[Ranglepung]

I was wondering as I drove to work this morning where does the growth in the economy come from, and how it's connected.
Now, I'm not an economist in any way, and to be frank, I can't understand how they think most of the time.
I'm an engineer, and sees most things as equations.
I want to discuss a principle here, so if most of my numbers are off, please don't run in to correct them, but if they are diametrically off, please do.
I can understand how China, Norway or any country with an eksport surplus can grow, as foreign capital is pumped into the economy.
But am i correct in saying that the worlds net growth is positive?
In an equation if one side gets bigger, the other side has to get smaller.
Is this were fractional banking enters the picture? (is this system a verified practise BTW? And if so, which banks practise it?)
Is the stock market (world wide) reletively constant, or is that also growing? How much of a percentage of the total economy is funneled through stock markets?
And what of the illigal, or black market?
Does all the money going into that disapear from the economy?
Or as I've read, re- entered via NYSE?

And what about USA and their growth.
I've read that the US economy growes about 3-4 % a year, give or take.
Now, if you set up an equation with the trade deficit on one hand and the net result of fractional banking minus the illegal economy you might get a net result of 3-4 %. But if that's correct, the rate of printing of new money must be enormous.

Am I way off? Kinda hitting it? Dead on?

I know I'm overlooking or neglecting a _lot_ of factors and connections here, but I don't have the time or knowledge to include more.

And as a side note as I see it, for anyone to claim they understand or is in control of the economic situation is vildly presumptuous.

[Doly]

I am in the same situation as you, a techie that is trying to figure out economy. I think I understand a few things already, but I don't feel I know enough to answer your question about where growth comes from. I can answer a couple of points in your post, though. I will be glad if other people that understand economy better point out any misconceptions I have.

$this->bbcode_second_pass_quote('Ranglepung', '
')But am i correct in saying that the worlds net growth is positive?
In an equation if one side gets bigger, the other side has to get smaller.

[JayBee]

One way to "grow" an economy is to dig resources out of the ground, process them (add value) and sell them on at a price greater than the price you paid to extract and process the resource.

Oil is such a resource and we all know how inflated our economies and lifestyles have become because of it. We on this forum also understand how hard it will be for economic growth when the resources of this planet are diminished. Peak everything.

Of course, there are other value adds. Services, the arts, you name it. But most other value adds require transportation or transmission, which is dependent on the fuel economy.

What I don't understand is the constant need for growth. Here in Ireland the drones in the ruling Fianna Fáil party repeat the mantras that the suits in all the western economies say, "We need economic growth", "Our population is declining", "We need migrant labour" etc.

When will a western economy say, "Okay, forget growth we just need 100% employment for our current population. We don't need migrant labour here as we can export additional jobs to poor countries so that they don't have the youth of their nations desert them for the west. If our population declines then so be it. We will manage our economy so that the decline in the labour force is matched by a decline in demand for products."

It's the constant demand for money (greed!) that makes our politicans and business owners destroy the environment and the cultures of the world just to line their pockets. What a fun world we will have when there are no resources left and we are one bland mono-culture.

[Wildwell]

Growth is simply the increase in the value of goods and services by an economy, usually measured in GDP (Gross domestic product) and stripped of inflation – which is the fall in the purchasing power of the economy. In the past, for example in Nazi Germany, inflation got so rampant (it hit 3.25 million percent per month), people started burning money because it was worth less than the firewood!

So therefore GDP is the measure of ‘real wealth’, although it must be remembered it is distributed unevenly and doesn’t reflect certain costs.

Growth is normally driven by increases in productivity, education and technology, but it can be new trade links, new markets being opened up etc. For example, if I become better educated then I may have the skill to do higher paid work (provided it’s in demand). In effect it’s finding ways to make money, so for example Fred might come up with a new invention which people want, or Jane might become a fashion model. When people have freedom, democracy and less state control (provided there are opportunities created for the less well off – such as state education etc) they tend, by historical record, to be more successful than a command-control type economy.

[Daryl]

I don't know alot about this either, but I think traditional economics says that we need economic growth primarily because of population growth. Output has to increase otherwise the growing population will have decreased wealth i.e. fewer jobs available and less stuff.

I'm also not sure how anti-growth economists argue against this. I would guess increased productivity would increase output, but that usually comes at the expense of jobs. Periods of negative growth are always accompanied by growing unemployment. I'm not sure how Anti-growth advocates plan to increase the number of jobs while output falls.

[Daryl]

For basics I can recommend some books.

Paul Samuelson is one of the main beginning textbook sources for economics. A very readable introduction to banking, Wall Street and finance is Marcia Stigum's book "Money Markets, Myth Reality and Practice." Michael Lewis' "Liar's Poker" is a great slice of life view of Wall Street bond traders also. Don't learn your economics from doomers.

