I do not have many problems with the targets of much criticism in Growth Isn’t Possible (GIP)—I do disagree with the appropriate solutions. I read only the introduction and conclusions in order to derive a general sense of the report and its purpose. The remainder appears to consist of data and statistics to support its conclusions on the limits of resources within the planet Earth. Since I didn’t read it let alone analyze it, I will generally try to refrain disputing the data itself.
The thrust of the report is that the fact the Earth consists of finite resources (hardly a controversial topic) posits itself in diametric opposition to the standard economic hypothesis that an economy must grow. Growth, in this sense, appears to be defined as the common Gross Domestic Product formula, which seeks to calculate the sum of economic activity within a given set of arbitrary boundaries (namely the borders of a nation or state). The world economy might be defined in a similar manner, although the category of exports and imports would, at this time at least, have to be eliminated. Coming from the Austrian School of Economics (ASE) that differs highly from most mainstream economic schools, whether they be Neoclassical, various strands of Keynesianism or Chicagoan, I don’t view the GDP statistic as the end-all standard of the performance of an economy. Indeed, the GDP category of government spending should be dubious because the government does not operate within an economic system of private property and profit/loss. Thus, it is unclear whether government expenditures create how much or any value since there is no metric of profit/loss—more directly, it is unclear whether persons operating in the economy view the services as beneficial since they have no recourse to trade for them or choose not to, i.e., profit and loss. Secondarily even the private measures of consumption and investment are suspect due to government interventions into the economy or by a bubble mentality. The GDP of the United States during 2005-2007 period were generally non-descriptive given the enormous misallocation of resources as a result of the housing boom, via both actions of the Federal Reserve as well as the quasi-private relics of the New Deal in Fannie Mae and Freddie Mac (which have since been nationalized), in addition to the reckless practices of banks and other financial institutions riding the bubble, all the way down to homebuilders and home supply stores. In considering this, it is possible that under an Austrian perspective that GDP loses a significant portion of its meaning. It may provide some sort of an indication of the health of an economy, but the distortions in the data may be too extreme to lend a complete picture.
Under these conditions then, one would probably agree with the report’s statement, “it was repeatedly observed that growth in aggregate national income couldn’t tell you anything about the nature of the economy, whether activity was good or bad.” Undoubtedly true, although the definitions of “good” and “bad” differ wildly. The report then mentions “spending on prisons, pollution and disasters pushed up GDP just as surely as spending on schools, hospitals and parks.” This is essentially the same point made in the previous paragraph, if one could consider the housing bubble, like the tech bubble before it, a “disaster”. What ASE points to, beyond the considerations of government distortions, is that the best regime for allocating scarce resources[1] is based on clear definition of property rights, free trade between parties and a dispute resolution process for aggressive, fraudulent or breach of contract actions. In essence, a private property system attempts to allocate resources based upon subjective preference[2] according to an individual’s needs and wants. If one person is proficient at producing shoes, they may trade them to a baker for bread and so on. Taxes are low and uniform; the state does not have a significant standing army, perhaps, on a local level a moderate police force although much of security work may be done privately.
Such a regime has not existed and isn’t likely to exist in the near future. The United States has ebbed and flowed violently towards and away from this state of affairs. In its early years, chattel slavery, the grossest state subsidy man has yet invented, and oppression of the native tribes were affronts to a private property regime. As slavery ended, the country began to move into a progressive era when nascent scientific beliefs combined with the interests of big businesses to immunize themselves from competition to create barriers to trade and regulations (the most significant being the Federal Reserve Act, in essence a banking cartel), bringing about such horrors as the misguided eugenics crisis within the U.S. that resulted in 64,000 persons being forcibly sterilized. After the myriad military incursions on behalf of privileged business interests throughout Latin America and the horrific quashing of the Filipino rebellion, the New Deal and World War II crystallized the supposed efficacy of state intervention and the United States destiny as a mercantilist/corporatist state was set.
Returning to the implications of the GIP report, as it was generated within Britain, they detail the problems within U.K. economy:
The problem with our economic system is now threefold. First, governments plan their expenditure assuming that the economy will keep growing. If it then didn’t grow, there would be shortfalls in government income with repercussions for public spending. The same is true for all of us; for example, when we plan for old age by putting our savings into pensions.
