Sunday, October 3, 2010


Talk to Festival of Dangerous Ideas, Sydney Opera House
October 3, 2010

Our economy, and pretty much every economy, has been growing for at least the past 200 years. Almost every year the quantity of goods and services being produced has increased. Production has grown faster than the population has grown, meaning that, on average, people’s annual consumption has increased. Our material standard of living has risen by a percent or two every year; we’ve become more affluent.

Almost every economist, business person and politician believes this is the way things should be and must continue to be forever. All those groups are convinced this is what the public wants: ever-increasing affluence. They think any politician who failed to promise economic growth would be pilloried; any government that failed to deliver it would be thrown out. Even the Greens avoid publicly expressing any doubt about the desirability of continuous growth. It’s just too hot. So deep-seated is this belief that it constitutes a bedrock assumption underlying the whole economic debate. Most of my participation in that debate - most of what I write in the Herald - implicitly accepts this conventional wisdom.

But the longer I’ve continued as an economics writer, the more I’ve read and thought about it, the more I’ve come to doubt the conventional wisdom. My rejection of the case for economic growth is spelt out in my new book, The Happy Economist. I have three reasons for breaking with this almost-compulsory belief.

The first is that, contrary to everything economists, business people and politicians assume, our increasing material standard of living over time hasn’t made us any happier. In many countries, annual surveys of the public’s satisfaction with life have stayed essentially unchanged over the decades despite ever-increasing real incomes. It’s true that, at any point in time, people with higher incomes tend to be happier - a little happier - than people with lower incomes. But as everyone’s income rises over time, average happiness is unchanged. Psychologists offer two main explanations for this paradox. One is that we quickly get used to pay rises and promotions and the extra stuff they allow us to buy; we soon take them for granted as our expectations adjust. The other is that what we like is an increase in our relative income, because the income and the flashy stuff it buys give us greater social status. It allows us to engage in conspicuous consumption, demonstrating to the world that we’re not only keeping up with the Joneses but getting ahead of them. That cynical and sexist old American journalist H. L. Menken said that to be wealthy is to have an income that’s at least a hundred dollars a year more than the income of your wife's sister's husband. But no amount of economic growth can make all of us feel socially superior to everyone else. It’s a status race that some people can win only at the expense of those who lose. So it’s socially wasteful.

My second reason for breaking with the belief that the pursuit of unending economic growth is desirable is that the things we do to encourage growth by increasing the economy’s efficiency often generate social costs, many of which go unnoticed. They go unnoticed partly because they’re subjective and hard to measure, but also because, being things that fall outside the economic model - the economic way of looking at things, which has a deep influence on the habitual lines of thought of politicians and business people - we’ve never put much effort into measuring them.

One of the clear lessons of the ‘science of happiness’ confirms something we all know: how much of the satisfaction we derive from life comes from our relationships. Relationships with our spouse and our children, our parents and siblings, our wider relatives, workmates, neighbours and friends. But despite their central importance to our wellbeing, our relationships simply don’t figure in the economists’ model. Which means economists frequently urge on our politicians ‘reforms’ they are sure will add to our affluence, without a moment’s thought about what effect these may have on our relationships and the social dimension of our lives.

A prime example is the effort in recent years to lift the nation’s productivity by deregulating shopping hours and getting rid of penalty payments, which has hastened the demise of the weekend, when most adults and school children weren’t working and so were able to enjoy each other’s company. Only when the economics-types went to the extreme of Work Choices did many people see clearly the social costs that would accompany the economic benefits - the greater affluence - it might have brought about.

My third reason for rejecting the belief that the pursuit of unending economic growth is desirable - or even possible - is the one that would have sprung first to the mind of many of you: the sheer impossibility of exponential growth in the economy - growth at a reasonably steady percentage rate - continuing indefinitely within a finite natural environment. The basic economic model, which hasn’t changed much since the second half of the 19th century, is a model of market transactions: the factors of production - land, labour and capital - change hands for a price and are used to produce goods and services which also change hands for a price. So it’s the model of a market and the only things in the model are things that have a price. Anything that isn’t bought and sold at a price - including clean air, clean water, photosynthesis, native species, natural sinks for carbon dioxide - is external to the model and thus tends to be ignored. So the ‘ecosystem services’ that are utterly essential to the functioning of the economy - indeed, to the survival of humanity - have historically been treated by economists as ‘free goods’ - goods in such abundant supply they don’t carry a price and so can safely be ignored. The natural environment is outside the market, so we can forget it.

Now, it’s important to note that, 100 or 150 years ago, this was a reasonable approximation of the truth. Human activity - most of which is economic activity - obviously caused damage to the local environment, but so limited was that activity relative to the vastness of the natural world that it was reasonable to assume it was having no significant effect on the overall ecosystem. If so, it was reasonable to ignore the natural environment.

Two things have happened since then. One is advances in the natural sciences, which have allowed us to understand the harmful effects of economic activity on the ecosystem that often aren’t visible to the naked eye. The other is the massive growth in economic activity, as a result of the success of capitalism and the technological advance it fosters and exploits. In the past 200 years, the world’s population has increased by a factor of more than six, thanks to advances in public health and medical science. In the same period, the average material standard of living of all the people in the world has also increased by a factor of six, thanks to capitalism and technological advance. Multiply the two together and you see the amount of economic activity - as measured by GDP - has increased 45-fold in the past 200 years since the start of the Industrial Revolution.

