Economic growth is not the be-all

Written by Mark Buchanan via LiveMint on 6/24/18 

Politicians and economists have for years now worried about dwindling productivity growth—the failure of economies in recent years to keep producing ever more valuable output with the same quantity of inputs. Nearly all economists think we need more productivity growth if we’re to restore steady economic growth. In the UK, the opposition Labour Party has just gone so far as to propose setting an explicit 3% productivity growth target for the Bank of England.

But are we right to place such store by ever-increasing economic growth? Alongside its obvious benefits, growth has brought a raft of increasingly serious environmental problems, from rapidly declining insect and bird populations, to plastics pollution and climate change. Since 1980, growth has also driven a vast increase in wealth inequality, stirring political instability. Modern economics sees growth as a necessity, but some researchers are wondering if we might actually do better with less growth, or even no growth. Managing it will require some creative thinking.

Economists widely acknowledge that growth is a terrible indicator of beneficial economic activity. It goes up if we have more traffic jams that waste gasoline. It says nothing about social well-being, or inequality.

Some economists have proposed better measures, such as the Genuine Progress Indicator (GPI), which includes a number of social and environmental factors. It gives a rather different picture of the benefits of growth. For the US, for example, GPI data indicates that economic growth made the nation better off up to around 1970, but further gains have been offset since then by worsening social conditions and the depletion of natural resources.

Given this mixed picture, why do economists almost universally support policies pushing for growth? Of course, one of the big arguments for growth (and productivity growth) is that it’s the best way to move people out of poverty. But it’s a stretch to say we know this is true in the long run, given the limitations on today’s economic models which ignore costs such as inequality, social exclusion and environmental problems.

Economists also support more growth because they think that technology will somehow “decouple” economic growth from resource and energy use, becoming cleaner, and helping the environment, rather than despoiling it. But this is only a hope, and empirical data doesn’t support it.

Over time, advances in technology mean that we do use fewer resources per unit of economic growth, but this is only relative decoupling, not absolute decoupling. So far, more growth always leads to more resource consumption, and more pressure on the environment, not less. There’s no clear reason to expect this to change.

Clarity on these matters won’t come from old-style economic models with their narrow focus on maximizing consumption. Fortunately, some researchers are trying to imagine how economies might work differently. Over the past decade, they’ve developed more than 20 economic models that adapt standard macroeconomic models to include social and environmental factors.

This research isn’t aiming for some socialist utopia. It is just trying to realistically explore how policies might enable economies to support human needs—supplying innovation, high-quality goods and meaningful employment—while also avoiding excessive demands on the environment, or creating other social dysfunction such as extreme wealth inequality.

For example, one study compared estimates of likely consequences of high-growth, low-growth, and no growth policies for the Canadian economy over the next 20 years, including different possible scenarios for green technologies. The high-growth policies increased gross domestic product by 80%, but also led to rising unemployment and emissions. Zero-growth policies weren’t good either—except in reducing greenhouse emissions—and led to exploding unemployment and poverty. But a scenario of policies aiming for low growth in the short run, slowing to a no-growth economy in 15 years, reduced greenhouse emissions, poverty and unemployment together in a more balanced way.

One interesting theme that emerges from this work is that future economists may need to de-emphasize productivity growth, which tends to occur most in areas where technology can replace labour. Many economists see Artificial Intelligence and other technology as the great hope to restore productivity growth, and with it, economic growth. An alternative, the new research suggests, is to keep people employed, but to shift the focus to economic activity supplying human and social services ranging from entertainment and education to the care of children and the elderly. British economist Tim Jackson argues that there’s vast potential for a green services sector to achieve both high employment and meet carbon reduction targets without relying on fast economic growth.

Most economists dismiss this kind of work without much thought. And of course the models deserve critique and refinement. But the research rests on the sensible view that human societies depend on the broader biosphere. From a long-term perspective, human activity that helps to preserve and enhance the biosphere could be the most valuable of all. Mainstream economists may be mistaken that growth, powered by productivity gains, is absolutely necessary. There may be many other ways forward.