ways to increase real marginal productivity. The most obvious is to have better tools and equipment, which economists call capital goods — the farmer with a tractor is more productive than the farmer with just a small shovel.
It takes time to develop and build capital goods, which requires savings and investments. Savings and investment increase when present consumption is delayed for future consumption. The financial sector banking and interest provides this function in modern economies. The other way to improve productivity is through specialization. Laborers improve the productivity of their skills and capital goods through education, training, practice, and new techniques. When the human mind better understands how to use human tools, more goods and services are produced and the economy grows.
This raises the standard of living. Actively scan device characteristics for identification. Use precise geolocation data. It is impossible to conceive of a world in which there is absolutely no consumption of these resources. People need to drink water and eat food. Beyond that, humans have found that using other resources such as wood have enabled them to build fires to stay warm and structures to shelter them from wind, rain, and snow.
The use of such resources has enabled humans to, not just live, but also to improve the quality of their lives. The improvement in the quality of life is what motivates the desire for continued economic growth. The situation changed dramatically around years ago. While much of this economic growth and improvements in living standards has been concentrated in certain nations, developing countries have also seen increases in per-capita economic growth, higher life expectancy , and decreases in mortality rates from disease and malnutrition.
Further, while climate change is not something new, research indicates that the increases in global temperatures since the last half of the 20 th century are most likely the result of human activity. Yet, these critics tend to have a narrow, although understandable, interpretation of economic growth.
Although much of economic growth in the past has coincided with physical growth, the concept of economic growth doesn't depend upon it.
Economic growth is the increase in real after inflation GDP , where GDP is the total value of the domestic production of all goods and services. The keyword here is value. Economic growth occurs when the value of real GDP increases. There are two ways in which value can be affected.
One is what critics of economic growth tend to focus on: an increase in the quantity of production. The other way, however, is to increase the quality of what is produced.
Extensive economic growth describes increases in physical growth that uses more inputs. Intensive economic growth, on the other hand, describes growth increases resulting from more efficient or smarter ways of using inputs to produce higher quality goods.
In fact, some economic growth can be good for the environment and reduce our dependence on natural resources. That includes expanding public transportation and making it more efficient, improving the energy efficiency of homes and businesses, producing more fuel-efficient vehicles, investing in non-polluting industrial processes, and cleaning up industrial waste sites.
Because economic growth doesn't mean infinite increases in our consumption of natural resources or environmental degradation, it is possible to separate economic growth from physical growth and its harmful effects. Though mostly private, and thus, in a sense, more free, the U. It is in large measure a tax on the community. Most rich countries have long since decided that achieving higher rates of sustainable growth is not the most important economic issue.
In this basic sense, then, the Index makes a political judgment that does not find clear majority support in any of the industrial countries today. The prosperous Asian countries have taken a different but parallel tack. Social spending in Japan is far less extensive than in the West, as government has officially left citizens to provide their own security to a far greater degree.
But the government has implicitly encouraged corporations to provide much of that security in its stead. Besides supporting the well-known practice of lifetime employment in much of industry, the government has protected Japanese wholesale and retail companies from the sort of competition that has led to the dominance of discounters in the United States.
Staff-heavy distributors and retailers have become something of employers of last resort, ensuring that unemployment remains low and that consumers pay high prices. Japan has effectively privatized the training of low-skilled citizens, an area that the enthusiasts of economic freedom in the West have largely ignored or left to government.
As their economy continues to struggle with slow growth, many Japanese are now calling for government to deregulate and for corporations to become more flexible. But most citizens, already affluent, may well continue to accept the trade-off between higher growth and security. Affluent citizens in Japan and in the West are also likely to worry about income inequality. A widening gap between the wealthy and the rest of society may foster growth by encouraging many people to work hard, but in the long term, high levels of inequality could well undermine popular support for democracy.
Can a country with very unequal incomes have political freedom for long? The United Kingdom and the United States, two of the industrial countries near the top of the freedom index, seem bent on testing the question. The Index of Economic Freedom commends the two countries for increasing economic freedom in the s, but the United Kingdom and the United States have also been increasing their income inequalities significantly during the last 15 years.
It seems clear that most European countries have created systems of social protection they can no longer afford. But the British and American answers do not seem satisfactory either. Increasing inequality poses risks to peace in the streets, if not to our sense of fair play; it invites the poor to turn to violence, as they have in some less developed countries.
Unfortunately, globalization seems sure to increase the tensions between rising incomes and increasing inequalities. But Smith, who also had little sense of the complexities of economic development, made the assumption that people were of more or less comparable ability and that income distribution need not be a major problem.
Lake Woebegone excepted, not everyone is above average, and it will be increasingly difficult to include low-skilled persons in a high-wage economy. It is by no means clear that the magic of the marketplace can take care of such problems.
We need a broader framework of analysis to understand the essential economic choices facing most countries, rich or poor. You have 1 free article s left this month. You are reading your last free article for this month.
Subscribe for unlimited access. I've Always Wondered Katherine Wiles Apr 1, Share Now on:. In theory, the economy can continue to grow with a stable population. In practice, not so much. Dmytro Varavin via Getty Images. Share Now:. First name required. Last name required. Message required.
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