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I vaguely recall from my reading of Adam Smith’s “The Wealth of Nations”, during college, that he opined that a market-based economy must constantly expand. Is this recollection correct and, if so, what is the specific quote/reasoning? Is it not possible for such an economy to be static and self-contained?

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  • $\begingroup$ I doubt very much that Adam Smith ever said or wrote any such thing. You may be thinking of Marx or Lenin. $\endgroup$ – Kenny LJ Jun 2 '18 at 5:36
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    $\begingroup$ Let's call it a market-based economy rather than a capitalist economy (the latter term comes with a lot of political baggage). If, by 'expand', you are referring to a growth in output then the answer is no, this need not be true. For example, the US economy contracted by 5% between 2007 and 2009, and by 27% between 1929 and 1933. $\endgroup$ – Ubiquitous Jun 2 '18 at 9:38
  • $\begingroup$ Ubiquitous, thanks for the suggestion. I have rephrased the question accordingly. $\endgroup$ – Burch Jun 3 '18 at 0:38
  • $\begingroup$ I think there are two ways to interpret this question: (1) Is it literally inevitable that all market-based economies expand all the time? or (2) Must a market-based economy constantly expand in order to avoid certain bad consequences? Maybe you could clarify which of the two you were more interested in? $\endgroup$ – Dan Jun 4 '18 at 16:23
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No idea who said that first, but I have seen similar assertions in economic commentary many times. The logic was never fully explained, but revolved around the notion that we need compunding income to pay compund interest. Authors treated the idea as so obvious or well known that they never saw the need to explain the details, or cite earlier authors. (It’s been awhile since I’ve seen the assertion, so I cannot give examples.)

In theory, the belief that the economy must expand appears incorrect. One could look at the various stock-flow consistent (SFC) models in “Monetary Economics” by Wynne Godley and Marc Lavoie, and one sees that steady solutions are easy to find. Although debt compounds, borrowers just pay down debt.

As a practical matter, the tendency is to prefer growth. However, in a services based economy, it is unclear whether real GDP growth gas to correspond to greater natural resource use, which creates a debate whether it is “real growth” or “paper growth.”

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Your recollection is incomplete because Adam Smith has also forseen that the development of an economy will lead to an stationary state. In reality we have to deal with wars and other catastrophes, which prevent such an frictionless development.

I'm also unsure if your interpretation of Adam Smith is correct, that a market economy must constantly expand. I would intepret it the other way around: An market economy expands constantly (if not disturbed). In other words: An market economy does grow.

Here is also a link to the growth model which is related to the Wealth of Nations.

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