Advertisement

Our Times 3

Uneconomic Growth

Social Movements

Figure 1: Humanity’s Ecological Footprint. Source: Global Footprint Network 2010

The idea that economic growth can not continue indefinitely, or even for more than a few generations, is as old as economics itself. The classical economists — Smith, Ricardo and, of course, Malthus — each offered reasons for thinking that the human population would eventually outrun the capacity of nature to provide for much more than subsistence. These reservations were pushed to the background by the unprecedented economic growth that began in earnest in the 19th century, starting in the UK. Although this served to dispel doubts about the longevity of growth, such concerns did not disappear. They resurfaced in the mid-20th century in the writings of economists such as Boulding, Mishan, Georgescu- Roegen and Daly. Most notably, the idea that there are “limits to growth” was brought to the public’s attention through a 1972 book of the same name by Meadows et al. In 2008, with more than 30 years of data in hand, Graham Turner showed that, of all the scenarios examined in that influential little book, the one that fits the data best is the “standard run.” In this scenario, which assumes no major changes in physical, economic or social relationships, economic growth comes to an abrupt end around the middle of the 21st century.

The proposition that unending economic growth might be undesirable as well as infeasible also has a long lineage, dating back at least 160 years to John Stuart Mill’s remarkable reflections on the stationary state. Mill gave social, economic, environmental and spiritual reasons for why he hoped that “for the sake of posterity… they will be content to be stationary, long before necessity compels them to it.” Despite his book’s influence on the subsequent development of economics, this particular chapter was largely neglected for more than a century. Herman Daly, the most prolific and insightful economist of the past 40 years to write about the end of economic growth, built on Mill’s work when he coined the term “uneconomic growth,” which is growth beyond the point of causing more harm than good.

Diminishing Returns to Growth?

As Daly argues, the idea that an economic activity, whether in production or consumption, can become too large in scale is a fundamental principle in microeconomics. It is the point at which marginal benefit equals marginal cost and it defines optimal scale. This principle can be found in any introductory text on economics. It is the basic principle for maximizing profit in the private sector. It is also embodied in the ubiquitous methodology of cost-benefit analysis which is often relied upon to guide decisions in the public sector. And yet, when it comes to the macro economy, no such “when to stop” principle is deemed to apply. Apparently, there is an optimal level for each component of the economy but not for their sum. Is this a logical contradiction? Perhaps not. It could be argued that the size of the economy limits the range of opportunities for those operating within it. A larger macro economy means more resources, more opportunities, more choices and above all, improved well-being, or so it is argued. This would make logical sense if the economy was a completely self-contained system which could grow without limit, but that is not the case. Economies are embedded in societies which themselves are embedded in the natural systems of the biosphere. All economies depend on a continual “throughput” (another Daly term) of materials and energy, extracting these from the biosphere, using them to create economic value, and disposing of them in a degraded state back into the biosphere in air, in water, on land and underground. Just as people, companies and governments must function within the limits of the macro economy, the macro economy must function within the limits of nature.

The question of whether these limits are, in fact, binding is really an empirical one. Are growing economies, especially if accompanied, as they often are, by growing populations, encountering limits to the availability of resources? Are they confronting limits to the capacity of the biosphere to assimilate wastes? Have they reached a point where economic growth is compromising well-being rather than enhancing it? In other words, has growth become uneconomic? There is plenty of room for honest disagreement about the answer to this question, not least because there are many economies with people living and working in very different circumstances so that there is no one right answer for all. There is also room for debate because most of the data needed to address this question are gathered by private and public-sector institutions that remain committed to the growth agenda. And yet evidence is accumulating to suggest that developed economies in particular have entered an era of uneconomic growth.

