Macroeconomics

Chapter 7: Growth & Inequality

Part 1: Growth

Prof. Habermacher
EHL
Prof. Habermacher 2

1. Concept of “Growth” in the historic context

Interest in “growth”, as we care about how quality of life changed over time

This can be examined using:

• Real GDP (not nominal)

➔ Quantity of (material) goods consumed

• Per-capita GDP (not absolute or ‘total’ GDP)

➔ How much each individual consumes

➔ In the following: With “Growth” we tend to mean real, per-capita growth

Prof. Habermacher 3

2. Is growth a natural law?

No !
___

• For millennia, quality of life had

barely improved
• Per-capita growth started with
the industrial revolution

• Even agriculture (“Neolithic

revolution”) might not have
durably improved quality of life
in earlier millennia

Next slide: Why?

Prof. Habermacher 4

2. Is growth a natural law?

Malthusian trap
• Skim the PBS News article (intro on the
right) in 10’: https://to.pbs.org/3lcF5K1
• Did agriculture not improve life?
• Why then would they have invented it?

Malthusian Trap: “Gains in income per person

through technological advances are inevitably
lost through subsequent population growth.”

➔ As soon as there are a bit more resources

than absolutely required to survive, people
multiply, until resources become again so
scarce as to make people just barely survive!

Under Malthusian trap: growth* impossible! https://www.pbs.org/newshour/nation/world-woe-malthus-right

Prof. Habermacher 5

2. Is growth a natural law?

Malthusian trap: correct in the past

Malthus (1789) was right, right up to

before his own time!

E.g., red line in graph:

• Worst time, with Black Death, halving
UK population.
• Counterintuitively, this is the time that
led to a significant increase in UK living
standards!

https://ourworldindata.org/breaking-the-malthusian-trap
Prof. Habermacher 6

2. Is growth a natural law?

Malthusian trap: not today The agricultural revolution continues

• Following century: Productivity grew

so quickly, that even population
growth would not stop it!
• “The Agricultural Revolution got its
start in Great Britain in the early 18th
century and spread throughout Europe
and America by the 19th century. This
was a period of significant agricultural
development marked by new farming
techniques and inventions that led to
a massive increase in food
production” https://bit.ly/3l8Xnfg

⇨ Exponential agricultural growth, able

to keep up with population growth, A link to more info is in the Annex
helped us to overcome the M. trap
 Out of the box - applying Malthusian thinking in a separate
context:

In a competitive labour market, are waiters subject to

something akin to the Malthusian trap, w.r.t. the benefits of
tipping?

That is: if people tend to tip more, are waiters really better
off in the long run?

Prof. Habermacher 7
Prof. Habermacher 8

3. Growth requires Capital

A key enabler of growth is the use of capital

Capital: “durable produced goods that are in turn used as productive

inputs for further production”
➔ Increase labor productivity

Three observations:
• Capital helps increase output
• But: Capital creation itself absorbs some output
• Capital can have a long lifetime, but it depreciates over time

➔ Better consume output, or save (‘invest’) it as capital? Next slide

Prof. Habermacher 9

3. Growth requires Capital

Is it better to consume output, or to save (‘invest’) it as capital?

Output

Consumption Capital accumulation

Prof. Habermacher 10

3. Growth requires Capital

Is it better to consume output, or to save (‘invest’) it as capital?

Oat farmer Example: You’re a peasant family with a plot of land for oat
production

Three rules:

1) Farming by hand: hard; mediocre oat yield

Invest your oat into growing (feeding) your favorite capital: Horses (to pull a
plough)?

2) A horse can increase oat production significantly

3) More horses help even more, but there is saturation: there is an upper limit for
how much oats you (and the land) can produce using horses
Prof. Habermacher 11

3. Growth requires Capital

Your (oat) consumption, as a function of “capital” (horses)
How much oat can you consume if you want to hold (constantly) a given number of
horses?
Your own final
consumption
[qty of oat]

0 1 2 3 Amount of Capital
Values are purely illustrative [number of horses]
Prof. Habermacher 12

3. Growth requires Capital

Growing towards the Cmax
• If we start with no/low capital
stock, it can be worthwhile to
consume less now, to ‘save’ Cmax
more, i.e., invest in future
capital Slower
growth
⇨ Higher future consumption
Faster
⇨ Can grow towards Cmax growth
path
• The lower a current
consumption we accept, the
faster we can accumulate
capital, i.e., grow faster
towards Cmax
Prof. Habermacher 13