The obvious solution to the problem is to restrict government spending to minimums, but the obvious retort is that private firms likewise undertake expenditures on the expectation of growth. This fact seems self-evident, as what entrepreneur would undertake a new business if he didn’t think it could thrive. The difference is the government can spend as long as it can force its citizens to provide it with money (either via direct taxation or inflation) to do so while a business may either prosper or fail, with small businesses being notoriously risky propositions. In the private sector under a regime of property rights, small-businesses starting and failing need not consume ever greater quantities of resources. Some businesses might fail and cease consuming resources entirely, while others might take their place as they are better at allocating resources in accord with consumer preference.
Today, though, many economies like the UK are facing this problem in any case. Ironically, however, it comes as a direct consequence of the economic damage caused by the behaviour of weakly regulated banks, which were busy chasing maximum rates of growth through financial speculation.
This aside is tangential to the central discussion of the GIP report, but one can find a succinct discussion of the Austrian Theory of the Trade Cycle, which is decidedly different from almost all mainstream analyses. However to delve into it slightly and address the accusation at hand, one need ask two questions: why do banks need regulation and why were they chasing the “maximum rates of growth”? Greed, certainly, played a role as well as possibly ill-conceived manager incentives based on stock incentives (which can be very effective, depending naturally on how they’re structured). Bank regulation arose though from the concern over the public’s considerable risk to bank failures. Bank failures naturally arose not so much from “reckless lending” (a decidedly nebulous concept), but from the persistence of fractional reserve banking (FRB). Although FRB may well be acceptable if properly defined as a financial security (similar, for instance, to a share in a mutual fund), FRB’s origins were decidedly unique in that it arose from goldsmiths and banks holding customer’s gold and then surreptitiously lending some of those holdings out[3]; legal regimes generally were accepting this practice among banks while prohibiting it in other commodity storage facilities. Naturally, FRBs are prone to the infamous bank run, usually brought about by a downturn that calls into question the quality of the FRBs loans made on the base of deposits. The bank run decreases the banks liquidity and causes a crisis when the FRB cannot return money to all depositors. Solution: regulation that ensures banks keep a specified level of reserves to handle redemptions as well as control the riskiness of their loans so that they will have enough cash in the future to repay depositors (after paying depositors interest and generating a modest profit for themselves). The FDIC only reinforces the supposed need for this regulation by providing a government guaranteed price floor for demand deposits (as well as time deposits and certificates of deposit), ensuring that banks will issue as many as possible to generate as many loans as possible to profit as much as possible. What is not considered is forcing FRBs to become companies selling financial securities (instead of the legally privileged security of a demand deposit).
Secondly, neo-liberal economies typically put legal obligations on publicly listed companies to grow. They make the maximisation of returns to shareholders the highest priority for management. As major investors are generally footloose, they are free to take their money wherever the highest rates of return and growth are found.
It is always confusing when the “neo-liberal” moniker is used, as it refers to a long past time when liberals were considered those who supported an Adam Smithian economy of free trade in response to the conservative regime of militarily supported mercantile export policies, domestic guilds (basically the equivalent of state enforced labor unions) and licenses to trade granted to favored merchants. The labels have become confused in modern times to almost mean what the other had previously meant. The nomenclature is particularly treacherous for those of the so-called Austro-Libertarian focus who simultaneously support such diverse policies as gay marriage, drug legalization, freedom of speech, anti-police paramilitarism, anti-unionism, anti-minimum wage, free trade, and notably anti-militarism to the extent that one of its leaders, Murray Rothbard, broke with The National Review and allied with the New Left.
In order to avoid too precipitous of a digression, the “legal obligations” that are referred to here are, I assume, a fiscal duty to shareholders or potentially the possibility of a buy-out of shares if the company underperforms growth expectations. Excluding the implications of the CAPM for the time being, investors must not only focus on the return generated, but on the risk of that return. In the private sector, growth may be strived for but is certainly not guaranteed. The evident lesson of the recent downturn is that growth blindly pursued without recognition of risk can lead to disastrous consequences—particularly when the downside of those risks are deflected by institutions such as the Federal Reserve, the FDIC and various Treasury programs.
