Linear v Exponential Growth

Interesting piece by Mark Buchanan,

For two decades now, a lesser-known group of mostly German economists has been making a more extreme argument: that the standard model of exponential growth — in which an economy can be expected to expand by a given percent every year, no matter how big it gets — is fundamentally flawed. Rather, these economists claim that while exponential growth fits some young economies, mature economies tend, as a rule, to grow much more slowly — in a linear way, meaning that the percentage growth rate would constantly decline.

The latter view has gained support from a new study, in which a team of European economists and statisticians looked at data on the economic development of 18 mature economies, including the U.S. and most major European nations, from 1960 to 2013 (they started at 1960 to avoid the effects of World War II). They found that the data on growth in gross domestic product per capita fit best, statistically speaking, with a linear model. For only two countries did the exponential work better, and then only barely. In other words, linear growth — in which mature economies add less new activity (in per capita, percentage terms) each year — is the empirical norm.

If the finding holds up, then today’s economics may stand in need of some serious conceptual change. As the authors of the new study note, an awful lot of conventional economic analysis rests on the unquestioned assumption of exponential growth. Governments, for example, rely on it when they decide how much money they need in their social security funds, or when summing up the costs and benefits of any proposed project, including measures to mitigate climate change. If growth isn’t exponential, the discounting procedures used habitually in such analyses make no sense at all, and standard economics systematically undervalues the future.

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