Tuesday, 29 November 2011


growth of the economy

"Do not be deceived — 1% growth in GDP means 4% shrinkage of the economy."

For my previous aperçus regarding Greek Debt and Bank Capitalization see my Occidentis blog. I am now puzzling over the terminology in which the government and hence the media discuss growth of the economy. We are told day-after-day, week-after-week that the only way to get out of deficit is "Growth", and that the Office of National Statistics has downgraded estimates for past quarterly growth from  0.5% to 0.4%; while the Office for Budget Responsibility  has similarly downgraded its forecasts for future growth. We 'Small-is-Beautiful' people, i.e. those of us who have no ambition to conquer the world economically, might wonder why we should not be content with the status quo. Why do we need always to grow? But wait!

Gross Domestic Product (GDP) attempts to measure the total productivity of a country and is defined by an agreed formula usually written as the sum of gross private consumption + government spending + businesses' capital investment + net exports (or exports minus imports):

GDP = C + G + I + NX

Data is widely available stretching back decades and it is clear that since the second world war there has been an almost logarithmic growth in British GDP, with a doubling time of about 10 years. However, data on inflation show that the cost of a standard and agreed mix of purchases such as the Consumer Price Index (which has replaced the slightly more inflationary Retail Price Index) has shown an almost identical growth over the same period.

In other words gross domestic production (as opposed to GDP) has NOT incresased by more than a whisker in the last several decades if we correct for inflation. The increase in the 30 years from 1980, corrected for inflation is not 4 fold; it is a mere 1.1 fold; i.e. a 10% increase in 30 years. It further means that, with current inflation running at 5% (per annum) and current GDP increasing at a mere 1% p.a., the economy is not in stasis — it is shrinking. Do not be deceived; 1% growth in GDP means a 4% shrinkage of the economy. So maybe we do need see a rising GDP expresed, as it is, in a shrinking currency.

When I was a boy it was not uncommon to see a working horse with 'blinkers'; leather patches attached to the bridle such that the horse could not see to left or right, and only obliquely could it see ahead where it was going. I was told that this was so that the horse would not be alarmed by passing traffic. I think politicians have put blinkers on us the public, so that we do not get alarmed at what is going on. Recession to the BBC (Radio 4 World at One pm) means negative growth in GDP; to me it means negative growth in 'real terms'; i.e. any growth in GDP that is less than inflation.

On the other hand, a dramatic decline in gross private consumption does not worry me particularly, even when measured in real terms, for we were consuming far more than we were manufacturing during those boom years; we were busily spending money imagined for us by the financial sector and now imagined away again; dream money (see Bank Capitalization). What should worry us is not a decline in living standards, for we are still absurdly well off, but high youth unemployment. As a nation we have to find a product that the world want to buy, and settle down to make it at a price that tempts buyers. We are most of us sitting around waiting for someone else to think up what that product is and build the requisite factory, so of all people we waiters cannot complain. We can only wait patiently, and hope that somebody, somewhere, it doing the thinking.

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