The Question of Resources

Let’s consider resource inputs first. Many of the resources used by growing economies are bought and sold through markets. Most economists believe that for these resources, looming scarcities are and will be signalled by rising prices. Rising prices, actual or anticipated, will have the beneficial effects of stimulating efficiencies in use, inducing more exploration and development of new sources, encouraging new technologies and replacement with substitutes. With the rapid expansion of the BRIC (Brazil, Russia, India, China) economies in the past 20 years or so, and the increasing globalization of resource supplies, this sanguine view of resources was called into question by the spike in commodity prices just prior to the recent global recession. While many national economies struggle to emerge from this recession, resource prices declined briefly, but there is good reason to believe that if widespread economic growth resumes these resource prices will again rise rapidly as more and more remote and costly sources are exploited in an attempt to keep up with rising demand. It is conceivable that this will become a selfdefeating process, with rising prices putting a brake on growth. This could be bad news for the poorest countries, who will find needed growth impeded, but cannot compete with much richer countries for which, as we shall see, growth may already be uneconomic social well-being are not bought and sold through markets. There is considerable interest these days in “ecosystem services,” a term that refers to the myriad functions of natural systems that benefit humans directly and indirectly. They include essential activities such as pollination, flood control, photosynthesis and water purification. Most of these ecosystem services do not lend themselves to market transactions since people cannot be excluded from their use. Hence it is difficult if not impossible for property rights of any sort to be established over them. The market cannot function without transferable property rights since, in a very fundamental way, these are what are traded in market exchanges. In the absence of markets for ecosystem services there can be no prices to signal increasing scarcity and so no stimulation of responses that might otherwise alleviate their degradation. The loss of ecosystem services can make growth uneconomic if the value of the services forgone exceeds the gains from whatever activity caused the loss.

And here’s the rub. To obtain resources for which there is a market price and from which profits and royalties can be obtained, it has become necessary to access sources that are more remote, more difficult to find, extract and transport, more risky and hence more costly. In so doing ecosystem services are lost. Examples include the loss of life in the oceans when drilling for oil below the seabed goes awry, or the removal of mountaintops for open-pit coal mining, or the creation of toxic lakes and denuded forests in Tar Sands operations. All of these activities involve a loss of ecosystem services resulting from the pursuit of economic growth.

One of the best-documented assessments of the pressure that humans are placing on the biosphere is the estimation of the human appropriation of the net products of photosynthesis, or HANPP. HANPP measures the extent to which land conversion and biomass harvest alter the availability of trophic (biomass) energy in ecosystems. Estimates of global HANPP vary considerably, owing to differences in definition and databases, and there is enormous regional variation reflecting the different levels and patterns of economic activity around the world. H.K. Haber et al. estimate global HANPP at 24 percent, reducing by that amount the net products of photosynthesis available to the millions of species with which humans share the planet. Is it any wonder that other, independent estimates of the increasing loss of biodiversity suggest that we are in the midst of the sixth mass extinction in the history of the planet? This is yet another indicator that not just for some countries but for the whole human race, not to mention all mammalian species on Earth, growth has become uneconomic.

The loss of biodiversity is one of three examples where scientists caution that we have gone beyond the “safe operating space for humanity” (Rockstrom 2009). The other two are climate change and interference with the nitrogen cycle, with several other global threats mounting as economies and populations expand. The planetary boundaries that define this safe operating space were set at levels believed appropriate to keep the human economy and population on the right side of thresholds beyond which reversal of the pressures would probably be impossible. Economic growth that takes us beyond these boundaries is very likely uneconomic. At the very least, those who would lead us there should understand that the onus is on them to demonstrate that such growth remains worthwhile; the burden should not fall on those who seek alternatives to growth to show otherwise.

Exceeding the Globe’s Biocapacity

Sometimes insights into complex issues can be gained by approaching them from very different perspectives. Three graphs developed quite independently all point towards the conclusion that economic growth has become uneconomic, particularly in rich economies. Figure 1 shows that from about 1975 onwards the global ecological footprint, which measures humanity’s annual requirement for biological resources and greenhouse gas assimilation, has exceeded global biocapacity, and the deficiency continues to grow.

There is tremendous variation among countries in terms of their total and per-person ecological footprints. There is also considerable variation in the available biocapacity in each country. Canada is one of very few developed economies where the ecologicaltry’s biocapacity. But this “excess” biocapacity is not available to support more economic growth in Canada because it is already being used by people in other countries to support their consumption. This is an important and distinguishing feature of the ecological footprint: it is a measure of the global use of biocapacity of a person, a city, a region, a country, a world.

Redefining Progress

Figure 2 compares the real, inflation-adjusted perperson GDP of Americans with the Genuine Progress Indicator (GPI). An increase in real total (or per-person) GDP is the conventional measure of economic growth. For reasons that have become increasingly well known, GDP is a poor indicator of well-being, something for which it was never intended. While it includes expenditures on items that do not increase well-being, such as funds spent on environmental clean-ups by government and individuals and funds spent on the military, it excludes the value of unpaid work, environmental damage and the depletion of natural resources, and it makes no adjustment for increasing inequality. The GPI adjusts GDP to account for these and other deficiencies so that it can serve as a more meaningful indicator of well-being.

