Economic growth

Updated: Aug 20, 2021

The steady process of increasing productive capacity of the economy and hence of increasing national income. The analysis of economic growth has played an increasingly imp0rtant part in economics in the last two or three decades. On the one hand, awareness of the problems of developing countries, and the inapplicability to these problems of conventional tools, has led to the development of a whole body of theoretical and descriptive econornics concerned with them. On the other hand, the shift of emphasis away from the problem of persistent unemployment in advanced in­dustrialized capitalist economies towards the problems of full employment has naturally led to the question of what determines the rate at which the economy grows over time. The general emphasis is on the rate of growth of the LABOUR FORCE, the proportion of national income saved and invested and the rate of technological improvements (including increasing skill of the labour force and managerial efficiency) as being the main determinants of the growth rate of the economy. The econornic theories of growth have been rather abstract and formalistic, and much more attention has been paid to the logical and mathematical properties of the various growth models than to their empirical relevance, which is fairly low. The everyday concern with economic growth arises out of the idea that the greater the rate of growth of the economy, the greater, other things being equal, the increase in the leve! of well-being. Several economists, chief among whom is E. J. Mishan, have pointed out the possible fallacies in this, however. An economy may be growing more slowly than others because its population prefers to consume more now rather than later, i.e. they have a high rate of time preference. This is perfectly rational, in the sense that a high preference for current as opposed to future consumption is, on econornic grounds alone, no more repre­hensible than a low preference. Hence, the idea that they should consume less in order to save and invest more and grow as fast as other countries is both crude and paternalistic. Dr Mishan has also criticized the preoccupation with economic growth on the grounds that unless social costs incurred are allowed for, e.g. the costs of environmental pollution, the welfare benefits of growth may be illusory.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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James Knight
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