Reinventing Prosperity. Graeme Maxton
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to the Select Committee on Economic Affairs, House of Lords, London, for the inquiry into Aspects of the Economics of Climate Change.
Does economic growth lead to growth in GDP per person?
Not necessarily. Economic growth is the same as growth in GDP. GDP is also the GDP per person multiplied by the number of inhabitants. GDP will grow if the population grows and if the GDP per person grows. But if the population declines, GDP will decline, even if the GDP per person stays constant. Or the situation may be like Japan since 1990: stable GDP, declining population, and increasing GDP per person.
The GDP per person is the value of the annual output of goods and services in a country divided by its (average) population during the year. Measuring GDP per person helps show how well the nation has succeeded in getting its people into paid jobs. The GDP per person is higher, all other things being equal, when labor participation rates grow, when people work more hours per year, and when they work more effectively (producing more output per hour, perhaps because they are better trained or have better equipment). But higher GDP per person does not always lead to higher average well-being in the population. Above US$30,000 per person per year, it appears that many would choose shorter hours and a steady income, instead of working the same hours and having a rising income—especially if all their neighbors do the same.
Why do the people who own businesses focus on total GDP, whereas those who are employed have more interest in GDP per person?
The sales of a company tend to increase with the size of the market. The size of the market increases both with the population and with income per person. This is why businesses are interested in market growth, and the growth of total GDP, irrespective of its source. Individual workers, on the other hand, are interested in higher wages, which grow in parallel with GDP per person and are not affected by population growth.
This era of rapid economic growth brought widespread social dividends. Higher tax revenues allowed governments to build more schools. This meant that more people could be better educated and for longer.14 Working hours gradually fell, giving people more leisure time.15 Joblessness was low,16 as was welfare spending. By the 1960s, most workers were even being paid while on vacation and most employers were providing pension schemes and health insurance.17
GRAPH 4: THE DISPOSABLE INCOME PER PERSON WILL REMAIN DIFFERENT AMONG THE WORLD’S REGIONS
Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012
Scale: Income in 2005-PPP-$ per inhabitant per year
The average disposable income is expected to develop similarly to the GDP per person (see Graph 3). But disposable income is expected to grow more slowly than GDP per person—and even decline—in the rich world because society will have to use ever more labor and capital to fight resource scarcity, climate change, biodiversity loss, and inequity.
The nature of work changed, too. At the beginning of the twentieth century, more than 80% of American men worked outdoors.18 By the end of the century, 80% worked in places that were heated in winter and cooled in summer. Work was much safer, too, thanks to better production technology, unionization, and improvements in medical care.19
At home, machines took away much of the drudgery of housework, freeing the average housewife from more than twenty hours of domestic work a week.20 The availability of running water, electricity, and constant light, as well as modern appliances such as washing machines, irons, and refrigerators, significantly reduced the time demands on women in the home. This allowed the number of women in the workplace to rise dramatically, offering them greater independence.21
Life expectancies gradually increased. With the drop in infant mortality, improved nutrition, and better healthcare, people born in the rich world at the end of the twentieth century were expected to live almost fifty years longer than those born one hundred years before.
TABLE 2: POPULATION, MILLION PEOPLE
Source: Maddison, Aspects of the Economics of Climate Change, 2005, p. 5, Table 2. Other* = refers to Australia, Canada, and New Zealand
As wages rose and poverty declined, the gap between rich and poor narrowed, though this was not just thanks to economic development. It was also because of the increase in output necessitated by two colossal industrialized wars and the state intervention this required.
In 1917, the United States’ richest 5% took home 33% of the total income generated by the economy.22 By 1953, their share had dropped to 20%, and the share taken by the top 1% had almost halved, to 28%.23 In Canada, Germany, France, Italy, and much of the rest of Europe, inequality fell even faster. In the Netherlands, Denmark, Finland, and Norway, the gap narrowed more dramatically still.
This change is especially important because if the gap between rich and poor is narrow, people are generally happier and healthier. Measuring inequality is a good supplement to GDP per person if you want to track social well-being. When inequality is low, countries tend to be more stable, more tolerant, and more law abiding, with fewer people in prison or sleeping on the streets. People live longer, too.24
Does economic growth always bring more jobs?
Economic growth usually brings more jobs. The number of jobs in an economy increases when GDP grows faster than average labor productivity. But since labor productivity is normally measured as output per hour, and GDP as output per year, society can also increase the number of full-time jobs simply by reducing the length of the work year (the number of hours worked per year per person in a full-time job). Of course, rising GDP does not always mean that jobs will be created. For example, GDP also grows when many small labor-intensive businesses are replaced by one capital-intensive factory with few operators.
Does economic growth always reduce inequality?
It depends on how the resulting output is distributed. If the value added is split evenly among all citizens, economic growth leads to greater equality. If one group, say the wealthy, takes more than their fair share, growth increases inequality. Redistribution of income (which is generally understood to mean taking from the rich and giving to the poor) is difficult and normally only achieved through strong labor unions and government intervention.
A simple measure of equality is the workers’ share of the national income (the “wage share”). The wage share increased after World War II in most rich countries, meaning there was greater equality, but fell back again after 1990 in many rich countries, especially the U.S. Another simple indicator of equality is the Palma ratio, which shows the percentage of national income going to the richest 10% of the population divided by the share of income received by the poorest 40%. In 2015, the Palma ratio was around 2 in the U.S. and around 1 in more egalitarian Scandinavia.
By the 1950s, the benefits of economic growth, once the total income had been more evenly spread across the population, had become truly remarkable. There was a vast improvement in standards of living, much lower unemployment, increased leisure time, reduced inequality, and higher life expectancies. Economic growth boosted education standards and made people happier. For decades, the pursuit of economic growth achieved all that people like to think it still does, and more.
It achieved much more. The fact that most people in the developed world have the right to vote today is greatly thanks to the era of rapid economic development. The terrible conditions workers had to endure in the nineteenth century, at the start of the industrial age, led them to demand change. Once they had achieved that, it was a small step for them to demand a say in how the world was run. It was the opportunity to increase output that led to the factory. It was the