Why can't economic growth occur continuously?

Germany in data

Rainer Metz

Prof. Dr., Head of Data Service Historical Studies at GESIS - Leibniz Institute for Social Sciences in Cologne and Associate Professor at the University of St. Gallen - National Accounts / Prices

In modern societies, more or less constant economic growth is essential. This is measured using the rate of change in gross domestic product (GDP).

Economic growth, i.e. the long-term increase in overall economic production, both in absolute terms and per capita, is a key phenomenon in modern societies, which is inconceivable without such economic growth. The central indicator for this growth today is the (real) GDP adjusted for price changes [1], which shows the level of the gross domestic product in its level and the extent of the relative change in this product from one period to the next in its growth rates. Dividing GDP by population gives GDP per inhabitant, which can be used both as a measure of productivity and prosperity. As a measure of productivity, it indicates how much each inhabitant in Germany produces on average. If one uses the GDP per inhabitant as a measure of prosperity, then one assumes that the total economic production (at least the largest part of it) flows to the inhabitants as income.

The long-term increase in macroeconomic production does not take place steadily and evenly (which would mean a constant GDP growth rate); rather, it is embedded in a more or less pronounced rhythmic alternation of upswing and downturn, of prosperity and depression, which is also one referred to as the economy. The concept of regularity is closely related to the term business cycle. The changes in the overall economic situation that repeat themselves according to a certain pattern are therefore also referred to as business cycles. In the course of time, research has identified cycles of different lengths and given different explanations for them. [2] For a long time, growth and the economy, alongside structural change, were considered to be the predominant development patterns of modern economies. Crises and depression were seen as part of the business cycle and thus as a normal part of the growth process. The financial and global economic crisis of 2007/2008 triggered a radical rethink here. For many, modern global capitalism has been (again) regarded as extremely unstable and at risk of crisis. According to this, the economic crisis represents an independent form of development of modern economies alongside the business cycle and therefore requires its own historical and theoretical analysis. Economic growth, business cycle and crisis are therefore the focus of the description of the long series of GDP reconstructed here and shown in Table 1. [3] The table shows the GDP in current and constant prices both in absolute terms and per capita (all data in euros), the index values ​​of the GDP series and the annual GDP growth rates at constant prices from 1850 to 2012 (see Table 1).

Table 1: Gross Domestic Product License: cc by-nc-nd / 3.0 / de / (bpb)
When looking at the GDP series in current (current) prices, the following can be ascertained: In 2012 the value of GDP was 2,643.9 billion euros, in 1950 it was 49.69 billion euros for the territory of the former Federal Republic of Germany, in 1913 (for the territory of the German Empire) 28.95 and finally in 1850 3.64 billion euros for the territory of the later German Empire excluding Alsace-Lorraine. If 1913 = 100, the index rises from 12.6 in 1850 to 9,133 in 2012. GDP per capita shows a similarly dramatic increase in current prices. In 2012 it was 32 276 euros, in 1950 it was 1,059 euros, 1913 432 euros and 1850 103 euros (again for the territorial borders already mentioned). If one sets 1913 = 100 again, the index increases from 24 in 1850 to 7,478 in 2012. The differences between GDP as a whole and GDP per inhabitant result from the population development.

Figure 1: Gross domestic product in constant prices from 2005 with trend license: cc by-nc-nd / 3.0 / de / (bpb)
The information in the current prices does convey a picture of contemporary values, but does not say anything about the real development. This can be seen in the price-adjusted GDP series. According to them, real GDP rose from 61 billion euros in 1850 to 2,469 billion euros in 2012. In Germany, the real value of GDP per inhabitant was 24,679 euros in 2012, in 1950 it was 4,777 euros in the Federal Republic of Germany, 4,720 euros in 1913 in the German Empire and finally in 1850 for the later German Empire excluding Alsace-Lorraine 1 775 euros. If one sets 100 again in 1913, then the index of real GDP rises from 20 in 1850 to 800 in 2012 and the index of real GDP per inhabitant in the same period from 38 to 523. Compared to 1913, real GDP has increased eightfold and real GDP per inhabitant more than quintupled. Real economic production in Germany has increased enormously in the long term - despite increasing population numbers, despite two world wars, despite political division and subsequent reunification. The dynamics of this expansion process only become apparent to the viewer when the rows are graphically represented. (see fig 1)

Figure 1 shows the values ​​for real GDP (upper graphic) and the values ​​for real GDP per inhabitant (lower graphic) on a semi-logarithmic scale [4] together with a trend line that represents growth at a constant rate of growth. If one looks at the series and trend development, the well-known epochs of German economic history become very clear. The development begins with the growth phase of the long 19th century, which ends with the First World War. However, GDP per inhabitant is growing more slowly than GDP as a whole, as Germany's population is also growing rapidly. This can be seen, for example, from the fact that GDP exceeds the trend line from around 1890 onwards, while GDP per inhabitant does not. In the war and interwar period with their extreme economic and political instability, GDP values ​​are mostly well below the long-term trend. During the Nazi era, however, there was strong growth, as a result of which GDP per inhabitant reached the trend line in 1943 and total GDP even exceeded this from 1940 onwards. In the immediate post-war period with the "economic miracle" and the associated breakthrough into a consumer society, GDP approaches the trend from "below" and, if you want to put it that way, swings back onto the historical growth path. This can be interpreted as a return to "normality", although here too there are differences between total GDP and GDP per inhabitant. While total GDP regained its long-term growth path around 1970 and followed it until around 2001, GDP per inhabitant even exceeded the trend. However, since reunification at the latest, it seems to be returning to this.

Short-term changes in GDP are embedded in this long-term growth, which, depending on their intensity and duration, are referred to as recession, crisis or economic fluctuations. These short-term changes can be represented with the help of the growth rates, i.e. the percentage changes in the values ​​for successive years. (see fig 2)

Figure 2: Annual growth rates of the gross domestic product in constant prices from 2005 License: cc by-nc-nd / 3.0 / de / (bpb)
The growth rates for real GDP are shown in Figure 2. Between 1850 and 1913 there are 12 years of negative growth, 10 of which fall in the period up to 1880. From 1914 to 1944, i.e. in just 31 years, there are 11 years with negative growth rates. Between 1914 and 1919 alone, GDP fell for six consecutive years. Overall, it is the worst collapse in overall economic production in Germany. In 1923, hyperinflation led to a loss of 13 percent of GDP. As a result of the global economic crisis, GDP fell again from 1929 to 1932 for four consecutive years. After the Second World War, between 1946 and 2012, i.e. in 67 years, there are only 6 years with negative growth rates, the first in 1967, the last in 2009. In this year real GDP was 5 as a result of the financial and economic crisis of 2007/08 .2 percent lower than in 2008, which corresponds to a "real" slump in GDP of 125 billion euros. In purely mathematical terms, this is the real production of the German Empire in 1883.