Economic growth does not matter for its own sake, but it matters a lot

Our World in Data presents the empirical evidence on global development in entries dedicated to specific topics.
This blog post draws on data and research discussed in our entry on Economic Growth.

Health, education, human rights, nutrition, peace, happiness – we care about each of these for their own sake. They are ends in themselves.

Economic output is different. GDP – the Gross Domestic Product – is simply a measure that captures the monetary value of an entire economy’s output. This does not matter in itself.

Why then should we care about national income (GDP) and how it changes over time (economic growth)?

My answer to this is one with a long history, indeed it goes back to one of the very first thinkers to write about economics: Aristotle, writing in the 4th century BCE, emphasizes very early in his Nicomachean Ethics that “wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else”.1

Aristotle argued that we seek prosperity not because it is an end in itself, but because it is a condition for well-being.2

More than two thousand year later, when economists started to measure national income, they made the same argument, Economist Simon Kuznets, who pioneered the measurement of GDP, emphasized in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income.”3

The view that national income does not matter in itself, but because it is a means to ends is shared by many economists today. Alfred Marshall, one of the founding fathers of modern economics, defined his subject as the study of the “material prerequisites of well-being.”

How is life at different levels of income?

What does the evidence say about the idea that prosperity is a prerequisite for well being? How does life differ between places that are prosperous and those that are not?

The visualization below shows living conditions – measured by twelve metrics – at different levels of GDP per capita. From top left to bottom right this visualization shows that where GDP per capita is high people live longer, children die less often, mothers die less often, doctors can focus on fewer patients, people have better access to clean drinking water, better access to electricity, they can travel more, have much more free time, better access to education and better learning outcomes, and people in richer countries are more satisfied with their lives.

Aristotle and Marshall got it right: prosperity does not matter in itself, but it is a prerequisite for many of the things that matter a lot.

There are no strong exceptions to this: there is no poor country that achieves living conditions that are similar to those in rich countries. And these differences are large. In high-income countries one in 10,000 births leads to the death of the mother, in low income countries this ratio is 50-times higher (see here). And if you study the visualization below that you see that the size of these differences is very large across all of these aspects of living conditions. In my article on the global inequality of opportunity I show that the level of prosperity of the economy you are born into is what matters most for your living conditions.

But, as the visualization shows, there is a lot of variation at each income level and my colleague Hannah Ritchie studied for maternal mortality how some countries achieve better outcomes than others at the same level of prosperity (LINK).

In the ‘Additional Material’ below you find the interactive version of each of these plots and more charts that allow you to explore how life differs at different levels of income.

Correlates of gdp how is life at different levels of income

How living conditions change with economic growth

The differences are even larger within the same country before and after it achieved economic growth. I show this in my text (LINK) on how living standards changed in the UK since pre-Industrial times how transformative the last two centuries of economic growth were.

There is a lot more going on than the 12 scatter plots above can show and what rising prosperity can offer us depends on where we start from:

  • At a low income, rising prosperity might give us just access to enough food, some decent housing and access to education for our children.
  • As incomes rise we gain access to food that is not just enough, but healthier and more varied – in our data you can compare the diet in a poor country like the Congo (mostly starchy roots and cereals) with the varied diet in a rich country like Sweden.4
  • And still higher incomes might allow us travel, access higher education, found a company, learn new skills, attend cultural events, go out to restaurants, and have better healthcare.

Just a correlation? 

Accounting

When we understand how GDP per capita is measured, we shouldn’t be surprised that many aspects we care about go together with higher levels of GDP per capita: Many of the goods and services that we value in themselves are counted as part of GDP.

One reason why we see a correlation between good nutrition and GDP per capita of a country is that the inputs for a good nutrition – the food that people consume – is counted as part of GDP. The same is true for many other aspects we care about. We see a positive correlation with housing conditions, medical care, and public infrastructure, because housing, medical care, and infrastructure are taken into account in the measurement of GDP per capita. To think about the positive relationships as ‘just a correlation’ would mean to not understand what GDP actually measures.

