There has been much talk and controversy about ecological limits to growth (in GDP or related measures), at the least since the famous Limits to Growth report to the Club of Rome was published in 1972. However, much less (if any) attention has been given to other possible sources of limits to growth. The reason is not that none have been identified – indeed, as early as 1976 Fred Hirsch, an Austrian-British economist, wrote his pathbreaking but largely ignored book on Social Limits to Growth, in which he pointed out to social scarcities that effectively impose limits on economic growth. He argued that so-called positional competition that is promoted by growth leads to ever more frustration within the allegedly ever better off society.
The point of departure of Hirsch’s analysis is the distinction between two categories of goods (and services): on the one hand there are so-called material goods. These are, in a sense, goods as commonly defined in economics. Their consumption generates utility because of the intrinsic characteristics of the good in question – e.g., I eat an apple because it tastes good, because it is healthy etc. But there is a second (and not necessarily small) category of goods and services – Hirsch calls them positional goods. They have no equivalent in standard economic theory. The consumption of positional goods generates utility at least partly by comparison with the consumption of these goods by others – e.g., having a manager’s job makes me better off not only because of its intrinsic characteristic (salary, power, freedom etc.), but also because others are not managers. In a further sense, positional goods define our position within the society and are thus socially scarce.
Social scarcity can have differing visible effects. One is physical congestion: the more people acquire the positional good “car”, the more frequent are traffic jams. The other is social congestion: this is the case in the area of jobs, where there is limited scope for “leaders”, “bosses” and the like. Furthermore, some positional goods are socially scarce because they generate utility by being physically scarce – for instance, there is limited amount of “picturesque” natural landscapes. Another area where such “direct” social scarcity prevails is in arts: a Picasso is seen as valuable mainly because there is only one of its kind.
The problem arising from the widespread existence of social scarcities is, according to Hirsch, a much more frequent incidence of what conventional economists call social dilemmas as usually assumed. These are situations in which individually rational behaviour leads to socially irrational outcomes. While any individual has the possibility to attain positional goods, it is impossible for everyone to attain them. Moreover, the widespread striving for these goods causes either their prices to increase or their quality to deteriorate. An example is education, especially higher education, and the competition for high-level jobs. Because ever more people reach higher levels of education (due to well meant “inclusionary” state policies), but at the same time the amount of high-level jobs remains more or less stable, both sides – the employers and the potential employees – face increasing costs of screening. The former are forced to introduce additional barriers, tests and other screening efforts to find the people who fit their needs. Meanwhile, the latter are faced with an ever longer “obstacle course” (i.e., longer education + more intense screening by employers) to get the desired high-level jobs. This makes clearly both sides worse off. For summary of this problem a common example from economics textbooks may be used: if all could somehow agree not to stand on tiptoes, they would keep seeing well enough without having to endure an inconvenient position.
In Social Limits to Growth Hirsch furthermore argues that the very nature of market capitalism is further aggravating the situation. Since its origin, market capitalism accentuated the self-interest based interactions between actors. At the same time, it rested partly on a particular social framework of conventions and trust that it inherited from the pre-industrialized world. However, the accentuation of self-interested behaviour and the related issue of commercialization (viz., the shift of activities from a communal to a commercial/market mode) undermine these social foundations that are so important for the functioning of market capitalism. This dependence was emphisized by Adam Smith already.
Why is all this seen as a source of limits to growth? Economics growth understood as a continuous increase in affluence means that ever more people have their needs in the material sector satisfied – and turn ever more attention to the positional sector. Meanwhile, as already pointed out, the latter is fixed – so while the economy as a whole keeps growing, it gets ever smaller (=more scarce) in relation to the rest. This in turn has two important effects. First, as already mentioned, positional goods become relatively more expensive and/or their quality deteriorates (e.g., due to congestion effects). Secondly, an increasing fraction of the population is frustrated because they cannot attain the (positional) goods they could attain if it were not the whole society who gets richer (and not only they alone). Therefore, economic growth is continuously aggravating the problems arising from social scarcity.
What can be done? Hirsch does not provide a ready-made solution to the problem he identified. Moreover, he points out the it is likely that any solution will have to be enforced very slowly. Some suggestions are given in his book as to what can be done.
Generally speaking, it is important to get people to behave more “socially”. As pointed out by Amartya Sen (in this text – alas, it is not available for free), there is no need for people to become more altruistic (which Hirsch, contemplating the failure of Marxism in creating a New Man, rightly sees as impossible to force) – it suffices that people realize that, in the end, they are individually better off if they behave as if they were altruistic. However, for this to be feasible, there must exist some basic amount of social norms and conventions that guarantee that people can to a certain extent “predict” what others are likely to do (or trust them). Hirsch calls this “a shift in the invisible hand from the private into the public or communal sector”.
What are more specific inferences for policy? First of all, Hirsch calls for efforts to “reduce the cost that faces individuals in orienting their actions toward social objectives”. A first step toward this goal might be, according to Hirsch, a limit put on salaries in high-level jobs – with the goal to disconnect the two sources of attractiveness of these jobs, i.e., their rather inherent characteristics (such as freedom, responsibility etc.) and monetary benefits (salary). Another proposal is to keep thinsgs that have social scarcity potential out of markets (where possible) – let them be or remain public goods. This would entail a policy quite opposite to the privatization and commercialization efforts of recent decades. It can be argued that social scarcities shift the boundary between “the sphere of legitimate self-interest” and “the sphere of social obligation” toward the latter:
The glorification of economic freedom thereby threatens to destroy it, much as breast-beating patriotism all but destroyed the nation state.
Admittedly, the solutions proposed by the author are rather vague. On the other hand, the challenge identified by Hirsch is a great one – it wonders therefore why his analysis is still largely unknown, 35 years after Social Limits to Growth was published. The problem of social scarcity hasn’t disappeared in the meantime . there are signs that it has become worse. Therefore, the concluding sentence of Hirsch’s books remains important:
For the overriding economic problem discussed in this book, the first necessity is not technical devices but the public acceptance necessary to make them work.
The Sceptical Economist 
Where I disagree with Professor Frank is the extent to which status displays and positional goods especially access to education hurt the poor.
It’s not (Robert?) Frank, but Fred Hirsch. Could you explain what exactly the point is about which you disagree with him?
Fred Hirsch’s work is indeed much overlooked. Hirsch was Austrian-British graduating from London School of Economics in 1952 and becoming professor of International Studies at Warwick University in 1975 until his death in 1978.
It says here, Hirsch was a U.S. American Economist. How can he be Austrian-British working in England if he is supposed to be an American?
Austrian-British is correct, US-American was a mistake