Question

Let us assume that we are given the opportunity to give money of EUR 10.000.000 millions to the inhabitants of a village with a population of about 2,000 inhabitants. What are the negative effects of such an action in Economics?

Answer 1

Generally, economic growth is good for the welfare of an economy. However, as if given an opportunity to give money of EUR 10.000.000 millions to the inhabitants of a village with a population of about 2,000 inhabitants. The negative effects of such an action in Economics would be a creative destruction which highlights how the progress brought on by economic growth could lead to a destruction of an old economic structure, in the process of creating a new one. This implies that a society cannot reap the benefits of creative destruction without acknowledging that there will be some individuals who will end up being worse off. This states that the “productive relationships, firms and sometimes individual livelihoods will be destroyed by the process of economic growth, because growth is brought about by the introduction of new technologies and creation of new firms”, and these replace firms and technologies currently in existence. There will be shift in the structure of production, with a move from agricultural and manufacturing to services. For instance, in the United States, at the start of the nineteenth century, around 90% of the population was engaged in agriculture. However, in the second half of the nineteenth century, there was a considerable decline in the percentage of employment in agriculture, and an increase in both manufacturing and services to over 20% of employment. Over the years, both the shares of employment in agriculture and manufacturing have experienced a decline, while over 70% of the current U.S. population now work in service industries. This shift in the structure of production may therefore have possible adverse effects on those engaged in agricultural activities. However, in the long run, this may not necessarily be a negative effect on the whole. This is because with a shift in the structure of production to services, there has also been an increase in household income in general, as earlier stated. Furthermore, despite a decline in the percentage of people employed in agriculture, improvements in technology have led to an increase in agricultural output.

Another effect of this process of ‘creative destruction’ is the creation of natural social tension. Because widespread structural transformations often accompany the growth and development of an economy, some relationships which may have been previously established could be destroyed, again creating more winners and losers . An Increase in income inequality is another possible effect of economic growth. Nevertheless, a large population growth is not only associated with food problem but also imposes constraints on the development of savings, foreign exchange and human resources. Generally, there is no consensus whether population growth is beneficial or detrimental to economic growth in developing economies. Moreover, empirical evidence on the matter for developing economies is relatively limited.