And all this in a natural environment that’s grown no bigger. So whereas it was possible say economic activity was too small to have much impact on the global ecosystem, it’s not credible to say it today. We get back to the earlier question of whether economic activity can continue growing exponentially in an ecosystem of fixed size. Clearly it can’t. And this raises a vital question: are we reaching the limits to growth? When ecologists first suggested this in the 1970s, economists laughed at them. But in the time since then the evidence has been stacking up on the scientists’ side. It’s now apparent, for instance, that we’re rapidly approaching the limits to growth in one dimension: greenhouse gas emissions arising from the burning of fossil fuels and the destruction of forests. There could be no clearer example of how economic activity is starting to do great damage to the ecosystem, some of which may soon be irreversible. But there are other areas where the damage we’re doing to the environment is mounting up: all the problems we’re having with water, rivers, farming methods and soil quality; the irreversible decline in fish stocks and the difficulties associated with fish farming; the declining reserves of certain non-renewable resources, and the destruction of species.

My fear that we’re approaching the limits to growth more generally than just in the case of greenhouse gas emissions is greatly increased by the rapid economic development of the two most populous countries in the world, China and India, which between them account for almost 40 per cent of the world’s population. We’re well aware of how hugely resource-intensive is the lifestyle of the 15 or 20 per cent of the world’s population in the developed countries. But now these two big countries have been growing at rapid rates for the past two or three decades. China’s GDP has been doubling every seven years; India’s every eight or nine years. Should this growth continue for another 20 or 30 years, the material standard of living of another 40 per cent of the globe’s population would be approaching that of ours. Question is: do we have enough natural resources available to make this possible? And could the global ecosystem survive such an immense call on its services?

Problem is: we’re in no position to urge the Asians to abandon their efforts to become as materially affluent as we have long been. It wouldn’t be moral for us to try and it wouldn’t have any effect if we did. There are two dimensions to the problem: the continuing growth in the world’s population and the continuing growth in the world’s average material living standards. I believe the only way to try to reconcile the poor countries’ material aspirations with the ecological limits to growth is for the developing countries to focus particularly on limiting their population growth and for developed countries such as Australia to focus on limiting our economic growth. (The rich countries don’t need to worry about population growth because our fertility rates are already below the replacement level of 2.1 babies per female.)

We rich countries need to move to a ‘steady-state’ economy, where there is no growth in our use (‘throughput’) of natural resources, even though there is no restriction on efforts to use all resources (natural, labour and man-made capital resources) with greater economy - that is, on productivity improvement. With a fertility rate below the replacement rate and limited net immigration, this should not involve a significant decline in our present material standard of living.

How would this absence of growth in the use of natural resources be achieved? By the much wider application of cap-and-trade schemes such as the emissions trading scheme proposed for greenhouse gas emissions. This would have the effect of raising the prices of natural resources and everything made from them, but provided the permits for firms to put natural resources into the production chain were auctioned rather than given away, the rise in prices would be equalled by an increase in government revenue. That is, the scheme would be equivalent to, in Tony Abbott’s immortal phrase, ‘a great big new tax on everything’. But the proceeds from the natural resource tax could be used to make equivalent cuts in other taxes, particularly income and consumption taxes. In other words, the tax system would be realigned, so that we increased the tax on environmental ‘bads’ while reducing the tax on environmental ‘goods’, without much change in the level of taxation overall. In the process, we’d be changing relative prices in the economy, discouraging activities that involved heavy use of natural resources while encouraging activities involving little use of natural resources.

At present, developed economies are oriented towards economising on the use of the most expensive (and most heavily taxed) resource, labour, but in the new regime labour would be a lot cheaper and the most expensive resources would be natural resources. So all of capitalism’s economising, productivity-seeking efforts would be redirected towards reducing the use of natural resources. The recycling of natural resources would become more economic, as would the repair rather than replacement of durable consumer goods. We’d still have a market-based, efficiency-oriented economy, but we’d impose a different set of constraints on it. It would be an economy that strove for improved quality, not increased quantity.

My guess is that a lot of people like the sound of an economy that does less damage to the environment, and aren’t particularly perturbed by the thought that their level of consumption wouldn’t keep increasing year after year, but wonder whether a capitalist economy that stopped growing would implode. If we stopped consuming more each year wouldn’t that lead to mass unemployment? They seem to think of the economy as being like riding a bike: if you stop going forward you fall off. Certainly, there are plenty of economists and business people who’d be happy to leave you with that impression.

The strongest argument in favour of economic growth is that we need a bigger economy to generate the extra jobs needed to gainfully employ an ever-growing workforce. But if ever there was a time when we were freed from that imperative it’s now. Like the other developed economies - and China - we’re entering a period where the ageing of the population means, if anything, the demand for labour will exceed its supply. What’s happening in Australia right now is that more than half the growth in our population and labour force is coming from immigration. In other words, our problem at present is the reverse of the one people worry about: to maintain our rate of economic growth we’re having to import workers from other countries. So if we give up our desire for growth in our use of natural resources, we can cut our rate of net migration and have little trouble finding jobs for everyone who wants to work. Should unemployment persist, however, the answer would be to take the gains from increases in workers’ productivity not as real wage rises (to permit higher consumption) but as a shorter working week.

The conventional view among economists, business people and politicians is that economic growth must continue. I believe, on the contrary, that growth in our use of natural resources must stop; that this could be achieved without great technical difficulty, that it wouldn’t involve any loss of human happiness and could lead to improvements in social relationships. The only question is how much further damage to the global ecosystem must occur before we come to accept the need for change. When we do come to accept it, however, it’s to the economists that we’ll turn to work out how it can be done.