Figure 2 shows that in the USA, GDP per person and GPI per person moved in tandem from 1950 until the early 1970s, after which they diverged. GDP per person continued to rise while GPI per person levelled off or declined, indicating that growth of the US economy has become uneconomic. A similar pattern has been revealed, with only modest differences, in many other countries for which the GPI or its twin, the Index of Sustainable Economic Welfare, has been estimated. What is striking about Figure 2 is that it looks so similar to Figure 1. The GPI diverges from GDP at roughly the same time as the global ecological footprint begins to exceed global biocapacity. With the US economy representing at least 25 percent of global economic production and consumption, perhaps there is more to this than mere coincidence.

Are We Happier as We Grow Richer?

Figure 3 relates per capita income in the USA to the percentage of Americans who describe themselves as “very happy.” The similarity between this graph and the graph of GPI per capita is striking, and it reinforces the notion that for more than a quarter footprint of its residents is smaller than the country’s biocapacity. But this “excess” biocapacity is not available to support more economic growth in Canada because it is already being used by people in other countries to support their consumption. This is an important and distinguishing feature of the ecological footprint: it is a measure of the global use of biocapacity of a person, a city, a region, a country, a world.

This account of uneconomic growth relies heavily on US data, but it remains valid since the US has the world’s largest national economy and one of the highest average incomes per person and therefore uneconomic growth might well be expected to emerge first in the US. Moreover, it is the country that has been most studied and offers some of the best data available for making such an assessment. There is no equivalent data for Canada, although the recently published Canadian Index of Well-Being (CIW), which uses rather different metrics, shows that while GDP per person increased by 31 percent between 1994 and 2008, the CIW rose by only 11 percent.

Decoupling?

There is ample evidence to conclude that if we are to move back within the safe operating space for humanity then we must reduce the demands placed on the biosphere to provide resources and assimilate wastes. And if we are to act on our ethical responsibilities towards other species, we must also reduce our use of land and water to relieve the pressures on their habitat. Justice demands, moreover, that the richest countries take the lead. There are some who believe that we can do all this without having to give up economic growth. The answer they say lies in “decoupling” the generation of economic value, as measured by GDP, from the throughput of energy and materials and the use of land and water. In a 2009 book, Tim Jackson examines this proposition in some detail and finds little evidence for absolute decoupling — a reduction in total resource use and waste generation while economic growth continues. Relative decoupling — a reduction in resources and waste per unit of GDP — is another matter, but its contribution to reducing the overall burden of the economy has generally been outweighed by economic growth. Whether this will continue to be the case remains in dispute, but we do know that for any rate of relative decoupling, the impact on total resource use and waste generation will be reduced by economic growth. Alternatively we can say that the slower an economy grows the greater will be the contribution of relative decoupling to an absolute reduction in throughput and habitat destruction.

The implication of all this is that rich countries in particular should deliberately and thoughtfully reduce the total demands they place on the natural environment through a combination of regulation, taxation and voluntary action. This is the kind of degrowth about which there should be no argument. If economies can still grow within these limits, so much the better, but it would be a mistake to count on it. It would be an even bigger mistake to continue to pursue growth that has become uneconomic.

Managing Without Growth

But do advanced economies require economic growth, to keep unemployment from increasing as labour productivity rises, to reduce poverty, and to pay for all the investments needed to “green” the economy? In other words, growth may be uneconomic, but low growth, or no growth or degrowth, could be a lot worse. This is a question that I have examined in some depth in my book Managing Without Growth (2008) and in subsequent papers, and it is the central question of my ongoing research. By simulating alternative economic futures for Canada I have shown that it may well be feasible to maintain high levels of employment, substantially reduce poverty and greenhouse gas emissions, and keep the government’s fiscal house in order without pursuing economic growth.

Whether we and our public- and private-sector institutions can adjust to such changing circumstances in a reasonably smooth way remains an open question, but the alternative, which is to strive for endless economic growth on an already overburdened planet, is a virtual guarantee of upheaval and breakdown.

Peter Victor is an economist who has worked on environmental issues for over 40 years as an academic, consultant and public servant

This article appeared in the March/April 2012 issue of Canadian Dimension (The Degrowth Issue).

Advertisement

Fernwood 2021/22 leaderboard

Related Reading

Browse the Archive