Weekend read: The trouble with growth

Weekend read: The trouble with growth

Examining how global sentiment on economic growth — and resulting impacts on the planet — have evolved over time.

The following is an adapted excerpt from a chapter on “The Trouble with Growth” by Peter A. Victor and Tim Jackson from the Worldwatch Institute’s forthcoming "State of the World 2015: Confronting Hidden Threats to Sustainability" (Washington, DC: Island Press, 2015).

The 2015 edition of State of the World includes additional chapters on energy and debt, stranded assets, agricultural resource losses, the oceans, the Artic, emerging diseases from animals, and climate refugees.

Economic Growth as a Policy Objective

Anyone born after the middle of the 20th century can be excused for thinking that economic growth has always been a top priority for governments.

But as Heinz W. Arndt observed in his history of economic growth, “There is in fact hardly a trace of interest in economic growth as a policy objective in the official or professional literature of western countries before 1950.”

Worldwatch Institute threats to sustainability
Economic growth as a policy objective emerged after World War II as an effort by governments to achieve full employment for their citizens. In the 1930s, British economist John Maynard Keynes had argued persuasively that while no mechanism exists in the private sector of capitalist economies to guarantee full employment, government spending could be used to prime the economic pump and stimulate job creation.

His theoretical arguments were borne out by the experience of World War II, during which government spending increased dramatically, especially among the Allied nations, and unemployment largely disappeared.

During and following the war, with the bread lines of the Great Depression fresh in their memories, governments in many countries adopted full employment as an explicit policy objective, believing that Keynes had equipped them with the means to achieve it.

Full employment required that total expenditures rise continually to pay for the new infrastructure, factories and equipment that made full employment possible.

So governments began to pursue economic growth as a means of achieving their full employment goals. Within a few years, likely because of the Cold War and the global arms race, economic growth became an objective in its own right.

Clearly, belief in the indispensability of economic growth, while deeply rooted in governments virtually worldwide, is quite recent. The common view that growth has always been an important objective of government is mistaken.

That growth is inextricably bound up with human nature is an even greater mistake, if it makes us think that there really is no alternative to economic growth. Understanding that growth is not a necessary goal of government policy is critical if we are to imagine alternative economic futures.

The Negative Consequences of Economic Growth

While economic growth has brought higher living standards and jobs for many people, along with tax revenues for governments, it has been achieved at the cost of depleted soils and aquifers; degraded lands and forests; contaminated rivers, seas, and oceans; disrupted cycles of carbon, nitrogen and phosphorous; and more.

In short, economic growth is not an unqualified good. And these environmental costs, along with the social costs of unequal growth, can be substantial.

In the 1970s, economist Herman Daly considered the possibility that economic growth can have such serious negative consequences that they outweigh the benefits of growth. When growth does more harm than good, he explained, it should be described as “uneconomic,” since it results froman uneconomical use of resources.

Daly and his colleagues developed the Index of Sustainable Economic Welfare (ISEW) to capture the good and bad of economic growth and to give a more accurate measure of economic advance. The ISEW subtracts from GDP the value of unwanted side effects of economic activity — such as the costs of commuting; “defensive” private expenditures on health; pollution; and the depletion of natural resources — and adds in the value of activity that advances wellbeing and is overlooked by GDP, such as unpaid household work.

Daly’s team concluded that in the United States from 1950 to 1990, ISEW per capita increased far more slowly than GDP per capita — well-being lagged far behind output — and that in the final decade (1980–90), ISEW per capita actually declined.

Uneconomic growth had arrived in the United States.

Similar studies for other countries and regions using the ISEW and its sister measure, the Genuine Progress Indicator, have produced similar results. In view of the increasingly mixed record of economic growth, Daly concluded that an alternative to growth economies was needed.

He advocated for a “steady-state” economy in which the materials and energy used to produce goods and services are kept roughly constant (through recycling, substitution of services for goods and other materials-saving strategies).

Daly distinguished between growth and development, arguing that economies could and should continue to develop indefinitely, but without growth of the economy’s material requirements.

Defenders of economic growth often assert that slow or no growth will result in mass unemployment and misery, that the best way to reduce the costs of economic growth is more growth, and that prices and technology will ensure that economic growth is sustainable over the long run.

