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  • Writer's pictureSergio Focardi

Why a theory of qualitative growth?

The theory of qualitative growth is based on five intuitive observations:

  1. The quantity produced by modern economies increases continuously.

  2. The complexity of products, services and of the structure of the economy increases continuously.

  3. The monetary value of output increases continuously.

  4. Modern economies innovate in the sense that old products and services disappear, and new products and services appear into the market.

  5. The number of available products and services increases continuously..

It is easy to agree with the above points. However, if we try to make them precise, we run into serious difficulties. In fact:

  1. We cannot aggregate the quantities produced because products and services are heterogeneous and innovate.

  2. It is difficult to define a measure of complexity.

  3. The monetary value of output is arbitrary because prices are only relative prices.

The answer of mainstream economics is the following:

  1. Theory and models assume that an economy produces one single final good.

  2. It is assumed that we can define price inflation, that is a generalized uniform change of prices

  3. The magnitude of an economy is identified with the sum of all final consumer transactions, the nominal GDP.

  4. Economic growth (positive or negative) is identified with the percentage change of real GDP, defined as the nominal GDP discounted by inflation.

These assumptions are unrealistic idealizations. The theory of qualitative growth offers a sound answer based on the methodology of modern science. Modern science makes use of abstract terms that acquire meaning through the theory. For example, in classical mechanics, the relationship F=ma that links force with mass and acceleration acquires meaning with the definition of gravitational forces. In finance, volatility depends by the model of returns that we use.

We have an intuition that an economy produces "more" and "more complex" products and services but these terms do not correspond to simple observables. Therefore, the theory of qualitative growth introduces Quantity and Quality as abstract terms that belong to a global theory. They are not observable but they can be linked to observation processes such as Economic Complexity Indexes.

Note that modern economies are evolutionary complex systems subject to a process of continuous change. Therefore, economic theories and models must change when real economies change. In recent times, economies moved from slow-moving agrarian or proto-industrial economies to become evolving complex systems. Economic theory must follow this change.

We are now witnessing another important change: the Green Transition. A critical element of the green transition is "decoupling" of growth from the use of natural resources. The strategy currently proposed is the circular economy. However, the circular economy in itself cannot produce growth. If we want to grow without increasing the amount of materials used we have to increase the complexity of economic output. Therefore the modelling of Quantity and Quality in the future must change.

The concept of inflation does not easily apply to economies where products and services change and innovate. By definition, inflation is the change of price of products that remain unchanged. Today we measure the change of prices of a subset of products and services and we extend it to the entire economy. This is a misleading process that interprets genuine innovation as inflation. We need to introduce a concept of Generalized Inflation.

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