IMF podcast – What drives GDP growth with Daniel Susskind

I recently listened to an interesting podcast from the IMF with Daniel Susskind who is the author of ‘Growth: A Reckoning’. He believes that economic policy should consider more carefully the costs of growth and work to realign the drivers to better fit with the times. Below are some notes from the interview.

He talks about a short history of economic growth and looks at human evolution of which he identifies 3 facts that have defined the economic history of human beings:

• For the entirety of human existence (approximately 300,000 years) economic life was dormant. Whether a stone-age hunter-gatherer or a labourer survival was difficult.

• Modern economic growth began just 200 years ago

• Humanity has continued to sustain economic growth contrary to whenever growth happened in earlier centuries which couldn’t be maintained. Therefore growth is a very recent event.

Price of growth

This is mainly about ecological concerns and the fact that the technologies we rely upon for material prosperity are dirty carbon dioxide emitting technologies rather than clean technologies. We have a climate emergency. However, he goes further in that as well as damaging the environment these technologies are creating large economic inequalities – some industries have fallen into decline and with it communities that were established.

The cold war and GDP

Before the 1930’s and 40’s there was no way of reliably measuring the size of an economy until the work of Keynes and Kuznets led to the creation of what was first known as gross national product. But the pursuit of growth over time was the cold war as GDP became a proxy for who was winning the war between US and Russia – larger GDP = bigger military therefore if there was a ‘hot war’ those with more GDP would win. A choice between a planned economy and market economy as the winner. At the start of the cold war the Russians were said to be winning which spooked the Americans.

Bretton Woods and the other meeting

Although most people think that the most important meeting was the Bretton Woods Conference in 1944, there was another meeting that took place that year. Somewhere in Washington DC, nine economists from statistical offices in the US, UK and Canada met with a brief to agree on a plan to standardise the global approach to national accounting. What came out of the meeting was an agreement internationally that would be eventually become known as GDP.

What drives growth?

In his book Susskind looks at the work of two prominent economists Robert Solow and Trevor Swan. They established the Solow-Swan model of long-run economic growth looking at capital accumulation, labour or population growth, and increases in productivity largely driven by technological progress. And it is new ideas about the world that drive that technological progress – Paul Romer former Chief Economist at the World Bank.

Price vs Promise of Growth

Ultimately Susskind is trying to find a way to reconcile these two forces. He mentions the de-growth movement who argue the best way forward is to put growth into reverse. However it is important to understand how growth actually works, the old fashioned view is the material world of factories, farms, roads, office blocks etc. Romer and others have said that economic growth doesn’t come from using more and more finite resources but discovering ever more productive ways of using those finite resources.

Tangible world of objects ———> Intangible world of ideas

A kitchen pantry has 300 ingredients in it which is finite but there are many possible recipes from combining those ingredients. Chicken favoured ice cream?

Final comment

“It’s almost like policymakers are drivers on a train and the only tool they have at their disposal is to speed up or slow down. But the basic direction of economic travel is set by the rails that are laid down for them to trundle along. Instead we need to think that we’re on a boat that we can change the speed but also the direction as well. And we do that by changing the incentives that people face in society and in turn, changing the sorts of technologies that we develop.”

Sign up to elearneconomics for comprehensive key notes with coloured illustrations, flash cards, written answers and multiple-choice tests on GDP growth that provides for users with different learning styles working at their own pace (anywhere at any time).