It is usually accepted without question that economic growth is a necessary and good thing. It is one of the basic principles of neoliberalism, but it is only necessary and good for those who don't already have enough. For those who do - most people in the developed world - growth for its own sake makes little sense and can be positively harmful in terms of damage to the environment and depletion of resources - see chapter 7. Therefore in rich countries the requirement should be to share wealth more equitably within the country and to devote more to combating climate change and helping those in poor countries to achieve adequate material wellbeing. Growth is only necessary if there is insufficient wealth-creating capacity to achieve these ends.
However we don't yet live in world that wants adequate material wellbeing for everyone, we live in a competitive world where countries vie with each other for supremacy in terms of national prosperity, and if that end is served by disadvantaging other countries then so be it. For all the talk about free trade and globalisation bringing prosperity to all the reality is very different. Rich countries make the rules that all must follow, and those rules are designed to serve the interests of wealth power. All this is discussed in detail in Part 3.
Nevertheless it is important to understand what brings about economic growth, because many people depend on it to lift them out of poverty, so let's examine it.
It was shown above that additional spending can bring about growth but only if there is spare capacity. If not, all it does is cause inflation. To bring about growth in the absence of spare capacity what is needed is innovation, efficiency improvements[79], advances in technology, working longer hours or growth in the working population. When these things happen more wealth is created, there is more surplus wealth to trade, and the economy grows. However if the money supply stays as it is then there is no increase in purchasing power and growth will be restrained. This is because when production improvements occur or new desirable products appear some of the existing purchasing power is used to buy them, which means that other products that would have been bought are not now bought. Therefore the production of those products becomes spare capacity, which must be absorbed (i.e. the potential wealth that they are capable of producing must be produced and traded) in order for the economy to grow. All that has happened so far is that new or improved products have been substituted for existing products, which is not growth; it is just a transfer of purchasing power from one set of products to another. There is potential growth however, in that spare capacity has been created from the displaced production without any loss of wealth creation and trade.
The value of this spare capacity to the economy is the exchange value of the wealth that it produced before it was displaced, and this is the amount of extra spending that needs to occur in order for the spare capacity to be utilised. If enough money is added to allow this extra spending then initially it is used as investment by the displaced producers to upgrade equipment to produce better products, develop and produce new products, or engage in other activities to get back into the game, and thereafter the money is used to buy the products that are produced. If successful then the investment will repay itself in due course in enhanced turnover, and the capacity that was spare will then be utilised and full employment will be restored. If the displaced production fails to compete, then it will cease to trade and the workforce will lose their jobs. This still represents spare capacity, which will hopefully soon be utilised by existing or new companies in expanding production or creating new products. This process will utilise the spare capacity just as effectively as before, and the added money and corresponding new spending will again initially be used as investment in retraining the workforce for their new jobs and in buying new equipment for the expanded or new production, and again thereafter in buying the products.
If new money is not added to the economy then the spare capacity that is created will still be utilised eventually by increased spending with the existing money, but it will take longer than it otherwise would, because the money for investment will be harder to come by as it is in short supply and it will cost more in the form of higher interest charges. The outcome will be full employment and lower prices on average to reflect the increased value of money (i.e. same money but more wealth transacted). With added money the transition will be quicker and less costly to the displaced producers, and prices on average will not change.
A common misconception is that an increase in property or financial asset prices represents economic growth; it certainly feels like it to property and asset owners. This is not the case however because no additional wealth has been created, all that has happened is that buyers are willing to pay more for these things. Economic growth is an increase in created wealth.