Historical Dynamics of Growth Critique

Since the beginning of modern economic theory’s history, which set off in the second half of the 18th century, economic growth was one of the most central themes, creating controversies over and over again. The emergence of modern economics, identified oftentimes with the publication of An Inquiry Into the Nature and Causes of the Wealth of Nations by Adam Smith, coincided with the onset of an exceptional process in human history: until the late 18th and early 19th century, economic growth had been a temporary intermezzo at best, not a general pattern of socio-economic development of human societies. Then, around the time when Smith wrote his book, a new pattern gained momentum, economic growth becoming a matter of course. However, the perception of growth and its limits has evolved over time, in an interesting cycle: while the classics of economic theory took it for granted that economic growth will not continue forever, the neoclassics had (and still have) a different opinion on that. In recent decades, however, the conviction has gained influence that the economy cannot grow forever, even though for slightly different reasons than those named by the classics. The interesting thing about this development, however, is that each position has had its rationale given the knowledge that was then available.

When the so-called classics, i.e., Adam Smith, David Ricardo, Thomas Malthus, Karl Marx, John Stuart Mill, developed the foundations of economics, they were convinced that economies cannot grow forever. Sooner or later they would approach limits, either natural, as emphasised particularly by Ricardo and Malthus, or related to needs fulfilment, as proposed by Mill. Indeed, this was the then known pattern of human economic history. Interestingly, the classics differed in the evaluation of the consequences of the end of growth. While Mill looked forward to it, imagining a society similar to that of ancient Greeks, where people would be able to enjoy arts, sports and politics having fulfilled their material needs, the others were much more sceptical. The most pessimistic view was proposed, of course, by Thomas Robert Malthus. He believed that since food production cannot grow faster than linearly and population grows exponentially, people being unable to refrain from reproduction, humanity is doomed to living through a never-ending vicious cycle of short-term increases in wealth and resulting collapses and famines. This was the extreme version of classic “futurology”, but the classics all agreed that infinite growth is impossible.

The problem of the classic approach was that it had been based on two important assumptions which later proved to be wrong. First, especially John Stuart Mill believed that the material needs of humans have a natural limit, beyond which a steady state is possible. Today, we rather have the impression that material needs have no natural limits and can be extended ad infinitum. The second, even more important error in the classic theory was that Smith, Malthus and others underestimated the potential of technological progress. Today, the world population is many times larger than in Malthus’s times, the average standard of living and food production per capita being much higher, too. This could be achieved only due to technological progress. Technological progress and the fact that it proved Malthus wrong was one of the main reasons for the emergence of neoclassical growth theory, which assumed (and still does) that economic growth can potentially continue infinitely. Today, this idea has become more nuanced, economists talking of decoupling growth and knowledge-based economy etc. In the meantime, however, some thinkers have started to doubt both the feasibility and desirability of economic growth.

This new line of thinking has its roots in the 1960’s, coinciding with the emergence of modern environmentalism. The major turning point in the latter process was the publication of Rachel Carson’s Silent Spring, a book dealing with the harm people are doing to both ecosystems and themselves (it was about pesticides, particularly DDT). Carson’s perspective differed significantly from the old-style environmentalism of Waldo Emerton, Henry David Thoreau, Nikolai Tolstoi or Aldo Leopold, who emphasised the beauty aspect of nature, its aesthetics, or argued from a more or less religious perspective. Modern environmentalism, exemplified by Carson’s book on pesticides, focuses instead mainly on the interconnectedness between human and natural systems and on the feedback loops that turn our actions aimed at “harnessing” nature against ourselves. In this time period, when the awareness of our dependence on intact ecosystems was growing rapidly, a new line of thinking about economic growth emerged. Among the first critics of the infinite growth assumption were people such as Nicholas Georgescu-Roegen, Kenneth Boulding, Edward Mishan, Dennis and Donnella Meadows, Herman Daly or Paul Ehrlich, who offered the view that the ability of the economy to grow is constrained by the limitedness of the resources that it can draw from the natural environment. Their ideas have been developed further, so as to respond to counter-arguments of neoclassics, regarding the decoupling of economic growth from resource use, the emergence of a knowledge economy (where we are supposed to eat… what, some transcendent bits of information?), the idea of substitution among resources and backstop technologies, recalling Malthus’s analytical failure etc. But due to the rapid increase in the number of local, regional and global environmental problems we have to deal with, ranging from soil erosion and desertification to climate change and increasing scarcity of crucial resources (oil, rare earth, lithium, phosphorus etc.), the impression grows again that infinite economic growth is not feasible and that we should develop alternatives.

It is possible that we, the modern growth critics, are wrong again, overlooking some factors just as Malthus overlooked the potential of technological progress. On the other hand, we may also be right. Indeed, given the knowledge we have now, it is only reasonable to believe that we are right. It would be foolish to draw from Malthus’s failure the lesson that collapse won’t come. In this case, precaution is a good advise. We don’t know the future, so we should act so as to make sure that the less favourable options cannot become reality. [For economists reading this text: this would be what we now call the Hurwicz criterion.]

I am thankful to my colleague J.S. for providing the inspiration to write this post.

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