One of the most frequently asked questions in economics is what are the costs and benefits of economic growth. The debate that ensues is often very hard to break down, even for those economists who try. The debate typically revolves around two main points; what are the Costs to Individuals and Businesses? and What are the Benefits of Economic Growth?
Now to break this down and address each individually would be too long. So here I will touch on each point and give you an interpretation of the data for each. For the Costs to Individuals look at the cost of everything that is required to create economic activity. This includes all labor and products used in production, transportation, technology, government, banking, licenses, taxes, etc.
Now when discussing the benefits of economic growth we must keep in mind that there are two categories. One category of benefits is that of creating wealth, meaning money that is made by individuals and businesses. The second category of benefit is that of improving life, meaning things like healthier bodies, and cleaner environments.
These are in broad strokes though. When it comes to looking at the matter from a macroeconomic perspective costs and benefits are much more detailed. For example lets look at the cost to an economy of increasing levels of immigration. This can come in many forms such as increasing unemployment and creating lower-paying jobs for the native population, or it can mean providing social services and infrastructure improvements to immigrants.
Other costs that can be associated with economic growth are the costs of new technological goods, or innovations, and the costs of new environmental improvements. As you can see there are many different costs and benefits to economic growth. Let me briefly go over each of these topics.
It would be unfair to say that the costs and benefits of economic growth are solely measured in terms of costs and losses. In fact economic policies can cause costs to arise. If you increase immigration rates you may have an impact on local businesses in terms of higher unemployment. Similarly certain economic policies can create environmental costs and benefits.
One might argue that these costs and benefits are all important and should be included in any analysis of the costs and benefits of economic growth. However, the argument could be considered a rather circular one. The benefits derived from the policy are primarily considered because these benefits accrue only to individuals and businesses. Individuals and businesses cannot logically expect the costs associated with economic policies to be offset against any benefits received. Therefore costs and benefits are not included in the overall analysis.
If you really want to understand the costs and benefits of economic growth then you need to understand the concept of externalities. Externalities are costs that are not linked to the domestic economy but rather external to it. A good example of this is the pollution externalities caused by economic growth. Externalities are what drive up the cost of something over time no matter how many domestic companies are causing it.
While policies may appear to be externalities their costs are in fact internal to the policy. Economic policies such as subsidies, rent controls and tariffs are examples of internal costs. These costs are not exogenous, because they are not linked to any domestic economic activity. Costs are therefore externalities that only serve to increase the government's costs but do not decrease the benefits associated with economic policy. There are numerous arguments regarding the costs and benefits of economic policy, however it should be understood that any such cost is ultimately determined by its impact on the government as a whole.
Policy makers attempt to balance these costs and benefits through the implementation of certain policies such as price controls, import protection and other forms of restriction. Restrictions sometimes work to balance externalities by removing some products from the market or raising the cost of some goods. For example an importer may limit . . . . . . the amount of foreign goods that his company will sell to his customers. This leads to an increase in the price of imported goods. While this may prevent customers from buying imported goods the gain made from increased sales helps offset the increased costs of importing goods.
There are also arguments that the execution of growth oriented policies increases overall efficiency. The increased level of output that comes with economic growth is supposed to reduce the opportunity costs associated with investment decisions. In this view the costs and benefits of economic growth are both supposed to be positive.
Critics argue that the costs and benefits of economic growth are the result of inefficient policy choices and do not capture the true costs and benefits of the process. They argue that the prices and wages we have seen in the United States over the last thirty years are not a result of free markets. Instead they are the result of decisions made by government agencies, regulatory bodies, and public officials. A key role is played by these individuals in determining which economic policies are the best for the economy as a whole and as a result they can often have a significant effect on the costs and benefits of economic growth. For example, attempts by regulatory bodies to influence businesses to increase prices unnecessarily can create distortions in the allocation of resources that will reduce the benefits associated with growth.