Final answer:
The sustainable growth rate (g*) assumes the possibility of continuous growth without new external financing and maintaining a balance of financial ratios. However, this concept conflicts with the evidence that indefinite economic growth is unsustainable due to physical and environmental limitations, leading to the advocacy for a steady-state economy.
Step-by-step explanation:
Assumptions of Sustainable Growth Rate (g*)
The sustainable growth rate (g*) is the maximum rate at which a company or an economy can grow without needing new external financing. For the growth to be truly sustainable, a set of core assumptions must be valid. These include the continuation of current operational and financial policies, stable profit margins, consistent dividend payout ratios, and the constant ratio of assets to sales. This concept also presumes that the economic growth will persist at a rate that supports these criteria.
However, studies examining the long-term feasibility of continuous economic growth suggest that there are physical and environmental limits to this growth. Sustainable development is pushed to the forefront of economic discussions as scholars recognize the impossibility of maintaining exponential growth within a finite system. A shift toward a steady-state economy is called for, one that balances economic activities with ecological integrity and social welfare, rather than relying solely on growth metrics.
The Sustainable Development Goals (SDGs) are a framework that strives to guide nations towards a more sustainable path that balances human development with the planet's ecological capacity. The challenge faced by this paradigm shift is significant, especially given how deeply ingrained the notion of growth is within our societal, financial, and political institutions.