[Wildwell]

$this->bbcode_second_pass_quote('Daryl', 'I') don't know alot about this either, but I think traditional economics says that we need economic growth primarily because of population growth. Output has to increase otherwise the growing population will have decreased wealth i.e. fewer jobs available and less stuff.

I'm also not sure how anti-growth economists argue against this. I would guess increased productivity would increase output, but that usually comes at the expense of jobs. Periods of negative growth are always accompanied by growing unemployment. I'm not sure how Anti-growth advocates plan to increase the number of jobs while output falls.

[jaws]

If you like equations, then you might be helped by picturing the economy using the Solow model. This model explains the economy as the production of goods done by combining different factors of production.

The formula is something like this: Y = aLK

Where Y is the economy's production of goods, a is the technology known to man, L is the amount of labor and K is the amount of capital.

Altering any of these variables can result in economic growth or shrinkage. Solow determined that if the economy invests in capital at a constant rate, and that capital depreciates a constant rate, the economy will grow to a steady-state where investment is equal to depreciation. Population growth will also cause the economy to produce more, however the per-capita output will fall because of capital dilution. And of course improving technology will always cause the economy to grow.

[seldom_seen]

I think some of the confusion may lie in how growth actually occurs and the way economists measure it.

Think of the economy as a giant machine. On one end you shovel in energy and raw materials (oil, trees, water, minerals, soil). On the other end, out pops automobiles, condos, wal-marts, highways and golf courses (as well as more people to fill up these automobiles and condos).

This creates a feedback loop, more condos means we need more people. More people means we need more condos, ad infinitum. Once this feedback loop is broken is when problems set it.

Now if you talked to an economist, someone with a very myopic understanding of things. They would only be able to relate to this economy in terms of their specialized vocabulary. They would mention things like GDP, inflation/deflation, interest, capital and the all important "consumer confidence."

Bottom line is that economic growth comes from the input of energy and raw materials regardless of what economists say in their pretentious theories and nomenclature.

This is exactly why peak oil is so concerning. Oil makes up the single most crucial energy input to the system. Once the price becomes too high, or shortages set in, the whole system could begin to unravel.

[Ranglepung]

$this->bbcode_second_pass_quote('', 'I') think some of the confusion may lie in how growth actually occurs and the way economists measure it.

Think of the economy as a giant machine. On one end you shovel in energy and raw materials (oil, trees, water, minerals, soil). On the other end, out pops automobiles, condos, wal-marts, highways and golf courses (as well as more people to fill up these automobiles and condos).

This creates a feedback loop, more condos means we need more people. More people means we need more condos, ad infinitum. Once this feedback loop is broken is when problems set it.

Now if you talked to an economist, someone with a very myopic understanding of things. They would only be able to relate to this economy in terms of their specialized vocabulary. They would mention things like GDP, inflation/deflation, interest, capital and the all important "consumer confidence."

Bottom line is that economic growth comes from the input of energy and raw materials regardless of what economists say in their pretentious theories and nomenclature.

[Wildwell]

Q. Is growth measurable?

Yes, Gross Domestic Product, sometimes called Gross National product and the increase in this figure. GDP = Private consumption + Investment + Public Spending + the change in inventories + (Exports – Imports). However GDP is not a perfect measure of Welfare, for example recreation may not be measured.

Q. Who decides if there is growth?

It is the typical function of a free market economy. In effect it is the citizens hard work and government policy that greats the ingredients for growth – or recession. Citizens can of course vote in parties that restrict growth, protect the environment more or have protectionist policies. It is constantly argued that too much growth is bad for the environment, moreover damage to the environment will eventually impinge on the economy say through drought, storms or crop damage.

Q. Is growth fictional?

No, but it doesn’t always make for a better quality of life. For example parents spending less time at home with their children. Also the richer part of society tends to benefit more from growth. Most real wealth is held by the top few percent.

Q. Is the service economy important for growth?

In most western countries vital – the service economy and less tangible products such as computer software are wealth generating. Generally 2/3rs of output and 4/5ths of employment in western economies is services such as hairdressing, banking, law, consultancy, science etc. It does not shuffle money about; it creates wealth in just the same way as manufacturing.

There is such things as intangible assets: For example brands, Patents, Human capital.

Q. Why should transportation add value?

Without transportation you wouldn’t have a modern economy as it allows good and people performing services to move around and trade. Transportation adds value through trade links, getting people to work and so on. It should be noted that transportation has externalities and too much transportation is actually bad for the economy. These costs are: Congestion, pollution, accidents, climate change, noise. Airlines in particular have strange effects, as they allow positive and negative trade to an economy. For example, they may form valuable trade links, however these links may mean job losses abroad as well as people travelling outside the economy to spend money.