Thirdly, in the modern world, money is lent into existence by banks with interest rates attached. Because for every pound, dollar, yen or euro borrowed, more must be paid back, economies that function largely on interest-bearing money have a built-in growth dynamic.
This contention is true due to the FRB institution described earlier and the existence of central banks and could be resolved without resorting to the scheme described in the conclusion of the GIP report. GIP later notes that “nearly all money is lent into existence bearing interest. For every pound lent, more must be repaid, demanding growth.” As noted with the curious legal distinction of FRB, there is no reason why, in a free market, money would be in the form of demand deposits—indeed, inasmuch as these are financial securities, they are always denominated in something else and thus couldn’t be considered money in a definitional sense but rather facilitating mediums that promote transactions, somewhat similar to credit cards. ASE and other sources indicate that it is the inflationary bias of FRB’s ability of create money out of thin air that leads to the desire of return. One could no longer set aside money in the proverbial coffee can in the back yard without it losing value as inflation is inevitable, thus giving the impetus for some “growth” investment. Although commodity monies might certainly inflate through discovery of more of the commodity, it would probably not be to the same extent as FRB based money. The GIP report proposes the dangerous solution:
Low- or no-cost credit can be created by Central Banks for the purpose of achieving particular tasks – such as building new infrastructures for energy, transport, farming and buildings – for the environmental transformation of the economy.
Although the issue of control of many of these policies is important, it is never determined to whom the credit would be given or how the relative success or failure of the particular tasks would be judged. Indeed, this is not so much a credit as it is a wealth transfer or subsidy to certain projects (which is essentially what the Federal Reserve provides to banks within the cartel at the present date).
Money, then, is one of the most misunderstood and indeed difficult to understand components of an economy. Money, as a common medium of exchange, allows actors in an economy to trade to a much larger extent than a barter economy. However, the good, most likely a commodity, chosen as a medium of exchange is usually one that all actors desire to some degree—the curious aspect of a commodity that becomes a monetary unit is that is worth more as money than its initial use. Indeed, economic actors tend to use it far more as a medium of exchange than as its original intended use. Money in its traditional sense does not carry an sort of implicit (this was a curious invention of FRB demand deposits that are considered money or, if they were treated as financial securities that they are, facilitating mediums akin to credit cards instead of money or money substitutes). Though the supply of money might grow (or decline) there is no implicit impetus towards growth.
The problem extends beyond the economy. Our increasingly consumerist society demands ever higher consumption to demonstrate social status – conspicuous consumption.
Intriguingly, this is where the GIP report, both here and elsewhere, takes a turn for dangerous territory of pseudoscience. Just as the ASE’s subjectivism casts serious doubts on the efficacy or meaning of mainstream economists’ bizarre attempts to mathematically graph or model a consumer’s utility, ASE’s subjectivism would regard the claim of “an overly consumerist society” as normative rather than positive.
It is possible that consumerism could be referring to purely the overuse of resources, and the GIP report states something to that effect:
This mainstream view of sustainable development is quite different from definitions of so-called ‘strong sustainability’. The ‘mainstream’ view tends to emphasise decoupling economic growth from environmental degradation (including climate change). And, to drive that dynamic it relies heavily on market-based initiatives – the ‘ecological modernisation’ of the economy, defined by German sociologist Joseph Huber as a twin process of ‘ecologising the economy’ and ‘economising ecology’.
Ecological modernisation assumes that already existing political, economic and social institutions can adequately deal with environmental problems – focusing, almost exclusively on industrialism, with much less consideration (if any at all) being given to the accumulative process of capitalism, military power or the nation-sate system, even though all contribute in different ways to environmental degradation by being instrumental to growth and international competitiveness.
Policies of environmental or ecological modernisation include: the ‘polluter pays’ principle, eco-taxes, government purchasing initiatives, consumer education campaigns and instituting voluntary eco-labelling schemes.