3. Growth requires Capital

Conclusion Oat Farmer:
• Capital can increase production &
consumption
• To maximize consumption: (Equilibrium)
Capital & saving should be neither too Cmax
large nor too low
• Excessive capital (horses): consumes all product
(oat) to build & maintain (right end in diagram)
• Growth is finite; convergence towards a
“steady state”
• Consumption Cmax
• “Investment” not to ‘stimulate
demand’, but to increase future
production
• “Consumption” not “stimulating” the
economy. Reducing saving & growth!
Prof. Habermacher 14

3. Growth requires Capital

Generalization
• Oat-farmer example effects
generalize
• Goods & services we produce:
• Consumption? Cmax
• Investment?
• Capital depreciates & requires
maintenance
• Factories deteriorate
• In example: horses require constant oat
feed & replacement
⇨ Prevents infinite capital accumulation

➔ Limit to growth if technology

remains constant (no innovation)
Prof. Habermacher 15

3. Growth requires Capital

“Discounting” the future: Prioritizing current over future consumption

Reasons:
1. “Pure time preference”: Fundamentally care less about future
• Our own future
• Future generations
2. Wealth effect: If future society is richer, we may simply be less worried
about them: they ‘will have enough anyway’
3. Uncertainty: If the future is uncertain, we may invest less in improving it
• Possibility of collapse of society/extinction of humanity
• Uncertain “property rights”: If I fear I might be expropriated (my capital is taken away), I
might invest less
Prof. Habermacher 16

3. Growth requires Capital

“Discounting” the future

⇨ ↓Investment ⇨ ↓Targeted consumption level, to a level below Cmax

Discounting affects not only investment:

Also leads to overconsumption of natural resources
• If I’m not sure to remain owner of the oil field for 20 years, I try to sell its
oil hastily
Prof. Habermacher 17

4. Growth with technology improvement

Innovation leads to an improvement of technology

Improved technology allows to produce goods & services using fewer

inputs: Lower labor, capital, or natural resources input

Innovation (inventions) can sometimes happen spontaneously

Often, innovation stems from a deliberate effort (research)

The strong growth we have experienced in the past 2-3 centuries, is

based on a huge amount of innovation. Agriculture, …, IT, …
Prof. Habermacher 18

4. Growth with technology improvement

Conducive factors for innovation (examples):

1. Economic incentive to think about new solutions

• Possibility to sell/market innovations
• Property right/patents
• Access to investments (→ Capitalism/financial markets)

2. Economic incentives to apply innovations

• Competition

3. Education

4. Tax incentives for research

Prof. Habermacher 19

4. Growth with technology improvement

Innovation can lead to sustained growth
➔ Beyond merely capital accumulation

So far, we have not run out of new ideas/inventions. But in future…?

What do you think: Will innovation always continue?

“Always” is a strong word!

You can also consider, say, whether for many hundreds of years, we can expect
innovation at a pace at least +- similar to what we experienced in the past 100 years or
so.
Prof. Habermacher 20

4. Growth with technology improvement

Will innovation continue in the foreseeable future?
View 1. General history (graph) suggests: New waves will unfold

https://medium.com/@snambi/waves-of-innovation-e5eb95a261bc
Prof. Habermacher 21

4. Growth with technology improvement

Will innovation continue in the foreseeable future?
View 2. “Secular stagnation”: Recent
evidence would suggest, we’re in an
innovation crisis
Maybe “low-hanging fruit has been
picked”?!

Why would it be the case?

Might the data be misleading?
Opinions on these differ! Many explanations
have been brought forward. See the 32 views
(!) collected in FT 2016 “Productivity and
innovation stagnation, past and future: an
epic compendium of recent views”, https://www.economist.com/buttonwoods-
https://www.ft.com/content/b4eb7727-ffb3-3296-af9a-9c6e74ad1d84
notebook/2014/11/03/the-long-view
Prof. Habermacher 22

4. Growth with technology improvement

Will innovation continue in the foreseeable future?
Hence: We don’t really know! At least, there
exists no consensus on this important question!

One word to justify such an agnosticism:

• There is no consensus on whether, in a few
decades, we start to live more and more in
entirely digital worlds.
• No consensus on whether in a few decades AI
will completely surpass human intelligence and
turn the world upside down.
➔ With such uncertainty/divergent views, no
wonder we lack a consensus on what kind of
growth we’ll have in the future! https://www.economist.com/buttonwoods-
notebook/2014/11/03/the-long-view
Prof. Habermacher 23

4. Growth with technology

improvement
A humbling word about how
little we know about
innovation and its future:

FT 2016 “Productivity and innovation stagnation, past and future:

an epic compendium of recent views”, https://www.ft.com/content/b4eb7727-ffb3-
3296-af9a-9c6e74ad1d84
5. Is innovation good?
Looking at the current and past world, many will barely doubt that
innovation is generally good

• For the pre-industrial era, the explanations in the NPS News above
could be seen as evidence of a major negative effect of innovation
• Recall: Hunter gatherer quality of live vs. settled agricultural societies

• But: Industrial revolution/recent 200 years, have seen quality and

quantity of human life increase dramatically

Discuss: Is it therefore settled, whether innovation is generally “good”?