Virtuous cycles

The fact that the relationship between national income and development outcomes is more than just a correlation is what makes development research difficult.

Much of the difficulty in researching development and understanding the drivers of economic growth is due to the fact that many good things go together, which makes it so hard to disentangle cause from consequence. Is it education that boosts growth or is it growth that makes education possible? What about health?

Amartya Sen refers to the ends of development as ‘capabilities’ because development increases the range of things we are capable of. The big conundrums of development research are due to the fact that causality typically runs in both directions: The prerequisite for higher growth are higher capabilities and the prerequisite for higher capabilities is often a higher income. Much of the research in development tries to quantify just how much each causal impact matters and how to get these many interlocking virtuous cycles started in the first place.

Growth and prosperity are not everything

If growth was the only aspect that mattered for development then it would be much less work to publish Our World in Data. It would only include the entry on economic growth.

Growth matters, but there is much more that matters as well. A major motivation for working on Our World in Data is that we believe that there is too much emphasis on GDP as a metric of development and it is because we care about so many different aspects matter in development, that this publication is as broad as it is.

Many good things are correlated with higher prosperity, but not all. Women’s participation in politics, for example, is not correlated with income.

And one of the major tasks for humanity in the coming years is to find a solution for the problem shown in the chart below – higher incomes are correlated with higher carbon dioxide (CO2) emissions. This is such a big dilemma because prosperity is at the same time a prerequisite for many development outcomes we want and correlated with outcomes we don’t want.

Prosperity today will translate into better living conditions for future generations only when we make our economies sustainable and this will mean to reduce emissions. If we fail to achieve this, it could do the opposite: high prosperity today will risk good living conditions for those who come after us.

In this way, only sustainable prosperity is real prosperity. To make current prosperity sustainable we need to bring down greenhouse gas emissions. But emissions are still rising and it will be one of the main challenges of the coming years to secure sustainability – which by the classic definition is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.

Conclusion

What societies care about is not economic growth, but finding solutions to problems they face. And much of the progress that was achieved against some of our biggest problems – hunger, disease, poor shelter, hard labor and lack of energy – required more productive economies.

Economic growth is not an end in itself, but a means to many different ends. But to say that income only has an instrumental role is not to say that it is of little importance. Higher income does not measure your well-being, it measures whether goods and services you value remain out of reach or not. And because many of these goods and services matter for your wellbeing, income matters too.

Higher income is useful because it gives us the opportunity to do more; it is an all-purpose means to increase our capabilities and freedom. Economic growth is possible because of productivity growth – the production of more by using less inputs – and one of the big welfare gains is that people in richer, more productive economies have to work fewer hours.

The focus on economic growth has at times obscured why we are interested in it, and in the worst cases it has been confused with being an end in itself. Prosperity is only valuable in so far as it opens up possibilities that we value in themselves. Income allows us to decide what our living conditions should be, it is a resource that each individual or family can decide on how to use. Turning prosperity into a satisfied life is not easy. As Thomas Wells argues in his essay ‘If you’re so rich why aren’t you happier’, it depends on our skill for choosing what we spend our income on. But without prosperity you don’t have the choice in the first place.

Hoarding of money for its own sake would be a confused obsession with means at the expense of the ends that matter. And the same is true at the society level: It is important to understand what contributes to economic growth not because economic growth is synonymous with development, but because economic growth is an important input factor that makes development possible. It is for this auxiliary role that we seek to increase incomes. GDP is not a measure of welfare, but the level of GDP matters for welfare.

This post focused on the effect income has on improved living conditions. But what’s clear is that some countries have been much more effective than others at converting economic growth into better lives for their populations. In a companion post I focus on the variation of outcomes at each level of income. Why is it that some countries do much better than others at the same level of income? And what can be learned from this?

Additional information: