This little post has been written with Ewen Gallic,
“End of the world, end of the month – same fight!” can often be seen on signs during various demonstrations, in France, but also as the title of the inaugural lesson at the Collège de France by economist Christian Gollier, reminding us that climate change and the economy are facing off in a battle that promises to be bloody. “Growth” seems to be a key element in this battle, but this battle will likely remain in vain as long as this term is not clearly discussed, allowing us to leave the often dogmatic trenches.
Growth, an Essential Yet Too Vague Concept
It is clear that for a grown-up-economist (in the sense used in Saint Exupéry’s Little Prince), it is impossible to imagine an economic model without perpetual growth. In their book published after receiving their Nobel Prize in 2019, Abhijit Banerjee and Esther Duflo (Banerjee and Duflo 2020, Chapter 5) ponder the possible end of growth. To introduce their reflections, they highlight the views held by Robert Gordon against those of Joel Mokyr, both economists at Northwestern University. While the former predicts a stagnation of growth around 0.8% and dismisses the idea of a new period of strong growth due to recent advances in artificial intelligence, noting that these new technologies have been around for 20 years without having triggered rapid growth, the latter envisions more sustained growth, due to the battle of nations in the field of scientific progress. It is striking to note that for Abhijit Banerjee and Esther Duflo, the idea of the end of growth corresponds to weak but positive growth, sweeping away the very idea of decline.
While many economists recognize the importance of economic growth, it is appropriate to revisit its definition in order to appreciate its desirability and understand its limits. In economics, and particularly in macroeconomics, “growth” refers to the increase in the production of goods and services in an economy, over a period of time. It is traditionally measured by the variations in GDP (gross domestic product). In the foundations of economics, it is commonly taught that GDP can be understood through three equivalent perspectives: production, income, and expenditure. When GDP is measured by production, one approach consists of totaling the market value of final goods and services produced by the economy over a given period, such as a quarter or a year. The market value is obtained by multiplying the quantities produced by the market prices corresponding to the final goods or services. With this approach, only final goods (like a complete car) are included in the GDP. The production value of components (intermediate goods) is not added, as these components are used in the final production and would therefore be counted twice. Another method, still under the production prism, consists of measuring GDP by adding up the value added by firms. The value added of a firm corresponds to the value of its production minus the value of the intermediate goods used. In the case of a car, the value added of the firm that produces the car is calculated by subtracting the value of the components used from the total value. Similarly, the value added of the firm producing the components is calculated in the same way. Equivalently, GDP can be measured by income, by summing the labor income (income paid by firms to workers) and the capital income (the rest of the value added of firms after paying labor income). Finally, GDP can be calculated from the expenditure viewpoint. It involves accounting for all final goods and services expenses by households, firms, and public administrations. Expenses are traditionally categorized into five groups: consumption, investment in physical capital, public spending, exports, and imports.
Through this third definition, it is observed that consumption plays a significant role in growth. This definition is shared by many leaders, as evidenced by the plethora of political speeches encouraging stimulating consumption to foster growth. An illustrative example is that of U.S. President George W. Bush, who, following the attacks of September 11, 2001, declared, “Mrs. Bush and I would like to encourage Americans everywhere to go out shopping.” This statement recalls the call made by President Emmanuel Macron a few days before locking down the country during the Covid-19 epidemic in March 2020: “life continues. There is no reason to change our habits of going out.”
Beyond this encouragement of consumption, it is appropriate to question the very desirability of growth. In many economic activities, particularly in connection with insurance, the absence of growth can pose serious difficulties. In the event of an economic downturn, risk prevention by the insured is no longer a priority expense, or seen as essential. Dentists emphasize in prevention campaigns that dental health is essentially a matter of individual responsibility, and Cyran (2021) reminds us that dental care is closely linked to economic conditions, like many health care services. For life insurance and annuities, the absence of growth is also problematic, perhaps even more so when pensions are funded by a pay-as-you-go system and thus depend on the incomes of active workers. Indeed, a growing workforce and a robust economy generate more contributions, whereas weaker economic growth can put financial pressures on the system since there would then be fewer active workers relative to the number of retirees.
