The Limits to Growth, reloaded

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Is economic growth a blessing or a curse, asks Hans Christian Müller in a guest post for “Economic Intelligence”. One thing is for sure: The degrowth movement is gaining momentum – and suffers from some analytical shortcomings.

Dick Smith really meant it. Therefore he brought a suitcase full of money to the press conference where he announced the Wilberforce Award in August 2010.

The eccentric Australian businessman promised to give one million Australian dollars (731,000 Euro) to the person who convinces the economic profession  that endless economic growth will eventually lead to disaster.

The winner will be announced at the end of 2011. As more and more economists question the paradigm of unlimited economic growth Smith will be able to choose from a wide range of candidates.

Almost four decades after the “Club of Rome” published its manifesto “The Limits to Growth” in 1972, the so called “degrowth-movement” is gaining momentum again – thanks to the financial crisis, climate change and growing commodity shortages.

An increasing number of economists challenge the view that the current way of doing business is sustainable in the long run. Last year, for instance, more than 400 mostly young scientists met in Barcelona for the second global degrowth-conference.

Furthermore, the number of blogs, books and articles about this topic steadily rises. And several governments in the western world have appointed committees to discuss whether prosperity without growth is possible.

Giorgos Kallis, a professor at the Autonomous University of Barcelona, ​​the world’s most cutting-edge place for degrowth research, says:

“Especially in France, Italy and Spain, our movement is strong.”

In the UK, the United States and Germany, however, the movement is still rather weak.

One basic belief unites the critics of growth: things cannot go on this way. They are convinced that mankind’s greatest challenges cannot be solved by economic growth: Climate change, mass unemployment and the increasing public debt.

Growth is wrongfully seen as a panacea for all economic diseases, says Herman Daly, a professor for ecological economics at the University of Maryland and former World Bank manager. Daly is one of the masterminds of the degrowth movement.

While steady growth is acknowledged to be necessary in developing countries in order to fight poverty and improve the living standards of people, it is considered as harmful in the developed countries as it does not further increase the societies’ well-being. Thus, the proponents of degrowth call for new welfare indicators which also take other factors into account – for instance equality, education opportunities and the state of the health system.

In particular, the researchers fear that further growth is possible only at the expense of the environment. They point to the experience of the recent decades: Every attempt to use less energy and a smaller number of resources was always far more than offset by the increasing output.

While today’s cars can go 50 percent more kilometers with one liter of fuel than in 1970, the total worldwide number of cars doubled along the way. In addition, an average driver drives 20 percent more miles every year nowadays. Hence, all efficiency gains could not reduce the total emission of greenhouse gas.

Maintaning a steady growth-rate of two percent per year, while cutting down pollution at the same time, is pure utopia, says Tim Jackson, a professor at the University of Surrey.

In his bestseller “Prosperity without growth”, Jackson argues that the volume of greenhouse gas emissions which are necessary to produce something worth one pound would then have to be 130 times smaller in 2050 – which is, according to Jackson, simply impossible. (For more details, see this  report of the UK  Sustainable Development Commission.)

Standard economic theory is at odds with claims for stopping economic growth. Mainstream economists consider stopping as equal to stepping back. They argue that without economic growth unemployment would inevitably rise.

Because of inevitable technical progress, labor productivity rises steadily. If output stagnates, this  would automatically decrease employment and lead to recession and poverty.

Growth skeptics try to rebut these concerns with macroeconomic models that shall show that even a non-growing economy could be stable. Herman Daly postulates a “steady state” in which the economy only uses as many resources as growing in the same time.

Furthermore, he and his disciples argue that rising productivity does not necessarily imply that output has to grow simultaneously. Alternatively workers could work fewer hours. This idea was advocated by labor unions and leftist politicians in Europe throughout the 1990s, but got totally out of fashion since then.

Economists sceptical of growth advocate a fundamentally different economic policy. The government should increase taxes on consumption of resources and invest more in public goods like parks, schools and hospitals.  Georgios Kallis from the Autonomous University of Barcelona asserts:

 ”Of course, we do not want to create artificial recessions. Instead we want qualitative changes of the economic system.”

However, the movement’s economic analysis is immature. While their evaluation of the current situation is clear and relentless, their proposals how a growth-free economy could be concretely implemented are still diffuse, as they mostly remain on the abstract macroeconomic level.

“Many trust too much in the state”, says André Reichel of the University of Stuttgart. He is one of few researchers who investigate the business-related aspects of the topic. Can firms be freed from the steady pressure to grow without suppressing creativity and the spirit of free enterprise?

“There is nothing wrong with firms trying to make profits, since that is what drives them forward”, says Reichel. According to him, the problem is the pressure to make more and more profits each year, as it is common for  companies listed on the stock market.

Advocates of the traditional economics have not contributee much to the debate so far – or they simply promote more growth as a solution to the great problems of mankind. Says Juergen Donges, professor of economics at Cologne University in Germany:

 ”The costs associated with the inevitable adjustment to environmental changes can be met more easily if the economy booms.”

According to Donges, people systematically underestimate how well the economy and society can adapt themselves to changing conditions.

A similar argument is put forward by the Canadian economist Richard Lipsey, the bestselling author of some seminal textbooks: Humankind with its inventive talent and entrepreneurial spirit will eventually find a way out – it would be dangerous to stop it right now. According to Lipsey it is deep in our genes to invent new things and to improve old stuff:

“To stop invention and innovation would require a highly restrictive political regime, more repressive than Stalinist USSR.”

Note: This is a guest post by Hans Christian Müller. Hans is a freelance economic journalist and regularly contributes to Germany’s business daily Handelsblatt. He’s doing his Ph.D. in Economics at the Duesseldorf Institute for Competition Economics (DICE). He has co-authored the paper  “The first shall be last: Serial position effects in case contestants evaluate each other” and recently published a working paper entitled ”Firms’ Forecast Errors Regarding Their Own Future Key Figures: The Disappearance of the Overoptimism Bias“.

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