Murray Rothbard describes in “Law, Property Rights and Air Pollution” that damage to another party’s property right should take precedence over public good considerations such as “economic growth”. Whether the authors here intend the “modernisation” schemes to include this type of analysis is unclear.
Other authors have addressed the fundamental paradox of resource depletion under a private property rights regime. John Bratland has dealt with many of these issues in a series of articles in the Quarterly Journal of Austrian Economics:
- On Societal Ascendance and Collapse: An Austrian Challenge to Jared Diamond’s Explications
- Toward a Calculational Theory and Policy of Intergenerational Sustainability
- Human Action and Socially-Optimal Conservation: A Misean Inquiry into the Hotelling Principle
One of the conclusions of these reports is that private property regimes enforce conservation of resources because as a resource becomes scarcer, it becomes more expensive thereby causing individuals to conserve it or find ways to exploit it more efficiently. Individuals will then not find themselves in a situation where all of the resource is suddenly gone, but that as the resource is depleted, they need to conserve it by reducing consumption and/or finding alternatives. Moreover, certain proactive programs such as recycling may actually expend more resources than traditional waste disposal. Waste generation and disposal may both suffer from the tragedy of commons, since waste disposal is generally thought of as a public good. In a world were vast tracts of land are unowned or have inexact property rights (such as bodies of water), waste tends to get dumped there as it does not cause an immediate problem for the dumper or other individuals[4]. The solution thereby may be not so much regulation of pollution be bringing unowned lands into ownership and clearly defining rights among so-called fluid resources such as bodies of water.
In all of this discussion on growth, it seems that most of the focus is centered on having more instead of having better. The paper does point out that there are limits to efficiency, but to put this issue into sharp relief, consider whether it would be better to have double or even three times the amount of goods and services as an American in 1900 versus half or even a third of an American in 2000. One might contend that even on that basis the 1900 American consumed fewer resources than the 2000 American, but it is unclear what even that entails—for instance, the 1900 American consumed considerably less oil because the full benefits of the internal combustion engine had yet to be realized. However, consider now if transportation needs had to be filled by a combination of horses and steam engine trains. Many cities would be grappling with the problem of what to do with the enormous piles of horse manure while methane from equine flatulence might be contributing to anthropogenic global warming. The basic conclusion is then is that benefits are not best calculated the accumulation of things but by satisfying needs and wants, which, beyond basic human needs, is a very subjective concept.
However, the GIP report intends to quantify the unquantifiable by creating an objective measure of human satisfaction:
In fact, a growing body of literature shows that once people have enough to meet their basic needs and are able to survive with reasonable comfort, higher levels of consumption do not tend to translate into higher levels of life satisfaction, or well-being.46 Instead, people tend to adapt relatively quickly to improvements in their material standard of living, and soon return to their prior level of life satisfaction. This is known as becoming trapped on the ‘hedonic treadmill’, whereby ever higher levels of consumption are sought in the belief that they will lead to a better life, whilst simultaneously changing expectations leave people in effect having to ‘run faster’, consuming more, merely to stand still.
In truth, this is not tremendously different from the mainstream economic tenet (shared with ASE) of marginal utility, whereby an additional unit of any good confers a decreasing amount of satisfaction upon the recipient.
National trends in subjective life satisfaction (an important predictor of other hard, quantitative indicators such as health) stay stubbornly flat once a fairly low level of GDP per capita is reached. And, importantly, only around 10 per cent of the variation in subjective happiness observed in western populations is attributable to differences in actual material circumstances, such as income and possessions.
These claims are rather stunning in their attempt to quantify a “variation in subjective happiness”. How can a subjective state be quantified? A subjective state would by necessity differ from person to person, thus making a uniform level of measurement impossible. Or so it would seem—the reports where this data is derived is footnoted but the definitions of “subjective happiness” are buried within them.
Possibly the most unusual claim of the GIP report is:
Between 1990 and 2001, for every $100 worth of growth in the world’s income per person, just $0.60, down from $2.20 the previous decade, found its target and contributed to reducing poverty below the $1-a-day line.38 A single dollar of poverty reduction took $166 of additional global production and consumption, with all its associated environmental impacts. It created the paradox that ever smaller amounts of poverty reduction amongst the poorest people of the world required ever larger amounts of conspicuous consumption by the rich.