In 1973, Kenneth Boulding stated, “anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist,” echoing the analysis of Donella and Dennis Meadows in their report to the Club of Rome, clearly posing the question of the limits to growth (in a finite world). Economic history very largely contradicts this fable of endless growth over decades, centuries. For the macroeconomist Robert Gordon, the 150 years that elapsed between 1820 and 1970, during which economic growth saw a meteoric expansion, were an exception in economic history, even though many economists wanted to see it as a “normal” state. During the first period, growth was at 1.25% per year, almost ten times what had been observed in the three preceding centuries. During the second period, it was more than 2%. In the early 1970s, a period marked by a slowdown in growth, the first reflections on the end of growth emerged, with the work of William Nordhaus, James Tobin, William Olsen, or Hans Landsberg. But these questionings are far from consensual. In 1983, Ronald Reagan stated, “Perhaps you remember a report published a few years back called ‘The Limits to Growth.’ That title – limits to growth – said it all (…) There are no such things as limits to growth, because there are no limits on the human capacity for intelligence, imagination, and wonder.”
Even today, while a majority of economists remain convinced of the benefits of growth, they agree to recognize the flaws of the metric used to measure it, the GDP. As highlighted by Abhijit Banerjee and Esther Duflo, “GDP only values things that can have a price and be placed on the market. This is significant, as growth is always measured in terms of GDP.”
Growth at Any Cost?
Beyond traditional accounting indicators used to measure economic growth, a range of economic theories offers different perspectives on its drivers and underlying mechanisms. At the heart of these theories lie three fundamental elements: capital, labor, and technical progress. The foundations of economic growth theory were laid in the late 1950s by Robert Solow and Trevor Swan. In their neoclassical modeling, growth is primarily influenced by the expansion of the workforce and by the accumulation of physical capital; however, in the long term, economies tend to remain close to a “balanced growth path,” a trajectory of sustainable and balanced economic growth in which each variable of the model grows at a constant rate. Also, in Solow and Swan’s modeling, long-term growth cannot be explained by an increase in the workforce or capital accumulation, but rather by technical progress, although the origin of this progress is not specified. Subsequently, Paul Romer proposed another framework, inscribed in the “New Classical Economy” of growth. In his model, long-term growth stems from the accumulation of human capital (education, knowledge) and innovations seen as positive externalities spread by contagion: innovations made by one company can benefit others. Other models of endogenous growth are later proposed, where growth is mainly explained by investment in human capital in Robert Lucas’s approach, or by government spending in Robert Barro’s theory.
To simplify, neoclassicals emphasize the increase in productivity thanks to technological advancements. Due to the law of diminishing returns, the marginal productivity of capital (whether human or physical) decreases with the addition of extra units of this capital. Each additional unit contributes marginally less and less to the total production. Long-term growth is then explained by technological progress. For economists of the New Classical Economy (NEC), the increase in investments in human capital, knowledge, and physical capital is advanced as the main source of growth.
Empirically examining the perspectives of neoclassicals and NEC economists, one can explain the slowdown in growth since the 1970s. This stagnation, or even regression, in production factors is explained by several reasons, notably the increase in capital intensity (it takes twice as much capital as it did fifty years ago to create the same amount of wealth). An insufficient level of qualification is sometimes also highlighted. As for the vision of growth supported by technological progress, there is a decrease in the efficiency of research and development (Scannell et al. (2012) show that over the past half-century, the number of drugs invented per billion dollars invested in R&D has been halved every nine years). Simultaneously, it is also possible that the impact of the Internet is not as revolutionary for the economy as the mill, the steam engine, or electricity were.
This increase in production has been accompanied, over the last 150 years, by an increase in the consumption of goods, as Antony Galluzzo recounts. We have moved from a self-sufficient peasant community to a predominantly urban and connected consumer society. According to Dietrich Vollrath, we have become so productive in producing goods that it has freed up our money to spend on services. And valuing services is complex, even more so in a digital, if not virtual, world. We all remember those new technology companies valued at several billion (dollars or euros). Robert Solow stated in 1987, “you can see the computer age everywhere but in the productivity statistics,” introducing an unexpected paradox where technological progress does not always lead to quantifiable productivity gains. Peter Thiel, the founder of PayPal, stated, “we were promised flying cars, we got 140 characters! (…) if you look outside of computers and the Internet, you see forty years of stagnation.” It may be thought that it takes time before the contributions of new technologies can be observed, but in 2015, Matthew Yglesias was relatively pessimistic: “robots are not taking our jobs, they are taking our leisure.”
