Читать книгу Reinventing Prosperity - Graeme Maxton - Страница 10

– CHAPTER 2 –

THE TRADITIONAL SOLUTION: ECONOMIC GROWTH

Traditionally, economic growth has been seen as the best way to reduce unemployment and inequality.

ALMOST NO MATTER where you live in the world, economic growth has become something of a constant. For more than thirty years, businesspeople, governments, and politicians have seen the pursuit of economic growth as their main goal. News reports and commentators focus on it endlessly. Taxi drivers, bankers, and economists often seem to talk of little else: How is it possible to boost economic growth? Why is the growth rate down this quarter? When will the economy recover?

Economic growth appears to be in our collective blood. It is hard to believe that it was not always so.

What is economic growth?

It is regrettable that the word “growth” is often used alone in the context of the economy, because this leads to much unnecessary confusion in the world. It is always necessary to be precise and to explain exactly what is growing, whether it is the economy (the total gross domestic product, otherwise known as GDP), demand, consumption, or GDP per person, for example. The descriptor matters because these variables do not move in parallel. If consumption grows, for example, that does not necessarily mean that the economy also grows. More importantly, it matters because these variables do not contribute equally to human well-being.

If you want to be a source of clear thinking never use the word “growth” alone. Explain what is growing!

Economic growth is the increase in the total output of an economy from one period to another, typically measured in percent per year. The total output is the market value of all goods and services produced in a nation in a set time period, less the costs of the inputs (such as raw materials) used (with an adjustment for trade). The resulting figure is called the gross domestic product. GDP measures the value added in the country in a time period of interest. Economic growth is the same as growth in GDP.

Since most (between two thirds and three quarters) of the output of rich nations is consumer goods and services, economic growth is normally associated with consumption growth—not least because the media often wrongly portrays economic growth and consumption growth as the same thing. But it is not always like this. In times of war, for example, GDP often grows spectacularly because of increased production of military equipment, while consumption declines.

Many people forget that GDP is a measure of the level of activity in an economy, not the level of happiness or the standard of living. GDP certainly increases when more consumer goods and services are produced, but it also increases when prisons are built, when warships are launched and guns are fired, when road accident victims are treated, and when dikes are rebuilt after flood damage.

One particularly important example of an activity that boosts GDP but does not improve well-being is the repair and adaptation work needed in response to climate change.

When GDP rises, there is economic growth. Higher GDP normally requires more labor, which means more jobs and more wages. This means people have more money to spend, leading to higher consumption. The owners of businesses make higher profits, and stock markets tend to rise. More tax is paid, so governments can build new roads and more schools. The economy is running along nicely, in other words.

If the economic engine coughs, and GDP falls, it is usually a sign that something needs to change. Some sectors of the economy have expanded too rapidly perhaps, or people have borrowed too much, or house prices have risen too fast, or companies have failed to invest in new technologies and become uncompetitive.

On such occasions, governments sometimes choose to step in. They might lower interest rates to make it more attractive for investors to initiate new projects or put interest rates up to dampen the housing market. They might offer support to local industries to help them become competitive again.

Or they might do nothing at all.

A modern market economy is, after all, largely self-correcting, thanks to Scottish moral philosopher and historian Adam Smith’s famous invisible hand.¹ If house prices are too high, they will eventually drop back to more sensible levels by themselves. If people have borrowed too much, they will eventually start paying back what they owe or declare themselves bankrupt. If businesses become hopelessly uncompetitive, they will go bust.

The good, “up” part of the economic cycle leads to rising production and investment. This brings greater profits, higher tax revenues, rising stock markets, and more jobs. More jobs lead to more consumption.

The bad, “down” part of the cycle works the other way. When people have too many debts, they cut back on their spending and start paying back their loans. Because they buy less, inventories become too full, so factories cut production. Business profits decline and investment falls. Stock markets fall back, unemployment rises, and tax revenues shrink. The downwards spiral continues like this, sometimes for years, until the imbalance that caused the slowdown has been addressed and the system is back near the starting point.

But once there, the cycle restarts and growth resumes. Typically, this cycle repeats itself every four to eight years.

To understand what is happening in their economies, societies track GDP, and so the output of goods and services has become the principal measure of social development. But GDP was never intended to be a measure of well-being. Simon Kuznets, who was the chief architect of the United States’ national accounting system and developed the idea of measuring GDP in 1934, cautioned against using it as an indicator of general progress. It was developed for Roosevelt’s government to demonstrate that the U.S. economy could provide enough war supplies and still maintain a healthy output of goods and services for consumers. Increasing GDP was never meant to be a goal for modern societies.