Even many advocates of sustainable economies argue that growth is necessary.

The Global Commission on Climate and Economy, led by Sir Nicholas Stern, launched its recent New Climate Economy report under a bold headline in favor of “better climate, better growth.” Meanwhile, the OECD’s annual Going for Growth report continues to advise member countries on how to increase their rates of economic growth, even though other reports from the OECD propose “green growth” and “inclusive green growth,” adding a social justice dimension.

Thus, the critique of growth, which has a long and serious pedigree, has generated serious pushback. Who is correct — the critics of growth or its defenders?

Central to the debate is the answer to these questions: Can economic growth be designed in a way that reduces its “uneconomic” costs, even as growth continues indefinitely? Or must growth be abandoned in order to put the world’s economies on a sustainable path?

Decoupling Economic Growth from Throughput

The environmental costs of economic growth come from the increasing use of “throughput” — the materials (biomass, construction materials, metals, minerals and fossil fuels) used to support economic growth.

Obtaining increasing supplies of these materials has led to deforestation, the degradation and loss of soil, the removal of massive quantities of material to access underground resources, transformation of the landscape and more-frequent and more-serious pollution as ever more remote sources of materials, especially fossil fuels, are accessed.

Most of these materials remain within the economy for a very short time: fuels for only moments upon use, and many other materials, even with recycling, for less than a year — although some remain much longer, such as building materials and precious metals.

After use, these discarded materials and the dissipated energy are disposed of back into the environment, which has a limited capacity to absorb them.

When this capacity is exceeded, a wide range of environmental problems arise. In the early days of industrialization, these problems were primarily local (polluted rivers and urban air, municipal waste dumps, mine tailings), but with global economic expansion, the associated environmental problems became regional (acid rain, hazardous waste shipment and disposal) and now global (acidification of the oceans, loss of biodiversity, climate change).

A critical question is whether throughput, especially those components that do the most damage, can be decoupled from economic growth. If it can, then at least the environmental reasons for questioning the sustainability of economic growth can be addressed.

Some analysts are very optimistic about the potential for decoupling growth from throughput, by shifting consumption from goods to services, better design of products and processes, recycling more, substituting scarce materials with more abundant ones and replacing fossil fuel energy with energy from renewable sources.

Significant improvements in efficiency are possible [but] … it is by no means certain … that those actions will be sufficient to meet wide-ranging economic, social and environmental objectives, especially in the long term.

Ernst von Weizsäcker and his colleagues speak of a “factor 10” economy in which the throughput requirements per dollar of GDP are reduced by a factor of 10. Such a reduction would allow economies to increase their GDP 10 times without any increase in throughput. Alternatively, they could reduce their throughput by 50 percent if GDP increased only five times.

This tradeoff between GDP growth and throughput reduction has two critical implications. First, the greater the rate of economic growth, the faster must be the decline in the rate of throughput (throughput per unit of GDP) to achieve any desired level of total throughput reduction.

There already are many indications that the capacity of the biosphere to absorb the wastes generated by the world’s economies has been exceeded in several important respects. Therefore, global throughput will have to be reduced as swiftly and as equitably as possible, to bring economic and environmental systems back into some sort of balance.

And this is without considering that some components of throughput (radioactive waste, heavy metals, carbon emissions) accumulate in the biosphere, requiring even greater reductions in throughput to achieve reduction targets.

The second critical implication of the relationship between rates of economic growth and decoupling is to consider what happens after a substantial, say tenfold, increase in GDP — even assuming a tenfold or more level of decoupling.

An economy growing at 3 percent per year will experience a tenfold increase in GDP after 78 years, which is about the average lifetime of a person born in an industrialized country. Throughput per dollar of GDP will have to shrink to 10 percent of its current value over that period to avoid an increase in total throughput, which is very ambitious.

After that, if economic growth continues for another human life span without an increase in throughput, throughput per dollar will have to be only 1 percent of what it is today simply to avoid an increase in the total.

At some point, this process must come to an end and economic growth must cease if sustainability is to be achieved. These arithmetic examples can help scope out the extent to which decoupling is required, but they cannot tell us anything about what might be feasible.