A part of the misunderstanding about the benefits of growth comes from the fact that economic growth and prosperity are distinct objectives. To echo Tim Jackson’s thesis, “rising prosperity is not the same thing as economic growth.” From 1750, the term “prosperity,” from the Latin prosperare (which means to make happy, to succeed, to achieve success) took on an economic meaning, “a state of abundance, increase of wealth.” It is evident that once a majority of the population has satisfied its main physiological needs (eating, housing, or clothing), understanding consumption and growth poses challenges. We then move from “pure public goods” to “pure private goods,” or somewhere between these two extremes. And beyond a certain threshold of wealth, long since reached by most developed societies, the conditions of use of goods and services deteriorate as they are used. We talk about congestion. Fred Hirsch illustrates this idea by revisiting an example borrowed from Philip Wicksteed: Napoleon wanted every soldier to have a marshal’s baton, to understand that anyone could become a marshal. While knowing it was impossible for everyone to become marshals. Although the privileged minority is very restricted, no soldier should feel excluded, each hoping to be part of it one day. John Maynard Keynes came to the same conclusion in his Letter to Our Grandchildren. It then seems difficult, if not impossible, to consider the issue of growth without considering the issues of inequality and redistribution. Moreover, even if the economy is increasingly virtual, it is essential to question the importance of energy and raw materials in their production, and the disastrous ecological consequences.
Economic Growth or Green Growth?
A central concept for discussing growth while taking into account ecological consequences (referred to as green growth) is that of decoupling, introduced by Paul Ehrlich and John Holdren. It is based on the principle that since the Industrial Revolution, the growth of production has always been accompanied by significant growth in energy consumption, as well as an environmental footprint whose cost is more than proportional. In its weakest form, so-called “relative” decoupling relies on the growth of energy consumption and pollution being smaller than that of economic growth. This requires energy efficiency, renewable energy sources, green innovations and technologies, local and sustainable agriculture, rethought urban planning, and education (or incentives) for consumers and businesses. “Absolute” decoupling, on the other hand, means that the economy and environmental damage move in opposite directions. It is also conceivable that decoupling exists at the local or global level, in the short term or the long term. And thinking globally shows that decoupling will be difficult to achieve, even though it is necessary that the value of production continues to grow (in the ordinary sense of the word “growth”) to ensure social and international peace, while the environmental footprint must decrease (what we call “degrowth”) to guarantee the survival of the planet.
It seems that the economy has fundamentally evolved from a raw material transformation economy to a virtual, almost dematerialized economy. Yet, we still find the two types of workers described by Bertrand Russell more than 70 years ago: “There are two types of work: firstly, altering the position of matter at or near the surface of the earth relative to other such matter; secondly, telling other people to do so. The first is unpleasant and ill-paid; the second is pleasant and well-paid. The second is capable of indefinite extension: there are not only those who give orders, but also those who give advice on what orders to give.” Kate Crawford reminds us that this economy of extraction and exploitation of raw materials has never ceased: the materials used to build processors that train algorithms to convert ledgers into alexandrines are increasingly hard to extract, generating more and more pollution. Because growth also means an increase in CO2 emissions. And with the scenarios envisioned by the IPCC, that is a minimum halving of CO2 emissions by 2050 (in order not to exceed the +2°C goal by 2100, set in Copenhagen in 2009, relative to pre-industrial levels), it is impossible to imagine having the same growth as that observed during the 20th century.
As Ronald Reagan said, human imagination and creativity seem limitless. How can one not believe, then, in human ingenuity and in the improvement of technologies to address most of the current and future threats to human well-being? This technological optimism may remind us of the precautionary principle. The significant difference is that this principle is invoked when the future is uncertain or ambiguous, and there is even a small probability that a risk might occur. In other words, we’re talking about a technology that would be progress in 99% of scenarios, but with 1% (bad) chance of being disastrous. In the context of climate change, being techno-optimistic means giving undue importance to the small probability that a technology will emerge to save us, while minimizing the risks of suffering a medium-term disaster. And if technology doesn’t come to our rescue, the problem of low growth could be solved by focusing growth on a (small) proportion of the privileged.
References
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Crawford, Kate 2021. The atlas of AI: Power, politics, and the planetary costs of artificial intelligence. Yale University Press.
Cyran, Olivier 2021. Sur les dents. Ce qu’elles disent de nous et de la guerre sociale. La Découverte.
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Wicksteed, Philip (1910). The Common Sense of Political Economy. Macmillan & Co.
Yglesias, Matthew (2015) The Automation Myth. Vox, 27 juillet.
OpenEdition suggests that you cite this post as follows:
Arthur Charpentier (May 10, 2024). Growth, Degrowth: What Are We Talking About? Freakonometrics. Retrieved September 9, 2024 from https://doi.org/10.58079/11nqy