Components of Growth

June 16, 2018

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Where does economic growth come from?

I’m going to break it into four components

  1. Innovation. By “innovation”, I mean using more effective production techniques than before. The normal implication is using newly discovered techniques that are more effective than older ones, which is probably the most common, but I am going to stretch it, and, for instance, still count abandoning a newer technique for an older one as innovation too if it improves production.
  2. Capital accumulation. Making things to make things. It’s a bit unnatural, but for my purposes, this is a technique in itself, so really it’s just a variety of innovation. However, you still need to be able to afford to delay production, in order to produce more, so to that extent it is a separate element of growth.
  3. Scale. As a rule, you can produce more effectively at larger scale than at smaller scale. Further, scale can support innovation if there are different techniques that are more effective than old techniques at large scale but not at small scale.
  4. Mobilisation. You can produce more if you devote more of the available resources to production. This is a bit of a catch-all, it can include working more hours, eliminating unproductive activity, reducing unemployment.

Am I talking about economic growth for a company, for a society, for the world? At this point it doesn’t matter, you can always break it down into those four components.

Now, I’m going to go out on a limb here and say that economic growth is good. But growth by the three components is not the same. Innovation is the good stuff. Orders-of-magnitude increases in wellbeing haven’t been powered by improved mobilisation, and not by scale directly, except insofar as it has enabled innovation. They’ve been powered by innovations.

Mobilisation is a very mixed bag. Cutting out pure waste is good. But a lot of what appears as waste is actually production of something you’re not measuring: social capital, antifragility. On the other hand, relative to innovation, the goals of greater mobilisation are small.  If you get waste down to 50% of effort, then a further doubling of output is the most you can achieve by reducing waste.

Scale is generally good up to a point, but again you reach a point the gains become small and the social effects can become large.

I’m not convinced that capital accumulation deserves as much attention. Even quite backward subjects of study usually have access to capital proportional to their production. The main point is that it causes growth to be exponential: your rate of growth is dependent on your level of growth. Innovation is also a cause of that phenomenon.

 

What drives growth is the market and competition. Where there is competition, competitors will seek additional growth in all its components. Where there isn’t, growth usually just doesn’t happen at all.

What I’m getting at is that there is a reasonable political case for restraining scale and mobilisation, but much less of one for restraining innovation. In practice, though, this is generally very hard to do. Once you take the authority to overrule the market and prevent competition, the incentives to interfere in innovation are every bit as strong as those to interfere with mobilisation and scale. This is the orthodox libertarian view that you will find throughout the early years of this blog.

 

There isn’t a conclusion. This is just a problem that hangs over every political view that isn’t pure market liberalism. It’s part of the context of everything I think about. For an example, see The Trichotomy Explained