In recent decades, GDP has become increasingly important and most people assume that almost all economic growth is good. Growth is not just necessary, they believe, but essential. They assume that increased output leads to higher living standards. This is because they have also been told that there is a trickle-down effect, that the riches created through increased production spread throughout society, narrowing the gap between rich and poor. And they have been told that faster economic growth will create more jobs and reduce unemployment. Because people assume it does all this, GDP has become almost divine. The belief that society should pursue economic growth at all costs is not only assumed to be true, but the underlying assumptions about what it achieves are also rarely questioned.

As we will show, these assumptions were (mostly) correct between 1950 and the early 1980s, but things have changed since then. The pursuit of increased output has actually widened inequality and led to higher levels of unemployment while damaging the environment. It has also increased the number of people living in poverty in much of the developing world.

We will explain how and why this has happened in the coming chapters. For now, however, we will look at one of the first assumptions that people need to ditch to understand what is going on: the idea that economic growth is always good.

Why do most people believe that economic growth is good?

People believe that economic growth is good because it has historically led to rising incomes, higher employment, and safer pensions for most people.

Economic growth certainly has many benefits. But it is not always socially advantageous. What society counts as economic growth is frequently very damaging, whereas what it fails to count, and subsequently ignores, is often vitally important.

When someone builds a house, this generates economic growth—an increase in GDP. If the house falls down because it is badly built, however, the loss is ignored because the collapse did not require any human effort, equipment, or resources. It does not reduce GDP. But building it or deliberately knocking it down adds to GDP because both require labor and equipment.

It may seem counterintuitive, but gigantic storms, such as Hurricane Sandy, which devastated parts of the Caribbean and the U.S. east coast in 2012, are good for economic growth. The destruction they bring is ignored, while the increase in output that comes from rebuilding adds to economic growth.

Building a prison contributes to GDP. If people burn the rain forests and plant oil palm trees, this also adds to GDP. Similarly, the removal of nuclear waste from contaminated ground adds to GDP.

So, housing more prisoners, creating ecological devastation, and cleaning up after radioactive leaks are good for economic growth.

A parent raising a child does not generate any economic growth. Teaching a child to be a good member of society, helping them develop a sense of morality, or imparting good manners are without any value, in terms of GDP. If the child is raised by a paid nanny, however, or learns to read and write at school, this adds to GDP.

From a GDP perspective, nature is worth only what can be extracted, or built upon, because everything needs to have a monetary value before it can be included. So when people build homes on flood plains or drive cargo ships through seas where there were once ice caps, GDP increases and economists and commentators are delighted because the new homes and trade generate economic growth. The value of the lost wetlands and polar ice caps is not counted.

Nor does GDP growth take any account of inequality. If there is rising wealth in an economy, but it all goes to the richest 1%, the unequal distribution is not reflected in GDP. Neither does economic growth take into account people’s health or happiness. When it comes to GDP, as long as the economy grows, that is all that matters.

To highlight how unhelpful measuring GDP can be, French historian Alfred Sauvy² pointed out that a man who marries his cleaner reduces his nation’s GDP. His wife will still clean the house, but she will no longer be paid and so will not be counted. Her work becomes economically irrelevant.

Although it may be difficult to believe, societies’ focus on economic growth is a very recent phenomenon. The pace of economic growth experienced in the last thirty years is also extremely unusual. Between 1980 and 2007, the world had the fastest and the most sustained period of economic growth in more than two thousand years.

To many people, the pursuit of economic growth has become almost natural, yet for most of recorded history there was no economic growth at all. Nothing. Following the decline of the Roman Empire in around 400 CE, the economies of Europe shrank for hundreds of years.³ Between 1000 CE and the early 1800s, they grew by only 0.3% a year,⁴ practically a recession by today’s standards. There was human progress during these eight hundred years, of course. The population rose, and there were many advances in technology and science. But change was almost imperceptibly slow compared to today.

For centuries, every generation lived in exactly the same way, unless there were wars or plagues, which there often were. Grandfather after grandfather would sit on the same wooden chair, at the end of the same wooden dining table, eating the same amount of the same sort of porridge with the same wooden spoon.

There was no increase in production and no economic growth.

Until the nineteenth century, it was thought that there were unbreakable laws that governed humanity. Social thinkers of the time observed that living standards stayed almost constant for centuries and believed that there was a law of nature that held the majority of people in poverty and stopped society developing any faster or getting any richer. Even when new lands were colonized or plundered, and their treasures were shipped back to Europe, the life of the average citizen did not get any better. Whenever standards of living improved just a little, the population would increase and, without any increase in food production, poverty would return. Living standards were pushed back to where they started. There seemed to be no way out of the cycle.

