The long run, and the short run

We’ve been speaking about growth in our series this month, and we’ve learnt that measuring growth is both important and tricky. But remember, by definition, growth by itself is meaningless unless you ask about time. That is, it isn’t much to say that something grew. How long did it take for it to grow is an equally important question!

The fancy-pants way of saying this is is to say that growth is a flow concept. What that really means is, we measure something per unit of time. If we measure something at a point of time, we call it a stock concept. Stocks and flows – keep those concepts in mind, because they keep recurring in economics.

All right, so growth is a flow concept, and we need to think about growth in terms of time. Fair enough: how long is appropriate? A month? A year? A decade? Even longer, or even shorter?

As it turns out, there is no right answer to this question. Think about a baby being taken to her pediatrician. The parents will naturally be anxious to find out if their child is growing normally, which means they want to know more about the long term growth prospects for their baby. Will she, five, ten, fifteen years down the line, be as tall as her peers, or not? What about her weight? These, and other questions, are long term questions – we’re talking years, not decades.

But hey, the parent’s might have bought in the baby because she’s running a temperature. In this case, the parents want to find out if their child will have a temperature tomorrow or not. These kind of questions are short-term questions.

Similarly, economists think about what India’s economy will look like next month, but also worry about whether we will be developed by 2030. We can’t be developed if we don’t grow in any month between now and 2030, so the monthly prognosis is important. But the long term prognosis also allows us to make corrections whose impact will be felt only in the long run.

For example, reducing interest rates today will impact financial markets tomorrow directly. But deciding to build a network of highways across the country is a multi-year project whose impact will take time to materialize, and will then be felt for many years at a stretch.

And so when we think about growth, we’re thinking about both the long term, and the short term, India growth story. It helps, however, to be very clear about the whether the precise economic problem we’re dealing with needs long term thinking, or short term thinking, or both.

Interest rate changes by the RBI? Short run policy. The Union Budget, announced every year? Short run policy. Plans by the Niti Aayog to electrify every village by 2020? Long term policy.

Such it goes.

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