MacroScope

Must we always try to grow the economy?

June 7, 2011

In one chapter of his sharp new book The Next Convergence, the economist Michael Spence asks a simple yet evocative question: Why do we want our economy to grow?

Spoiler alert: He does find a few good reasons. It’s rare, though, to hear an economist raise even theoretical doubt over such a deeply ingrained assumption in Western economies; one may as well ask why we want electricity. In the United States, we hear that economic growth should trump nearly all other social and political considerations (a position held by some on the right), or that growth should be tempered by other important values—environmental protection, health and safety, wealth redistribution—which is widely believed on the left. But almost no one anywhere on the modern political spectrum argues that we should try not to grow the economy, or that never-ending growth is impossible.

Yet it’s a curious consensus since, as Spence notes, “for most people, the main goal is a decent level of income.” We may associate growth with providing material comfort for ourselves, but growth is primarily a means to an end, rather than an end in itself.

Many people will quite reasonably say that they want the economy to grow so that standards of living can improve for the worst off. Yet there is ample evidence that in the world’s largest economies, the growth that has occurred in recent decades has made economic inequality worse, not better. At a minimum, if raising living standards for the poor is a society’s main goal, there are faster paths to getting there than waiting for that old rising tide to lift all the boats.

Moreover, our automatic assumption about the virtue or even feasibility of growth is hardly universal. John Stuart Mill, a towering philosopher of the 19th century, assumed that advanced societies would grow their wealth until they reached a “stationary state,” a point at which all basic human needs had been met and the accumulation of greater capital would be unnecessary. He viewed this evolution not only as inevitable, but desirable. “The best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to fear being thrust back, by the efforts of others to push themselves forward,” Mill wrote.

Such a view is obviously hard to square with American conceptions of liberty and self-determination. Most Americans accept that the state has a right to tax them, but would never accept the idea that they or their businesses could be coerced to stop increasing their wealth. And a glance at the Forbes 400 list of billionaires suggests that voluntary wealth caps aren’t very popular, either.

Even in America, however, economic growth has not always been as reflexive a political goal as it is today. Particularly before trade became truly globalized, there were usually easier ways for corporations to increase profits than to invest in the capacity to grow. In the 1940s and 1950s, many industrial businesses prioritized lower taxes and price stability over growth, and the Eisenhower administration largely agreed.

It was in fact the political left—trade unions and the liberal economists who came into power under John Kennedy—who urged the country to adopt a stance of permanent economic growth. They saw sustained growth as a way to create jobs and to pay for social goods, such as poverty reduction. As Daniel Bell noted in his classic book The Cultural Contradictions of Capitalism: “The idea of growth has been so fully absorbed as an economic ideology that one no longer realizes how much of a liberal innovation it was.”

There have, of course, been challenges to this worldview in subsequent years. The most prominent came from the “Club of Rome,” whose 1972 book Limits to Growth laid out much of the critique that is today widely associated with the slow-to-no growth philosophy of many environmentalists.

Yet no major government on a national level has seriously tried to pursue a strategy of keeping its economy from growing. So long as competition exists among nation-states, the failure to grow will be associated with a fear of being overtaken, economically or even militarily.

That competition may be one reason that Mill’s idea of a stationary state seems so distant to a modern reader. Another, discussed by Spence, is that innovation inevitably fuels economic growth, and so long as humans innovate they will create growth, even unintentionally.

Still, history and nature provide precious few examples of anything that grows forever. Increasingly as we integrate into what Spence calls a “multispeed world,” we will encounter instances in which growth itself is not sufficient. The recent election in Peru, for example, saw the victory of an anti-poverty leftist, even though Peru’s per capita gross income has risen 82 percent in the last five years. (The Wall Street Journal cited an economist’s study title as summing up the national mood: “It Isn’t the Economy, Stupid: Economic Growth Does Not Reduce Political Discontent in Peru.”) And so the challenge for the West is: Can we channel our thirst for economic growth into something more effective, like better distribution of wealth?