Basically, not only is gross income inequality a potential result of poverty reduction under a free market, but a necessary condition thereof—meaning resource depletion will occur ever faster. An objection of this paradigm, even in ignorance of the data, would be why would the inequality be expected to continue. The aforementioned public company bias for growth could shed some light on this situation, as various companies often have very different profitability ranks at one point in time, but they tend to revert back towards one another as competition erodes their advantages. Furthermore, apart from an apparent correlation, the GIP report does not make it clear what the causal mechanism is that necessitates larger amounts of consumption of the rich for consequent poverty reduction.
The conclusions of the GIP report are unclear in just exactly they are suggesting as remedy for the current state of affairs. Clearly they reject traditional GDP as an economic statistic while proposing a number of alternative measures, but they do not ever outline a plan for sustainable growth. They oppose the three bad conditions (gov. expenditure based on growth, equities favoring growth, interest bearing money) but it’s not clear what would replace them. The report seems to point towards a mixed economy (elements of central planning and free markets) with a weight towards command-and-control but it’s not clear who would exercise control or how it would function.
However they do suggest a number of things. First is a series of aforementioned measures to replace GDP:
The Happy Planet 2.0 (2009), which provides a new compass to set society on the path to real progress by measuring what matters to people – living a long and happy life – and what matters to the planet – our rate of resource consumption.
The National Accounts of Well-Being (2009), proposes nations should directly measure people’s well-being in a regular and thorough way, and that policy is shaped to ensure high, equitable and sustainable well-being.
If resource allocations where to be judged via certain statistics, what are the mechanisms to ensure that such judgments are made apart from political considerations. The statistics would have to be protected from special interests seeking to tweak them in their favor. Even if such public choice issues are ignored, what are the mechanisms for change if a better statistic is generated and how would it be decided that a new index is actually better. Perhaps these papers do address these issues—unfortunately I have not read them. But the authors do not seem to explicate these considerations when constructing a new framework for property rights:
First, he [Herman Daly] said, you need to identify the limit of whichever aspect of our natural resources and biocapacity concerns you, then within that, allocate equitable entitlements and, in order to allow flexibility, make them tradable. Such an approach could be applied to the management of the world’s forests and oceans as much as CO2. Daly credits the innovative American architect and polymath Richard Buckminster Fuller for first suggesting the approach. At a fundamental level, this is the primary mechanism to avoid the tragedy of the commons.
Fundamentally, this is what property rights within the ASE framework attempt to accomplish, without the preconceived bias to a “limit of whichever aspect of our natural resources and biocapacity concerns you”. Who decides these limits? Who issues these entitlements? There are a host of problems here that the authors don’t address explicitly even if they are contained elsewhere within a footnoted paper.
In addition, an indicator such as the Happy Planet Index which incorporates the Ecological Footprint helps to reveal the degree of efficiency with which precious natural resources are converted into the meaningful human outcomes of long and happy lives.
I do not doubt that the authors have put considerable effort in constructing this index. But the issue is not so much the statistic but who and how the statistic is engendered in the previously mentioned entitlement scheme. For all the GIP report’s criticism of banking, this plan appears to suggest the hallmark of a modern corporatist banking—the central bank, headed by a disinterested president. One of my previous rants against the Fed suggested a position that economists viewed as the ultimate post—here a fully disinterested individual, surrounded by the best data fed into the best economic models courageously steered the national economy through booms and busts. To me, the GIP report inevitably implies some sort of governmental commission that would be viewed as the height of science—dispassionate and supposedly objective but no less at a loss to properly wade through the oceans of variables and data to decide the measures and allocations for the planetary good.
There are some other portions of the conclusion which would lead to a plan of action or at least a better description of the destination:
When the financial crisis hit, in the UK alone over £1 trillion was found to support the banks, apparently from nowhere. It can be done. Through so-called ‘quantitative easing’ money really was conjured from thin air (the dirty little secret of banking is that this is practically what happens all the time when people borrow, for example, to buy a house).