Fortunately, Vaclav Smil makes a recent attempt to assess feasibility in his book "Making the Modern World: Materials and Dematerialization." Smil provides a comprehensive, detailed account of decoupling from the first Industrial Revolution to the present day. He makes the important distinction between relative and absolute decoupling, as others have done.

Relative decoupling is about reductions in throughput per dollar of GDP, and absolute decoupling occurs when total throughput, or some important component of it, declines while GDP increases.

Smil provides plenty of evidence and numerous examples of relative decoupling, and he expects it to continue well into the future. In contrast, he is very skeptical about the prospects for absolute decoupling, and yet this is what those who maintain that growth can continue indefinitely rely on.

Relative decoupling does not automatically lead to absolute decoupling for a number of reasons.

The first is the Jevons paradox, an insight put forward by William S. Jevons in his 1865 study of Britain’s coal industry, which revealed that improvements in efficiency lead to reductions in operating costs, but that lower operating costs often induce increases in use. It is “a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth.”

The Jevons paradox, or “rebound effect” as it is now sometimes called, is a pervasive relationship that explains much of the disconnect between relative and absolute decoupling.

The other two factors that explain the disconnect between efficiency improvements and absolute reductions in throughput are increases in population and increases in the general level of consumption.

Concluding his book, Smil writes, “to stress the key point for the last time, these impressive achievements of relative dematerialization have not translated into any absolute declines of material use on the global scale.”

…So much for global decoupling.

At the national level, Smil observes, “Clearly, there is no recent evidence of any widespread and substantial dematerialization — be it in absolute or . . . per capita terms — even among the world’s richest economies.”

However, he does point to Germany and the United Kingdom as examples of a few countries where “overall material inputs have stabilized or have even slightly declined . . . while some of their specific inputs continued to rise.”

Smil acknowledges that this promising result may be due to changes in trade patterns, and this is exactly what has been shown in other research studies. The shift in manufacturing from industrialized to developing countries has entailed a shift in the location of where materials enter the interconnected economies of the global economic system, rather than any real reduction.

Another recent study by Tommy Wiedmann and colleagues traces the material inputs (biomass, construction minerals, fossil fuels and metal ores) embedded in the consumption of 186 countries from 1990 to 2008, and makes very clear the connection between international trade and the absence of absolute decoupling.

The authors conclude: “As wealth grows, countries tend to reduce their domestic portion of materials extraction through international trade, whereas the overall mass of material consumption generally increases. With every 10 percent increase in gross domestic product, the average national MF increases by 6 percent.”

MF refers to the “material footprint” of nations, which includes all of the materials used to support consumption in countries irrespective of where the materials are obtained.

The most reasonable conclusion to draw from studies such as those of Smil and Wiedmann et al. is that there is very little precedent for absolute decoupling and no foundation of experience on which to base a realistic expectation for the degree of decoupling required for sustainability.

So while one may speculate boldly about the future prospects for absolute decoupling of throughput from economic growth, and thus maintain that economic growth can continue without limit, such speculation finds virtually no support in the historical record.

Envisaging Alternative Futures

Interest in alternatives to economic growth goes back a long way in the history of economics.

In 1848, John Stuart Mill devoted a chapter in his "Principles of Political Economy," an influential book for several decades, to a consideration of the “stationary state.” He was motivated to do so not because of a concern that economic growth could not continue, but because of what it was doing to life in Britain as he saw it.

Although Mill’s language comes from an earlier age, his sentiments are surprisingly modern:

“I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress. . . . The best state for human nature is that 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.”

Numerous writers, including several notable economists such as Keynes, Daly and E.F. Schumacher, have cast their minds forward in contemplation of a future very different from their own times.

A theme of particular interest is understanding what might be possible in advanced economies in the absence of economic growth and reductions in throughput.

Would these economies collapse without growth? Would mass unemployment result? Could the existing institutions — in particular, financial institutions — survive without growth, and if not, what sort of changes might be required? What would be the implications for economic growth of strict limits on throughput?

To hear chapter co-author Peter A. Victor answer these questions and discuss this chapter more fully, tune in to the State of the World 2015 launch event webcast  April 13.