Prof. Habermacher 24
5. Is innovation good?
While we so far benefited, important caveats exist:
1) According to many accounts, human civilization as we know it was
multiple times at the brink of extinction by nuclear war, in the past
70 years

2) Resource overconsumption? Climate change?

3) Will we ever pick a truly black ball from the innovation urn?!
➔ Next slide

Prof. Habermacher 25
 5. Is innovation good?
“Vulnerable World Hypothesis” (Bostrom 2019)
Innovation creates new possibilities before we can understand their consequences
⇨Will we ever pick a truly black ball from the innovation urn?!
Recommended read: http://www.nickbostrom.com/papers/vulnerable.pdf

⇨ What if creating a nuclear bomb had been as simple as creating a firecracker?

Past

⇨ What if GHG had been 1000 (or 100 or 10?) times more potent?
Was it not by pure chance that this had not been the case?
⇨ What if bioengineering deadly bioweapons becomes child’s play in the future, with
advances in biotech?
Future

⇨ What if we can create nanomachines with poisonous stings flying around like today’s
mosquitoes, but targeting specific individuals?
…

Prof. Habermacher 26
5. Is innovation good?
“Vulnerable World Hypothesis” (Bostrom 2019)
Innovation creates new possibilities before we can understand their consequences
⇨Will we ever pick a truly black ball from the innovation urn?!

Interpretation:
1. There is no guarantee that future innovation does not lead to a terrible disaster
2. Policy dilemma:
• An argument for strict control of technology and surveillance of population
• But:
• Such surveillance itself may also represent a major risks for society
• Unilateral technology restriction of development can lead to disadvantage
in multi-polar world

Prof. Habermacher 27
Prof. Habermacher 28

5. Is innovation good?
“Vulnerable World Hypothesis” (Bostrom 2019)
Innovation creates new possibilities before we can understand their consequences
⇨Will we ever pick a truly black ball from the innovation urn?!

Original abstract:
 Prof. Habermacher 29

6. Infinite Growth with Finite Resources?

Typical statement you might find yourself confronted with:
Someone who believes in infinite growth is “either a madman or an
Growth critique/“Degrowth” movement

economist”. David Attenborough, 2013.1

⇨ Widely shared view, e.g., among some ecologists. No surprise: Graphs!
Global resource consumption https://bit.ly/3la5TdZ UK GHG emissions https://bit.ly/3NjAnqa

• But: does this really proof that green growth is impossible? 1 Most famous for his (BBC)
nature documentaries. Source:
https://bit.ly/3MjBLZs
 Prof. Habermacher 30

6. Infinite Growth with Finite Resources?

Growth = Extensive growth x Intensive growth

Extensive growth = physical growth that uses more inputs

Intensive growth = growth from more efficient or smarter ways of using inputs to produce
Pro-growth arguments

higher quality goods

⇨ We might not be able to have heavier cars without using more resources

⇨ But more efficient & smarter cars, better doctors & medicines, better books, better
virtual worlds, better insulated houses… all while reducing the resource footprint

E.g., US between 2007 and 2016: GDP +13%, Emissions:1 -13%.

Environmental & resource taxes: highly efficient to preserve resources!

1 Even accounting for production delocalization
Prof. Habermacher 31

6. Infinite Growth with Finite Resources?

Interpretation: A mixed picture
Pro-growth
In theory, with sustained innovation
(previous section), we could have growth for
the foreseeable future
Growth critique
So far resource use is exponentially increasing
Environmental taxes often lacking

Moreover, growth can make it easier to For individual persons, companies, politicians,
afford better environmental/resource countries, regions, generations: Often irresistible
protection. A point that seems often ignored to overconsume at the cost of others
by ‘degrowth’ advocates
⇨ Policies biased towards excessive resource
Regulated markets (env. taxes) could be consumption?
ideal for green innovations
Domestic environmental regulation often means
New era: A purely ‘digital’ lifestyle might at outsourced pollution
some point reduce the need for physical
energy (assuming efficient computing) Market forces (see above: discounting)
incentivize quick resource depletion
Annex

Prof. Habermacher 32
Prof. Habermacher 33

Is growth a natural law?

For those interested, an interesting
slide set:

“Why the Industrial Revolution

Started in Great Britain”:
https://slideplayer.com/slide/4599
211/