Exponential Economic Growth

In a blog post written long ago, I discussed an equation that represents how quickly your savings would grow through compound interest. I mentioned that this sort of growth was called exponential growth and that it also applied to the growth of an economy.

I have since had the opportunity to look at some real data for our economy, showing how GDP per capita (a measure of the average income in a country) has changed with time. Plotting it as a graph it looks like this:

UK GDP per Capita

GDP per capita is flat (and low) for most of the graph until, there on the right… whoosh, it keeps shooting upwards. This is what exponential growth looks like. When things start getting big, they get a lot bigger, very quickly.

Here are some thoughts.

Economic growth is a Big Deal

The average person today is about 5 times as rich as someone living 100 years ago. With an average growth rate of 2% a year, the average person’s income should double every 35 years. Some poorer countries, like China, have managed growth rates of over 10% a year, which would see incomes doubling every 7 years! Increasing growth should be a big priority.

In some ways, this understates the increases in our standard of living. 5 times as much quantity of riches in 100 years doesn’t allow for the increase in quality. Would you rather drive a car built today or one built 100 years ago? Not only that, we can buy things that were never available then. Video games and smart phones. Televisions and roller coaster rides. Aeroplane flights and parachute jumps.

The Industrial Revolution was a Big Deal

What was the most import event in history? Those of a religious persuasion would say the resurrection of Jesus Christ, or the life of Mohammed. The discovery of the New World and the Moon landing also merit consideration. But looking at the graph above, the most significant event materially in human history was (probably) the Industrial Revolution. Before it, people’s income chugged along at the same level for centuries. After it, incomes started heading into the stratosphere.

Maybe recessions aren’t that Big a Deal?

By zooming in our chart, we can look at recessions:

UK GDP per Capita with RecessionsWhen you look at recessions in the grand sweep of increasing prosperity, they look rather insignificant; like small dips in the side of Mount Everest. I don’t mean to demean the hardship brought about by recessions – the unemployment, frustration and disruption to many. My point is that in aggregate, they really don’t halt the onward march to increasing riches.

Recessions are a bit like fires. I hope we can find ways to better prevent them and stop them doing much damage. But they do happen and do cause damage to some people. Luckily, we’ve found ways to help those damaged – fire insurance.

We need to find better ways to insure people against the damage done by recessions. We have social insurance – unemployment benefits etc, but there are political limits to how much we can use them.

Maybe we need to develop more private insurance. Nobel prize winning economist, Robert J. Shiller, in his book The New Financial Order makes the case for developing livelihood insurance – giving workers the ability to insure themselves against big drops in their income. Other new financial products could be used to insure against big house price drops, and problems in whole economies.

Maybe politics isn’t that Big a Deal?

During the time period covered during the big-upswing in the graph, we’ve had all kinds of governments. Laissez-faire governments that provide little beyond the constable and the frigate. Socialist governments that have ran entire industries. And all through these wildly diverging policies, prosperity has increased at much the same pace.

Maybe its that alternating governments average their policies out. Maybe the policies that would really increase growth (or reduce it) are too radical for anything governments are able to attempt. But ultimately politics doesn’t seem that big a deal.

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