Q. What needs to be born in mind with GDP?

Inflation: Rising prices meaning less bang for each buck, eroding the purchasing power of individuals. Economies therefore should aim for stable prices as this gives confidence. There are various theories as to what causes inflation, but most economists focus on things like interest rates.

[MonteQuest]

$this->bbcode_second_pass_quote('JayBee', 'W')hat I don't understand is the constant need for growth. Here in Ireland the drones in the ruling Fianna Fáil party repeat the mantras that the suits in all the western economies say, "We need economic growth", "Our population is declining", "We need migrant labour" etc.

[MonteQuest]

$this->bbcode_second_pass_quote('Wildwell', ' ')So therefore GDP is the measure of ‘real wealth’, although it must be remembered it is distributed unevenly and doesn’t reflect certain costs.

[GoIllini]

$this->bbcode_second_pass_quote('seldom_seen', 'I') think some of the confusion may lie in how growth actually occurs and the way economists measure it.

Think of the economy as a giant machine. On one end you shovel in energy and raw materials (oil, trees, water, minerals, soil). On the other end, out pops automobiles, condos, wal-marts, highways and golf courses (as well as more people to fill up these automobiles and condos).

This creates a feedback loop, more condos means we need more people. More people means we need more condos, ad infinitum. Once this feedback loop is broken is when problems set it.

Now if you talked to an economist, someone with a very myopic understanding of things. They would only be able to relate to this economy in terms of their specialized vocabulary. They would mention things like GDP, inflation/deflation, interest, capital and the all important "consumer confidence."

Bottom line is that economic growth comes from the input of energy and raw materials regardless of what economists say in their pretentious theories and nomenclature.

This is exactly why peak oil is so concerning. Oil makes up the single most crucial energy input to the system. Once the price becomes too high, or shortages set in, the whole system could begin to unravel.

[MonteQuest]

$this->bbcode_second_pass_quote('GoIllini', ' ')$this->bbcode_second_pass_quote('', 'W')hen these assets deflate, the purchases will have been done on "credit." In other words, by going into debt.

[GoIllini]

$this->bbcode_second_pass_quote('MonteQuest', '')$this->bbcode_second_pass_quote('GoIllini', ' ')$this->bbcode_second_pass_quote('', 'W')hen these assets deflate, the purchases will have been done on "credit." In other words, by going into debt.

[MonteQuest]

$this->bbcode_second_pass_quote('GoIllini', ' ')But if you have a 30 year fixed loan, and you can get a depleting annuity at an interest rate of just ~3-4% higher than your loan amount, you can wind up buying a depleting annuity that will make the mortgage payment on your house for about $100K.

[GoIllini]

$this->bbcode_second_pass_quote('MonteQuest', '')$this->bbcode_second_pass_quote('GoIllini', ' ')But if you have a 30 year fixed loan, and you can get a depleting annuity at an interest rate of just ~3-4% higher than your loan amount, you can wind up buying a depleting annuity that will make the mortgage payment on your house for about $100K.

[Doly]

I'm trying still to grasp concepts here. Please be patient with me.

GDP is a measure of the total purchasing power of a country. Is this correct?

My understanding of money is that it reflects the cost of human labour. Gold is expensive because it takes a long time to find (and perhaps also because there aren't that many gold miners). High tech is expensive because only a few people have the knowledge and tools to produce it. Potatoes are cheap because they take very little effort to grow, and they grow in lots of places. It's nothing to do with anything like the "intrinsic value" of resources, but just how easy it is for people to get them. Things that are extremely easy to get, like air, are free.

If the total amount of money tends to grow, even when we correct for inflation, it must mean that one of several of these things are true:
1) Population has grown (more labour available).
2) The levels of employment have increased.
3) Specialized skills have increased (because specialized skills are more expensive).

If we want to move towards a sustainable world, population should stop increasing. The level of employment has an obvious limit as well. So there would be only specialized skills to drive growth. The economy could still tend to grow, but a lot more slowly.

How does the price of oil affect the picture? If the cost of transport increases, a lot of things that were transported long distances won't be profitable to transport any more (think of the famous 5,000 mile Caesar salad). This is likely to cause a decrease in specialization, at least in the short term. It makes sense to be a widget-maker if you can sell your widgets all over the world, but if you can sell them only to your neighbours, you probably can't make a living out of widget-making. So, some people (perhaps many) lose their jobs and the jobs they get eventually are less specialized.

So after peak oil the economy must go through a fairly long period of negative growth, and eventually reach stability or very little growth.

Is this correct or way too simplistic?

[Wildwell]

$this->bbcode_second_pass_quote('MonteQuest', '')$this->bbcode_second_pass_quote('Wildwell', ' ')So therefore GDP is the measure of ‘real wealth’, although it must be remembered it is distributed unevenly and doesn’t reflect certain costs.