The “Limits to Growth” Obsession

When a typical conventional economist wants to show somebody (e.g., her students) that all the talk about the “alleged impossibility of infinite economic growth” is rubbish, it is very probable that she take the 1972 Club of Rome’s report “Limits to Growth” as her starting point. This modeling work about the limits population and resource scarcity pose to economic growth, done by a group of young PhD’s, made extrapolations of historical trends of population growth and natural resource extraction to conclude that “sustainable” economic growth is not possible and that it is likely to seize during the 21st century due to these constraints. So, the economist’s arguments goes, as you can see, population growth has slowed, we do not seem to run out of natural resources – and, if you look at the widespread Cobb-Douglas production function, you will see that this wouldn’t matter either. Ergo, infinite economic growth is possible, and Meadows et al. (the authors of “Limits to Growth”) are naive doomsayers. However, this line of argumentation is a) “too easy”, and b) wrong.

Let us begin with the easiness of the argument quoted above. The striking fact is that our economist is dismissing a whole idea by shallowly interpreting one particular source. The quintessence of the argument is that since the prophesied doomsday hasn’t come, it won’t in the future. Thus one is free to conclude that there are no “limits to growth”. Ridiculous as it may seem, I witnessed such statements repeatedly – and the economists who made them are quite acknowledged.

It is indeed true that the exact forecasts from the first report from 1972 did not become reality (fortunately they didn’t). I haven’t read this original “Limits to Growth”, but I read the 2004 updated version. So, while I cannot comment on the former, I know that the latter does not “define” any particular time frame for the collapse of the world’s growth-based economy. Nevertheless, it does quite convincingly show that sooner or later the point will come when it will collapse. Unless we change something, at least. However, it is easy to dismiss the authors’ argument by simplifiedly claiming that since the extrapolations didn’t hold, the foundation of the report is wrong (i.e., there are no limits to growth) – and not that, as I would argue, the authors apparently made the mistake of attributing concrete values to their extrapolations (which they did not in the updated version).

There is another reason why the economist’s argument is “too easy”. It ignores the broad body of theoretical work done by other scientists who also point out that infinite growth is not possible. It is fairly easy to dismiss an argument based on extrapolations only – it is far more difficult to do the same with one based on theoretical considerations. Meanwhile, the impossibility of growth has been shown by, e.g., representatives of the ecological economics school – many of them quite distinguished economists, ecologists and other scientists.

It can be seen that the typical economist using “Limits to Growth” to “prove” that there are none commits the offence of oversimplification. Furthermore, as I have repeatedly argued in this blog, their own argument is wrong as well. Economic growth has limits, and we are approaching them – some even claim that we have actually passed them already.

Since I have already provided some arguments against the infinite-growth thesis here, I won’t repeat them extensively. I would only like to evoke one, since it is often the second part of the typical economist’s pro-growth argumentation. It is the invocation of the Cobb-Douglas production function which “proves” that we don’t really need natural resources to sustain economic growth.

I already challenged this “proof” in length, so let me just summarize.

The Cobb-Douglas production function, by far the most popular in macroeconomics, makes the implicit assumption that the factors of production (usually labour, capital and “technology”, but natural resources are also sometimes(!) included) are perfect substitutes. As long as we have some amounts of any of them (be they infinitesimal), we can produce any given amount of output – e.g., if we are running out of natural resources, we just “substitute” them with capital or labour. This, of course, is absurd. We cannot produce anything without a certain minimum amount of natural resources (and labour/capital, for that matter). Furthermore, even physical capital (machines etc.) needs them – or can we make a machine out of knowledge and human labour only, as economists often implicitly claim?

Of course, we can make more out of less – by recycling, improving efficiency, switching to new technologies etc. But this cannot go forever – as physical science is telling us, we cannot recycle 100%. We cannot produce energy (or anything else) 100% efficiently, or out of nothing. And hoping for new, “perfect” technologies may prove risky (and is, indeed, naive).

It is important at this point to introduce the ecological economics’ distinction between development and growth (I explained it more fully here). While the former is a measure of qualitative improvement (more output out of a given amount of inputs) and can, at least theoretically, be sustained forever, the latter measures quantitative increase (more output due to more inputs) and cannot be sustained forever. When conventional economists are talking about “economic growth”, they mean growth in GDP or a related index of production. These measures do not differentiate between development and growth as defined above. If it would and if we could agree not to let the economy grow any more (while it would be allowed to develop) – the problem discussed here wouldn’t exist. Unfortunately, it does, since GDP growth can be quantitative and/or qualitative and we are not able to distinguish these two components.

Apart from the Cobb-Douglas (and other related production functions) argument against the infinite-growth thesis, there are many more. For example, it seems that in present the scarcity of natural resources is much less a problem than the world economy’s “unwanted outputs” – wastes and emissions, and other side-effects of production (e.g., soil degradation). They are not at all accounted for in GDP and other indices of production. But it is clear that the more we produce (growth), instead of producing better (development), the more wastes, emissions and other externalities arise.

It is easy to pick out a particular argument against one’s case, simplify it a little bit and then say that the opposite is “proved”, since this simplified argument apparently does not hold. This is not particularly what one expects from a scientist, and certainly does not enrich public discussion. It is a sad fact that economists engage in such demagogy.

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