Bellerbys Economics - Mr Stephenson

Tuesday, January 15, 2008

The Diminishing Marginal Returns of Economic Growth

Many Bellerbys students progress to Warwick University, which in many ways has been the spiritual home of progressive economic thought for a couple of decades - the new economics that tries to look beyond the narrow confines of a blind rush towards ever greater economic growth as measured in monetary terms - GDP.

Professor Andrew Oswald is one of the UK's most widely read economists and will become a familiar figure to many of our students as they progress through higher education.

As we begin Module 5 of the A-Level, it's interesting to look at his views on the Diminishing Marginal Returns of economic growth. We all know that as you increase your investment in the factors of production, the marginal return you receive from this investment rises at first and then begins to diminish for a number of reasons (the land available to cultivate gets poorer, the quality of the new staff employed will diminish as you recruit from a shrinking pool and so on).

Businesses overcome this problem by making a 'quantum leap' in their use of the factors of production - perhaps by switching investment from labour to more efficient capital (a new machine) or to a cheaper source of labour, or to a country with less environmental regulation perhaps and so on.

Prof Oswald suggests that the dash for economic growth follows this pattern for a whole country. At first, economic growth obviously has major benefits - reducing absolute poverty, providing electricity and clean water and so on - but does society then reach a stage where the returns from economic growth begin to decline - greater pollution, congestion, stress and unhappiness. If so, what do we do about that? It's not really posssible to stop economic growth - so perhaps the solution is to redefine economic growth in terms of other variables - shift the target as our equivalent of a quantum leap. The French President Sarkozy has also begun to think along these lines and has appointed two leading economists - Joseph Stiglitz, formerly of the World Bank and Amartya Sen, leading development economist, to try to produce a new index that puts happiness and well-being at the heart of economic policy in France - a quantum leap in perception you might say - should Britain do the same? Please read Dr. Oswald's views on this here:


  • I disagree with the French President that economic growth makes the people happy. People will always have more wants and needs, or in other words, they're not satisfied with what they have. It's human nature, we will always want more and more..

    By Anonymous william s., at 8:55 pm  

  • very diffcult to understand what the acticle saying about.But oviously i think it is talking about economic growth.

    By Anonymous steve wei, at 10:22 pm  

  • Obviously, it is tough to recruit the cheaper source of labour that has the same productivity as the current one. If the quality of the cheaper source of labour is lower than that of the current one, is it a limitation using quantum leap?

    Sam Hang

    By Anonymous Sam Hang, at 12:21 am  

  • i think the point of this question is only using GDP to measure economic growth.The increasing in the GDP figures just show us the total output increased this year.But do the Eonomic atually "growth"?why don't we take the cost of the increased figures into account?considering the enviorment damages,the rising stress of workers , the price of living becoming higher and higher ,do our economic really improving? i doubt that.

    By Blogger Eric Ma Qi, at 7:55 am  

  • some important information

    By Blogger shadowsman, at 11:04 am  

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