What is “economic growth?”

When I started Scioto Analysis in 2018, the first thing I did was conduct a study on economic growth. Even before I registered with the Secretary of State’s office, created a website, or even told most people I was starting this practice, I was working to investigate what economic growth looks like in the United States.

In January, I wrote a blog post about what defines “the economy.” The definition I put forth is the following:

“The Economy” = Formal Market Activity + Informal Market activity + Nonmarket Activity + External Costs and Benefits of Market Activity

Overall, when we talk about “the economy,” we are talking about the sum of all the stuff (tangible and intangible) in society and the intensity of people’s desires for that stuff. We measure the sum of stuff by counting it and we measure the intensity of people’s desires for stuff by estimating their “willingness to pay” for it.

The core measure we use at Scioto Analysis to estimate the size of the economy is the Genuine Progress Indicator, a “GDP+” measure that estimates the economic value of environmental and social indicators next to traditional economic indicators.

The value of the Genuine Progress Indicator is that it gives us a holistic picture of the economy, correcting for problems in Gross Domestic Product like valuing environmental damage cleanup and excluding economic activity like caring for children at home. Another value of the Genuine Progress Indicator is that it gives us an idea of how the economy has changed over time.

A chart that usually comes with a Genuine Progress Indicator study is a line chart comparing growth of the economy as measured by the Genuine Progress Indicator compared to the growth of the economy as measured by Gross Domestic Project. The figure below is from our 2023 study comparing the two measures and their relative growth over time. The trend is usually the same in Genuine Progress Indicator studies: once you factor in the adjustments for environmental damage, social value, and economic growth that the Genuine Progress Indicator makes, economic growth is not as robust as it is under Gross Domestic Product.

So how do we know if a public policy will grow or shrink the economy? That is the task of cost-benefit analysis.

Cost-benefit analysis has at times been described as “applied welfare economics.” When we say “welfare,” we’re not referring to the shorthand for social programs that give assistance to low-income people. We’re talking about welfare in the sense that it was used in the preamble to the United States Constitution, when one of the aims of the document was to “promote the general welfare.” 

More specifically, when we say “welfare,” we’re talking about it in the sense of Arthur Pigou in his foundational text in welfare economics, The Economics of Welfare.

Basically, “welfare” defined in this sense is the same definition we have for “the economy”: it is the sum of all the tangible and intangible stuff people have a willingness to pay for minus the sum of all the tangible and intangible stuff you would have to pay people to have. So a society that has more stuff people want is a society with a larger economy (higher “welfare”) than a society with less of that stuff.

Cost-benefit analysis is the systematic analysis of a public policy to see if it grows the economy (increases welfare) or shrinks it (decreases welfare). Whenever we are conducting a cost-benefit analysis, that is the project we are undertaking.

This is admittedly an opinionated take on the definition of “the economy.” Many people will claim that “the economy” should be restricted to activity conducted in formal markets to limit confusion. The line grays here, though, with informal markets where dollars change hands and taxes are not paid. Or with nonmarket activity like spending your time caring for children at home while not being paid for it. Or external costs and benefits. While there is certainly value in analyzing the formal market, drawing the line of consideration of public policy at its boundaries leaves a lot out, even when just trying to answer this admittedly narrow question of how we maximize the amount of stuff people want in a society.

Another objection to this line of thinking comes from an environmental sustainability angle. There are a lot of thinkers in the environmental economics world who are skeptical of the idea of growth due to concepts of planetary limits. This has led many to be drawn to ideas like Kate Raworth’s Donut Economics. But “maximizing the stuff people want in society” does not mean “maximizing material goods.” A full conception of the “economy” acknowledges that allowing wild land to not be used and developed is a type of “stuff” that we can elicit willingness to pay for with survey research. The same goes for the value of basic research, time spent with family and resting, reductions in risk of death, and even the value that people in the future place on ecological stability. If anything, this conception of “the economy” is better at promoting ecological stability than either a narrow conception of the economy focused on formal economic activity or the faint sketch of a framework laid out in books like Donut Economics.

An objection someone may have to the value of economic growth can come from another angle, and I’ll call this the “Buddhist Objection.” The objection is this: why should strength of preference matter? If an advertiser is able to convince someone to the point where their willingness to pay for a pair of jeans rises from $40 to $400, does value really increase tenfold? Conversely, if someone learns to live more simply, desiring less, should we consider that a loss to society as a whole?

I think this last critique of economic growth is a deeper one, and gets at something more fundamental than these other critiques. What I think makes it a valuable critique is that it gets at something we also focus on at Scioto Analysis: the essential pluralism of public policy analysis.

No one framework will be able to tell us with certainty what makes good public policy. The policy with the highest net present value, which means it grows the economy and general welfare the most, is not always the “best” public policy. Neither is the policy that reduces poverty and inequality the most, that improves health and education the most, or that improves subjective well-being the most. Each of these frameworks is just one way for us to understand a deep question that people have debated for millennia: what makes a good society?

My most truthful answer to this question is “I don’t know.” My most practical answer to this question is that a society where more people have more of what they want, where poverty and inequality is lower, where the population is healthy and educated, and where people evaluate their lives positively is a probably better society than one where people have less of what they want, where poverty and inequality is high, where people are unhealthy and lack education, and where people believe their lives are not going well. And we as analysts have precisely the tools to help us evaluate which of those worlds we live in and how to get closer to one than the other.