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Compound Economic Growth

Written by Gary North on December 5, 2015

Economic development is one of the most popular topics among economists today. Since the end of World War II, economists have become convinced that linear economic growth is both possible and desirable. They have almost universally concluded that one of the primary functions of the State is to promote economic development, not only in the United States, but all over the world. They have argued that the “positive” State, meaning a civil government which actively intervenes in the marketplace in order to further economic growth, is basic to a program of liberal politics. The civil government supposedly does not go far enough when it establishes legal conditions for private individuals to foster economic expansion through voluntary exchange and privately owned capital investments. The State is not supposed to be passive, because private individuals are supposedly incapable of guaranteeing compound economic growth.

Prior to the Second World War, economists worried continually about the advent of the static economy. They were convinced that an era of stagnation had arrived. A decade earlier, they were speculating, as now, about long-term prosperity and how to maintain it. Topics of interest within the economics profession are quite faddish. Economists are not very good academic entrepreneurs; they never seem to know which topic will be the “hot” one five years down the road.

The concept of linear development is uniquely Western. It is a product of Hebrew-Christian philosophy. Time is understood as a process with a beginning and an end. Events in time are unique; they cannot be precisely repeated. Time is therefore irreversible. Christianity, with its doctrine of the final judgment, also holds that human actions on earth and in time have eternal consequences. History is not cyclical. There is no reincarnation. “And as it is appointed unto men once to die, but after this the judgment: So Christ was once offered to bear the sins of many; and unto them that look for him shall he appear the second time without sin unto salvation” (Hebrews 9:27-28).

Linear time, however, does not necessarily imply compound economic growth. St. Augustine believed in linear time. It was he who was most influential in restructuring medieval Christian philosophy’s concept of the importance of time. But he argued that earthly kingdoms rise and fall, come and go. It is only God’s kingdom, and His earthly institutional church, that develop. Development is therefore spiritual, not external. Rome, with all its wealth, might fall, but this does not mean that Christians caused the fall of Rome, he argued. All earthly cities rise and fall.

The idea of earthly linear growth came with the Puritans and Continental Calvinists. They held to a vision of the future which included external cultural and economic progress. They argued that spiritual progress would be rewarded by God with external social progress, on and on, until Christ finally returns in glory. The preaching of the gospel will be successful eventually in turning the hearts of millions, and this, in turn, will create the conditions necessary for extended economic development and the spread of wealth. They saw in Deuteronomy 8 the model of com- pound external development, something the modern economist might call “positive feedback” between spiritual maturity and economic blessings.

Deuteronomy 8:18 reads: “But thou shalt remember the Lord thy God: for it is he that giveth thee power to get wealth, that he may establish his covenant which he sware unto thy fathers, as it is this day.” That is inescapably clear language. God gives His people the power to get wealth “that he may establish his covenant.” The visible manifestation of men’s wealth-producing abilities is a testimony to the validity of God’s covenant. Wealth in a community that is faithful to God’s law is a sign of the reliability of God’s promises. There is a positive relationship between wealth and faith. Of course, Deuteronomy 8 and 28 warn men not to regard blessings from God as products of their autonomous power (Deut. 8:10-l7). If they do this, the blessings will become snares leading to destruction (Deut. 8:19-20). But there is no mincing of words here: long-term economic growth is basic to the holy commonwealth. This includes population growth (Exodus 23:25-25; Genesis 16:10).

A Finite World

This is a world of limited resources. The ground has been cursed (Gen. 3:17-19). Therefore, we must conclude that nothing can multiply forever. The process of compound growth cannot continue indefinitely. Any multiplying species eventually runs up against environmental limits, beyond which multiplication slows and eventually stops or reverses.

Let me offer an example. Assume that Judas had invested his 30 pieces of silver at 3% interest, compounded annually. Assume also that the coins were the equivalent of a dime. He invested, therefore, $3 (pre-1965 purchasing power, of course). If he did so in A.D. 30, at the beginning of the calendar year, and kept the money invested until the end of 1979 (1949 full years), his heirs could now withdraw a grand total of

or 31 septillion, 400 sextillion dollars. That ain’t hay.

(For the rest of my article, click the link.)

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