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Economics and Finance

Since the 1950s governments of all persuasions, from the developing world to the most advanced economies, have set high 'economic growth' as a primary goal.

Peter G Martin

Almost all political parties in all counties, and the mass media of all types, regard growth as essential. The poor who gain tiny increases in income through it, and the elites who accumulate immense wealth by it, are all in favour of growth. It is rarely questioned - but what is it? And is endless economic growth sustainable?

Firstly, economic growth is generally used to mean the annual percentage increase in the value of goods and services that an economy produces, measured in money terms as GDP. The idea that an economy needs to perpetually grow is a relatively new one. The British political economist John Stuart Mill, for instance, wrote in 1857 about the 'stationary state' he foresaw for mature economies, in which there was no growth in capital stock nor in human population, but in which the human condition continued to improve through better technology, skills and knowledge. He saw growth as temporary, and that quantitative growth would give way to qualitative growth (and long before now).

Image here: Founding political economist John Stuart Mill predicted the end of growth

Many alternative economists now maintain that Mill was on the right path. US economist Herman Daly, for example, has long argued for such a 'steady state' economy. Daly has been generally ignored by mainstream economists and policy makers, but his ideas have not been refuted. In particular he and others have explained that perpetual growth is a necessary feature of the prevailing economic model, since it is the only way to prevent rising unemployment. This means, for example, the US economy must double in size every 15-25 years just to keep unemployment from rising. At the same time a range of factors are combining to skew the distribution of wealth so generated into fewer and fewer hands.

In addition there has been a realisation that human economic activity is a subset of the environment. We live in a physically bounded world, however smart we get at finding substitutes for materials as they become scarce or expensive. Our demand for energy and our generation of waste also has impacts at various scales. Global climate change by burning fossil carbon is just one example of such an impact. The biodiversity crash of the last 100 years is another.

There also appear to be limits to the extent that a rising material standard of living delivers human 'well being'. In developing countries where communities lack clean water, food, adequate housing, education, health services and other basic infrastructure, a rise in the material standard of living clearly improves the quality of life. But there is also evidence that once those basic needs are met, increases in income do not necessarily mean an increase in well being. What then is the purpose of economic growth beyond a certain point if it fails to deliver an improvement in well being? A reasonable question for the average worker in developed societies, it appears to be such a subversive idea from the point of view of those benefiting most from growth that it is rarely raised. Government, industry, commerce, finance and the media simply do not discuss it. It's an even more reasonable question when one recognises the immense destructive impact that 'growth' is having on our planet, its resources and its life forms. Many observers now talk about societies no longer benefiting from growth, and instead suffering social, environmental and economic harm from it (Heinberg 2011, Daly 1996, Dietz and O'Neill 2013).

Secondly, and critically, endless increases in the flow of materials, waste and energy are unsustainable. Indeed, perpetual economic growth of this kind is actually impossible. For those with these concerns the only question is how the transition to sustainability can be made before the environmental damage done is truly excessive and threatens the survival of our societies. Many maintain that we have already crossed that threshold with climate change caused by burning fossil carbon.

Rockstrom et al, for example, identify nine planetary boundaries that we need to remain within, and conclude that we have already crossed four. Loss of biosphere integrity is one - it has been estimated, for example, that the total number of animals on Earth has halved in the last 40 years (http://wwf.panda.org/about_our_earth/all_publications/living_planet_report/). The other three are climate change, land-system change and altered biogeochemical cycles (phosphorus and nitrogen). (www.stockholmresilience.org/21/research/research-news/1-15-2015-planetary-boundaries-2.0---new-and-improved.html).

New ways of thinking about and measuring human economic activity appear needed, such as the discipline of ecological economics. GDP (Gross Domestic Product) counts many pointless and even destructive activities as positive in the national accounts. As US Attorney General, Robert Kennedy famously said of the similar measure GNP (Gross National Product):

'Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.  It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.  Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.'

(http://www.jfklibrary.org/Research/Research-Aids/Ready-Reference/RFK-Speeches/Remarks-of-Robert-F-Kennedy-at-the-University-of-Kansas-March-18-1968.aspx)

GDP was never designed to indicate human welfare, or anything beyond the mere turnover of money in an economy, for which it is a reasonable index. As such it has been widely used to indicate the total material well being of a population. 'GDP per capita' is sometimes reported, although it too tells us nothing about the distribution of wealth or income which may be very unequal. However, GDP per capita does enable us to compare economies despite their different population sizes, and to track how this 'average person' is faring as a country's population grows (or in a few cases, falls). For example, it shows that often the average person's share of GDP may fall as population grows (e.g. Queensland in recent years), suggesting they are worse off in an economic sense. On the other hand, in regions where there is less population growth (e.g. South Australia), the average person's share of GDP may increase, even if the local economy is sluggish.

Much work has been done on other ways of measuring progress and welfare, although very few jurisdictions have adopted them. The best known is the Genuine Progress Indicator (for a brief summary see https://en.wikipedia.org/wiki/Genuine_progress_indicator, or for a more academic account see http://www.bioline.org.br/pdf?nd13075).

This item was prepared for the Wakefield Futures Group by Peter G Martin.