This is absolutely correct but as has been intimated previously, there is no discussion of eliminating FRB and central banking. If anything, the report later supports central banks.
Governments can also change priorities, spending less on unproductive military expenditure and more on schools, hospitals and support for those who need care. New techniques employing greater reciprocity with the users of public services can also radically reduce the upfront cash-cost of services by making them more effective (through so-called ‘co-production’).
The first sentiment is excellent, although it would be preferable that government provide none of these services (except national defense in a time of emergency—i.e. no standing army), leaving it to the free market. I am unsure on what the second sentence implies.
There’s also no reason why fairer taxation and greater redistribution, coupled with better services cannot provide security for all in old age, removing the insecurity that makes us all worry about having a private pension with a high interest rate.
There is every reason to believe that greater taxation and redistribution will only increase costs while decreasing incentives to allocate resources responsibly. Here again as a visceral reaction to interest rates, which seems somewhat strange.
Herman Daly makes the point that in a non-growing, steady state (or dynamic equilibrium) economy it might actually be easier to approach full employment. With lower levels of material throughput and lower levels of fossil fuel energy use, the proportion of human energy input (labour) is likely to increase. Generations of having people made redundant by machines largely powered by coal, oil and gas could be reversed. He writes: ‘There are several reasons for believing that full employment will be easier to attain in a SSE [steady state economy] than in our failing growth economies… the policy of limiting the matter-energy throughput would raise the price of energy and resources relative to the price of labour. This would lead to the substitution of labor for energy in production processes and consumption patterns, thus reversing the historical trend of replacing labour with machines and inanimate energy, whose relative prices have been declining.’
Perhaps I am misunderstanding the intent of the authors, but this sounds like a return to Luddites writ large. The report appears to suggest that humans perform labor that machines now perform in order to conserve resources would also help the unemployment. This seems extremely counterintuitive since the use of fossil fuels to power machines would appear to use fewer resources than the use of human labor, since human exertion to power machines is arguably significantly less efficient. It would seem to be the case that relatively more resources would be spent feeding, sheltering and caring for human labor than would be spent maintaining and fueling machine labor.
Other adaptations could bring a range of social, environmental, and economic benefits. A redistribution of paid employment via a shorter working week, tackling the twin problems of overwork and unemployment, would free up time for people to do more things for themselves, each other and the community, and reduce their dependence on paid-for services.
This seems to be a top-down force to convince people to consume less and take more in leisure. Basically this is a cartel of workers, all agreeing (or being forced by government fiat) to work fewer hours while possibly enjoying greater leisure time or activities. Of course, the danger here is if someone (or someone in another jurisdiction) breaks the cartel.
There are many things I liked about the GIP report in its criticisms of the current economic order. But there were more things I disagreed with in its prescriptions for change in that order.
[1] What economics is all about; if scarcity was eliminated, these points would become moot. Although from the report’s discussion of the laws of thermodynamics to basic human experience of need, resources are certainly scarce.
[2] A clear distinction from Ayn Rand’s objectivism, which extended not only to economics but morals and even the arts
[3] This curious legal exception was granted to banks, although other commodity storage units, such as grain elevators, were generally prosecuted when they attempted fractional reserve: “Grain elevators issued fake warehouse receipts in grain during the 1860s, lent them to speculators in the Chicago wheat market, and caused dislocations in wheat prices and bankruptcies in the wheat market. Only a tightening of bailment law, ensuring that any issue of fake warehouse receipts is treated as fraudulent and illegal, finally put an end to this clearly impermissible practice. Unfortunately, however, this legal development did not occur in the vitally important field of warehouses for money, or deposit banking.” Jesus Huerta de Soto has an extremely long and detailed discussion of the legal and economic issues in FRB.
[4] This was a point brought up by Rothbard in the previously mentioned paper—that air pollution was not considered actionable because it was so diffuse. Many early lawsuits resulted in tall smoke stacks that dispersed pollution high above the population so that individuals couldn’t clearly point to a source of any resulting malady or property damage.