Observing this, Adam Smith sought to understand how it might be possible to break the pattern and improve standards of living, not just for one generation or for one part of society but in a broader and more sustainable way for the majority. This is what his famous book, written in 1776 and generally known by its short-form title, The Wealth of Nations,⁵ is about.

People were poor, he argued, because output was too low. One way to fix this was to increase productivity, or the output per worker per year. To explain his theory, he used the example of a pin factory. Rather than having one worker produce as many pins as possible, Smith saw that productivity could be increased if the process was divided into simpler stages. If workers focused on one stage, rather than trying to do every stage themselves, the number of pins produced per worker would rise. This lowered the cost of each pin, expanding the market and allowing the business to grow. This generated more income for the owner, encouraging him to boost production and employ more people. If people had the chance to work and earn a wage, Smith reasoned, average living standards would improve.

Smith’s ideas and observations were not responsible for kicking off the era of rapid economic growth, however. That began thanks to another Scot, James Watt.

For thousands of years, people had used various forms of energy to supplement human manpower. Water wheels and windmills used water and wind to increase the supply of grain. Animals attached to plows were used to raise agricultural production. Wood, charcoal, and coal made it possible to work hot metal.

By the early eighteenth century, steam engines had been developed and were being used mostly to pump water from flooded coal mines. But they were very inefficient, requiring, somewhat ironically given their primary use at the time, huge quantities of coal. After many years of working on this problem, Watt managed to increase their efficiency by adding a separate condenser and rotary motion. This dramatically lowered the production cost of coal, allowing the mine owners to sell more of it.

As with Smith’s pin factory, Watt’s steam engine increased productivity.

Watt’s invention also made it possible for the engines to be placed anywhere there was access to water and fuel. This allowed the development of steam trains and ships, and so encouraged trade. Trade, as Smith observed, also promoted productivity growth and led to higher living standards for all.

Thanks to Watt’s steam engine, Britain’s weavers began to manufacture cotton more cheaply than the hand-weaving Indians. This gave birth to an entirely new industry. The mills built to spin and weave the cotton gradually changed the landscape, increasing the rate of urbanization. Other industries began to emerge, and by 1870, Britain’s steam engines were generating the energy equivalent of 40 million people, allowing the country (with a population at the time of less than 30 million) to expand its output without having any more mouths to feed.

The productivity of the nation was transformed.

During the nineteenth century, steam power spread from Britain across Europe and to the United States, where it changed the agricultural industry and led to the creation of the railroads.

After many years of near stagnation, the economies of Western Europe and North America gradually took off. In Europe, the rate of economic growth rose above 2% a year after 1820, and it remained at this level for the rest of the nineteenth century.⁶

What does all this mean in economic terms? Watt’s steam engine increased productivity, and so output. Energy, in the form of coal, was converted into practical forms of power (force, torque, movement, and heat), which increased the output per worker. The use of machines in factories had the same effect. The energy and mass production techniques increased productivity. They generated economic growth.

Economic growth comes mainly from rising productivity. It depends on the output per person increasing. This is important to understand, as we will come back to the issue frequently. Economic growth is not the result of rising consumption, from people buying more, despite what you might think if you read many newspaper reports. Consumption is a consequence of production. It is the increase in output that makes the increase in spending possible. Put simply, you can buy a bar of chocolate only if someone has first taken the trouble to make it.

Economic growth also depends on the population. If the population is rising, and if people have work and a source of income, they are able to buy things. So output will rise to meet the increase in demand. With a stable or declining population, though, as there will be in much of the developed world in the coming decades, this particular source of economic growth diminishes.

Output also increases when labor and capital are used to produce new machinery and infrastructure, and it increases when the nation produces something that other countries are willing to buy, when there is trade. We will look at this in more detail later.

What is well-being?

Well-being is difficult to define or measure accurately. It is perhaps best understood by people’s answer to the question: On a scale from 0 to 10, how satisfied are you with life in general? Subjective well-being is influenced by many factors, including income. Some of the factors are more measurable than others. When people are poor (for example, when GDP per person is less than $10,000 a year—as it was in the United States in 1955 or the fifteen countries of the European Union (EU) in 1965), increasing income leads to a significant rise in self-reported (“subjective”) well-being. At higher levels of income, however, the impact of higher earnings is lower, though it is still there. In rich societies, income is still important to individual well-being, but the effect is primarily relational. Middle-class people are more interested in boosting their incomes so that they keep their position in the social hierarchy and not because it allows them to buy another sofa.