Photo: Stunted corn plants grow in a field in Montbert, western France, as France suffers from one of worst drought in half a century May 31, 2011. REUTERS/Stephane Mahe

Comments
6 comments so far | RSS Comments RSS

Good to hear about another book calling economic growth into question. Support for the steady state economy as a societal and policy goal is burgeoning. Readers can join thousands of others, including many top scholars and other dignitaries, by signing the CASSE position on economic growth at:

http://steadystate.org/sign-the-position  /

Brian Czech, President
Center for the Advancement of the Steady State Economy

Posted by CASSE | Report as abusive
 

i agree with your points about competition. Among companies between similar service or product line there is a natural and inevitable consequence of growth in the form of assets, dollars, or event debt in one or the other. The two cannot grow together at the same time. It’s stark that you remind the reader that income growth is just as necessary as corporate growth. Income growth of the employee should climb relative to corporate growth; that would appease many economic dynamics and reduce disparity gaps between wealth classes. This article stimulates thought..Thanks

Posted by indyclub | Report as abusive
 

Wrong assumptions. Economic growth, equity, and ecology are not mutually exclusive of one another. We need to redesign the way we do business. Full product life cycle analysis, accountability, and transparency. Tax stupidly designed and harmful unsustainable products and subsidize smart ones. Government policies are the mechanical bunny that the economy must chase. Make stupid economic designs reflect their true costs that are currently born by American citizens in health costs, pollution costs, and costs to future generations. This requires innovation and capital investment, but innovation creates companies, employs people, squashes inefficiencies in the status quo, and reduces costs in the long run! Don’t bail out Wall Street, put that money in the hands of start-ups!

Posted by ThinkSmarter | Report as abusive
 

Only middle class or wealthy people can afford to question the need for growth. Anyone desiring to improve their life or the lives of their family members will not be amused. Secondly, unless you’re going to convince 1 billion Chinese people to embrace economic stagnation, giving up on growth is a sure way to imperil our long-term security situation.

Posted by mheld45 | Report as abusive
 

The idea of endless growth has a significant flaw: it presumes endless resources. To have markets always growing assumes an ever-expanding population, and we’re all becoming increasingly aware that our planet is demonstrating limits. Food and water supplies are already at crisis stage in some places; energy usage is altering the environment and looks to be harming food supplies; the oil economy is not seen as being viable within 40-50 years. Can these issues be ignored? No. Can they be circumvented? The crystal ball is unclear on that one. It would be prudent to think up an alternative paradigm that does not rely on GDP increases each and every quarter.

Posted by AltonBob | Report as abusive
 

Resources are not all that is involved in growth. The idea is more “how do we meet more and deeper human needs?” That doesn’t always involve more resources.

Many kvetch over how we aren’t making as much in our economy — we have more and more of an economy based on services. That’s as it should be. Meeting material needs is relatively easy, but making life meaningful, or at least fun, is more challenging, and more ingenuity gets thrown at it, and not more resources.

The economy can grow on a resource-light basis if the services delivered make life more pleasant and productive. Largely, that has been the case.

That doesn’t mean that GDP is the right measure for progress — most of the alternatives are worse, but my measure would be increase in net wealth plus consumption. That would avoid the fallacy of GDP growth showing progress as the economy rebuilds from Katrina, Tohoku, etc., or the fallacy that our economy is growing when the government borrows money to stimulate the economy. Net wealth plus consumption does not grow from that.

Finally, we need to adjust for externalities like pollution, lousy public schools, etc. Where a dollar spent does not yield a dollar of long-term value, the value should be discounted, the same was that China’s ghost cities should not be counted at all in GDP statistics (but they are counted at full cost).

Growth is good, and generally, more growth is better if it is measured fairly. It means that society can do more to meet human needs.

Posted by DavidMerkel | Report as abusive
 

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