Growth or Development?

One of the most important concepts in what came to be called ecological economics is the distinction between “growth” and “development” – a feature absent in mainstream economics. In traditional economic thinking both “growth” (a quantitative measure) and “development” (a qualitative one) are thrown together and merged into “economic growth”, mostly understood as growth in the gross domestic product (GDP). This generalization is highly problematic and has tremendous influence on sustainability. At the same time, it is so deeply anchored in standard economic thinking that it would take a lot of effort to change this failure.

Mainstream economics, especially macroeconomics, emphasizes the importance of economic growth. As the argument in a simplified way goes: in the last 200 years humanity experienced unprecedented rates of growth in economic activity. Through this we were able to lift the average standard of living of humankind by some orders of magnitude – despite high population growth. All this is mainly due to technological progress – and is there anybody out there who is opposed to progress? Furthermore, growth is needed to maximize consumption – and that is, by assumption, the sole goal of human beings. Thus seen, we cannot but let our economic activities grow – and that infinitely, or at least up to the point when we seize to exist (or our preferences toward consumption change – i.e., the homo oeconomicus seizes to exist).

There are many deficiencies about this way of thinking, though. Many of them have been discussed at length in this blog (see, e.g., here, here, here, here and here). Some examples are: unrealistic assumptions of growth models; overly optimistic views of the possibilities for future technological progress; ignorance of impacts of human activity on local as well as global ecosystems; ethical blindness; the inappropriateness of (per capita) GDP as a measure of well-being; etc.

Today, though, I would like to discuss another issue: the difference between quantitative and qualitative improvement in terms of humanity’s economic activity.

Since “economic growth” is mostly set equal to “growth in GDP”, the distinction between quantitative nad qualitative factors is completely ignored in economic statistics. Although most economists talk about technological change (i.e., at least in their understanding, a qualitative improvement of production) as the main driver of economic progress – in the end they refer to GDP growth. Meanwhile, with the currently used systems of national accounts, from which GDP data are derived, there is simply no possibility to distinguish between qualitative and quantitative drivers – GDP is a measure of output, and output can be increasing due to both.

Ecological economists emphasize therefore the distinction (going back to Herman Daly) between “growth” and “development”, where the former is a purely quantitative measure (more inputs resulting in more output), while the latter is a qualitative one (more output as a result of more efficient use of the same amount of inputs). This distinction is crucial.

Growth, i.e., an increase in output (=economic activity, as economists call it) due to use of either more of each input or additional, new inputs, cannot go forever. Actually, we already arrived at too high a level of economic activity (thus understood) – we use too many inputs and too much of them. The consequence is the advancing destabilization and deprivation of local and global ecosystems: be it climate change, soil erosion, pollution, biodiversity loss or others. If we want our descendants to have at least these same capabilities as we enjoy them, we have to curtail the use of natural resources and sinks, and economize on what is a sustainable level of their use.

Development, i.e., increasing output through economizing on a constant inputs level (or maintaining constant output, but lowering the use of inputs), can potentially go forever – or at least for a very long time (until our main source of high entropy energy, the Sun, seizes to provide it). There are many ways to achieve qualitative improvements: using new, more efficient technologies (e.g., LEDs instead of light bulbs); recycling materials; stopping particularly wasteful activities if they are not objectively necessary (e.g., driving to the corner shop by car); etc. We are actually doing much of that – the problem is that economic policy is still confusing growth and development, and therefore the design of incentives is often wrong or ambiguous at best.

The fact is that, historically, human economic activities have been both growing and developing. In an article on “real-output measures” from 1997 (accessible here) William Nordhaus suggested that these measures (i.e., mainly, GDP) don’t capture the reality of improvements in standards of living due to technological change – because they mostly ignore qualitative change (or development). This shows that the problem is mainly in measuring – as I already pointed out, the National Accounts we are using concentrate on quantitative measures, perhaps because they are easier to quantify/to express in monetary terms. Nevertheless, as shown above, this cannot go on in this way, because we are already facing ecosystem and social disruptions of great magnitude due to the lacking distinction between what is qualitative and what is quantitative change. Fortunately, there are proposals how to reform national accounting (see, e.g., this book by Stiglitz, Sen and Fitoussi).

There is one issue left: what about technological change? Economists are, one may say, disciples of technological progress. Is this obsession reasonable – does technological progress always promote development instead of growth? The answer is: No, it does not. Though progress in technology often does promote qualitative/efficiency improvements, one can easily imagine examples where it does or did cause growth as well. The best example is coal burning: it was, technologically, a great step forward when we achieved to “subdue” the solar energy stored in coal. Humanity suddenly was able to produce much higher amounts of energy with effort/inputs being constant. Nevertheless, this achievement, great as it be, unleashed a quantitative surge in coal mining and processing – in the end contributing to one of the greatest challenges we are now facing, the climate change. So, technological progress is not “good” by itself – nor is it “bad” so. Both is possible and, indeed, both has been the case in history of human economy.

What is the lesson to be learned? In today’s world we cannot go on mixing up growth and development – the cost of this is far too high for the conceptual problems and “state-of-the-art” inertia to predominate. Economic theory must be reformed and adapted to reality. Otherwise we shall not wonder why economists and ecologists cannot get along well.

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