In Jared Diamond’s study of human history, Germs, Guns, and Steel, he talks about the question that prompted him to study the course of human events. As an avid bird watcher, Diamond took many trips to New Guinea, where he befriended a man named Yali. Yali asked Diamond why it was that the European descendants had so much while the people of New Guinea had so little. Diamond’s fascinating account of the forces that shaped human history and the distribution of wealth is great reading. But for an economist, economic growth is described more simply—it’s merely an increase in the GDP.
Economic growth occurs when there is a sustained increase in a nation’s real gross domestic product per person over time. In most years the United States’ real GDP grows at a rate of approximately 2%. This means that on average, the economy doubles in size every thirty-six years. At the same time, the population increases at a rate of 1%, which means that current real GDP per capita is almost three times greater than in 1960. Economic growth is not guaranteed. Indeed, there are years in which no or negative growth occurs. These periods are associated with recession.
Growth reveals itself in positive and negative ways. Economic growth leads to increases in living standards, nutrition, healthcare, longevity, and material abundance. The downside is that economic growth often results in environmental destruction and increased income inequality. Economic growth as a goal for society is hotly debated, and both sides offer well-reasoned rationales for their positions.
Proponents of economic growth focus on the benefits it creates for society. The advances in food production, healthcare, longevity, and material abundance would not be possible without economic growth. A century ago, most Americans were involved in agricultural production and yet subsisted on far fewer calories than today’s Americans, less than 2% of whom are farmers. The average life span has increased from 48 to 78 years in the same period because of the eradication of many diseases and advances in basic sanitation and healthcare. The quality and quantity of material goods has increased as well, allowing more Americans the things that only the wealthy could acquire in previous generations. The average workweek has decreased in the same period of time, allowing people more leisure. For most, economic growth has been a blessing.
Can money actually buy happiness? When economists compare GDP per capita with a country’s overall level of happiness, an interesting trend occurs. As GDP per capita increases from $0 to $10,000, the level of happiness increases. This relationship breaks down after that. So to answer the question, the first $10,000 does buy happiness. After that, who knows?
As the economy grows and diversifies, more and more people are able to escape subsistence farming and pursue other areas of interest. This freedom for most everyone to pursue their interest and passion did not exist for most of recorded history. The creative explosion of production that has occurred over the last 150 years has yielded advances in all fields of human endeavor. Where life was nasty, brutal, and short for most, it is now relatively humane, peaceful, and long. If you have ever visited an old cemetery, you might have noticed the number of graves for young children. What was once a common occurrence is now a rare tragedy. The diseases that ravaged the population less than a century ago are for the most part eradicated. All of this is possible because of economic growth.
Material abundance is a benefit of growth and is often seen by critics as the driving force behind growth policy. They may be right, but if growth also yields substantive benefits for humanity, an extra iPod or McMansion might be a small price to pay. Material abundance is a natural outflow of humans being set free from subsistence agriculture to think, invent, and create. And even for those who choose to return to the land and farm, that freedom exists as well.
As people have become more specialized and more productive, their value to society has increased as well. Consider the amount of time and resources now devoted to raising an American child. The average American child has over $250,000 invested in her human capital. Aid organizations understand that increasing an individual’s value to society is important for developing a stable, productive society. Organizations that provide food assistance in the developing world have discovered that delivering families’ food rations to the daughters in school increases the value of the daughter to the family, which reduces the incidence of childhood pregnancy and prostitution.