Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Economy & Markets > Economic Trends

Think Economic Growth Is the Be-All? Think Again

Your article was successfully shared with the contacts you provided.
"I'm a light bulb" (Image: Shutterstock)

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 U.K., the opposition Labour Party has just gone so far as to propose setting an explicit 3 percent 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, or more pollution that needs cleaning up. It says nothing about social well-being, or inequality.

Some economists have proposed better measures, such as the Genuine Progress Indicator, which includes a number of social and environmental factors. It gives a rather different picture of the benefits of growth. For the U.S., 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.

A new study has extended these results on a state-by-state basis, with some surprises. Alaska has the highest Genuine Progress Indicator per capita, while Wyoming comes dead last. Seven states actually have negative GPIs, meaning that economic activity in these states actually costs more than it achieves. The distinguished states are Arizona, Arkansas, Louisiana, Mississippi, North Dakota, West Virginia and Wyoming, all hosting big energy extraction industries.

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, environmental problems or resource depletion.

Economists also support more growth because they think that technology will in future somehow “decouple” economic growth from resource and energy use, becoming cleaner, and perhaps even 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 or so, they’ve developed more than 20 economic models that adapt standard macroeconomic models to include social and environmental factors. These models include employment, inflation and interest rates, but also interactions between economic activity and the natural environment.

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-grow, low-growth, and no growth policies for the Canadian economy over the next 20 years or so, including different possible scenarios for green technologies. The high-growth policies increased GDP by 80 percent, 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 — which might surprise Britain’s Labour Party — is that future economists may need to de-emphasize productivity growth, which tends to occur most in areas where technology can replace labor. Many economists now 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, a “post-growth” era may be inevitable, and human activity that helps to preserve and enhance that 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, and we might find them if we spent more resources and energy looking.

Mark Buchanan, a physicist and science writer, is the author of the book “Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics.”


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.