Does economic growth lead to greater well-being?

It does in poor societies. Rising output tends to improve well-being when most people have low incomes. The answer is not as clear when it comes to rich nations, unfortunately. Remember, GDP measures the level of economic activity, not the level of happiness. It increases when more people work, when they create more value per person per year. But it also increases when they work on tasks that are socially undesirable, such as repairing the damage caused by climate change, work that effectively wastes human input, energy, and resources because it only fixes the unwelcome consequences of previous activities. So rising GDP does not always lead to higher average levels of well-being.

It is important to understand that economic growth is mostly dependent on improved productivity. Improved productivity means that fewer resources, in the form of workers, energy, and raw materials mostly, are required to generate a given level of output. Or, put another way, while the volume of inputs remains unchanged (workers, energy, and raw materials), the volume produced increases.

We can use Smith’s pin factory as an example: Let’s assume ten workers in a pin factory make one thousand pins a day. If they divide the tasks and specialize, however, they may produce ten thousand pins a day—a tenfold increase in productivity. This means the price of the pins can be reduced, making it possible to sell more pins. People get more pins per dollar, so consumption increases. The rise in productivity creates economic growth.

As long as more jobs are created, then the overall output and well-being of society tends to increase. This is what Smith believed would happen when he made his pin factory observations. But even at the time Smith was writing, and in the decades that followed, things did not turn out this way. Despite the dramatic increase in output, the effects of the first phase of the industrial revolution were awful for the vast majority. The average standard of living did not improve. In many cases it deteriorated, with millions of people worse off than before.

The cotton mills and factories were ghastly places, where children also worked, the hours were long, and the air was often so bad it was life threatening. Accidents were common and often fatal. The consequent rise in urbanization also brought slums, as well as the spread of disease and violence. Those who were unable to find work, as well as the homeless, destitute, or infirm, were typically sent to workhouses. Farmers were replaced by machines and thrown off their land. Life expectancies barely improved, and wages also remained pitifully low, because factory owners kept the profits for themselves.

There was much faster economic growth in the nineteenth century, and a progress of sorts, but almost all the benefits went to the rich. The early decades of the industrial revolution, which heralded the era of faster economic growth, did not improve the living standards of the majority.

Toward the end of the nineteenth century, the situation began to improve greatly because of the influence of the labor movement, which emerged in response to the terrible working conditions. Legislative reforms were gradually introduced to make the mills and factories safer. Thanks mostly to German engineering, the machines were made less dangerous and more efficient. Working hours fell and wages began to rise. But this particular change was not down to any benevolence on the part of the factory owners. It was because of the growing labor shortage. Faced with the choice between working in a dark satanic mill and poverty, almost a quarter of the British population emigrated, mostly to the United States, Canada, Australia, and New Zealand. Rather than live in industrial misery or destitution, they fled the country.

By the early twentieth century, the broader acceptance of workers’ rights and a host of inventions gradually began to boost living standards. Cars and aircraft changed mobility. Telegraphs and telephones lowered the cost of communications. Indoor toilets, piped water, and electric light transformed people’s homes. Labor shortages and the efforts of the growing trade union movement meant wages began to rise faster and eventually kicked off the virtuous cycle that the rich world enjoyed until very recently. With increasing wages there was increasing demand. This required higher output and brought higher rewards for those who paid the wages. This is one reason why Henry Ford announced in 1914 that he would pay his workers five dollars a day, far more than any of his rivals.⁷ Better pay would not just make them work harder, he reasoned, it would also make them better off. Then they could buy one of his cars.

As the twentieth century progressed and standards of living rose, the slums gave way to better housing and safer streets. Healthcare improved dramatically, and infant mortality declined, increasing average life expectancies. The rich world’s population increased,⁸ first rapidly, then more slowly as fertility rates sank. During the twentieth century, the same demographic transition—from many children and short lives, to fewer children and longer lives—spread to the rest of the world. The well-known result was a rapid increase in the world’s population, a rise that is unlikely to stop before the middle of the twenty-first century.

GRAPH 1: POPULATION GROWTH WILL SLOW

Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012

Scale: Population in thousands of persons

The population of the world is expected to reach a peak around 2040. Most rich-world countries (OECD less the U.S.) will experience decline from now on; only the U.S. will continue to grow slowly. China is expected to remain stable at around 1.3 billion people for a decade after 2015 and then decline. Fourteen big emerging economies (BRISE) are predicted to peak in the 2030s. Only the rest of the world (ROW—140 mostly small and mostly poor nations) will continue to grow beyond 2050.

The population increase led to further economic growth.

In 1900, the United States overtook China to become the world’s biggest economy. Fifty years later, the United States accounted for more than a third of global output and led the world not just economically but politically and militarily, too.⁹ The effects of the relentless focus on boosting productivity, as well as openness to trade and the magic of the free market, were abundantly clear. By the last few decades of the twentieth century, they had become clearer still. The Soviet Union, with its focus on state-controlled economic growth, was close to collapse. Communist China, which had been the world’s biggest economy for most of the previous thousand years and had a population five times the size of the United States, accounted for barely 3% of global output.

GRAPH 2: GDP (TOTAL OUTPUT) WILL GROW, BUT MORE SLOWLY

Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012

Scale: GDP in trillions of 2005-PPP-$ per year

The annual output of the world (its gross domestic product) is expected to grow, but ever more slowly, toward the middle of the twenty-first century and peak sometime after 2050. Most rich-world countries (OECD less the U.S.) are expected to peak around 2030 and be at 2015 levels in 2050. The U.S. will continue to grow slowly, because of immigration. China is predicted to increase its GDP by a factor of four. Fourteen big emerging economies (BRISE) will expand their GDP by a factor of three, as will the rest of the world (ROW—140 mostly small and mostly poor nations) because of rapid population growth.

In terms of GDP per person, which is a much better way to look at this transformation if you are concerned about the fate of the average citizen, the rich world leapt far ahead of every other region in the world. By 1900, the GDP per head in Western Europe, the U.S., Australia, Canada, New Zealand, and Japan¹⁰ was four times bigger than anywhere else. By 2000, it was six times greater. For almost 100 years, the developed world accounted for more than half the world’s GDP, despite never having more than a quarter of the population.¹¹

GRAPH 3: GDP PER PERSON WILL GROW AT DIFFERENT SPEEDS

Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012

Scale: GDP in 2005-PPP-$ per inhabitant per year

The output per person (GDP per inhabitant) will hardly grow in the rich world in the years to 2050. It is expected to explode—increase by a factor of five—in China. Half of the fourteen big emerging economies (BRISE) are predicted to follow suit; the other half will not succeed in takeoff. Growth in the rest of the world (ROW—140 mostly small and mostly poor nations) is expected to remain low toward 2050, because there will be little change in conditions for growth.

TABLE 1: THE IMPACT OF RAPID ECONOMIC GROWTH, 1820 VS. 2001

Source: Professor Angus Maddison FBA, February 20, 2005. Evidence submitted 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 factory that led to the exploitation of workers. It was the exploitation that forced the workers to fight for their rights. And it was this fight that led to greater democratic rights for everyone.

The fact that the United States’ minorities, and most of the rich world’s women, have much greater equality today is also greatly down to this era of economic growth. The years of growth freed the underprivileged from their chains, by offering them work and other opportunities, and by changing the way people think about equality.

In the United States and some other parts of the rich world today, certain groups seek to deny how these social changes came about. Employees are put under enormous pressure to reject being part of any organized group that challenges the will of business owners today. Yet much of the success of the United States’ remarkable development does not rest with those who established the factories and wanted to keep all the rewards for themselves. It rests with the workers who demanded better working conditions and found the courage to fight for their rights. This is where the foundations of the United States’ freedoms lie.

Today’s U.S. working class has been talked into believing that unionization is no longer necessary, and the middle classes think that it is not in their interests. As we will discuss in the next chapter, this lies at the heart of many of the changes that American workers have experienced since the early 1980s—falling wages, longer hours, and fewer benefits.

The rapid pace of economic development during the twentieth century in the rich world is also the reason why its physical infrastructure is generally better than elsewhere, though this is no longer the case in the United States. During the boom years, as the working population earned more, taxes allowed Western governments to spend more. This allowed them to construct bigger and better hospitals, roads, ports, and tunnels, which extended their advantage over their developing world rivals.

Bigger economies also gave the West more political clout. They offered the high-income world a stage from which to encourage others to follow its way of thinking. After all, why would the developing world not want something that offered so many advantages? Greater economic scale made it easier for the United States to demand less regulation and more open markets in other parts of the world. It allowed the United States and the rest of the developed world to nudge other countries onto the same economic path—often at a faster pace. There is only one way to develop, the developing world was told, and this is it. The era of rapid economic growth gave the rich world the chance to create new markets in its own image, to the benefit of its own citizens and businesses.

For decades, economic growth was the magic dust that transformed almost everything it touched.

As we will show in the next chapter, though, that magic dust has stopped working.