Home > The Economy and the Planet > Debate: Should GNP growth no longer be a goal in advanced economies? – Phase 1

Debate: Should GNP growth no longer be a goal in advanced economies? – Phase 1

Debate: Should GNP growth no longer be a goal in advanced economies?

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  1. paul davidson
    January 10, 2011 at 4:15 pm | #1

    GNP or GDP was a very useful proxy statistic for measuring economic growth when the economy was primarily a manufacturing and product producing closed economy. It was an excellent proxy for employment.

    But in economies where service industries are a large proportion of the economy– in a global economy context-it may no longer be a useful proxy. For example if an investment banker makes a deal for some type of financial derivative where his income fee is $x million, and next year he makes a similar derivative deal where his income fee is $2x million, has he produced twicwe as much in terms of income growth p[er capita??

    similarly if an entrerpreneur of a deal is made to offshore jobs for which the domestic entrepreneur earns X million– while a similar deal is made next year for offshoring and the entrepreneur makes 2x million — what has this to do with domestic economic growth??

    Paul Davidson

  2. January 10, 2011 at 4:34 pm | #2

    It goes to show you that there is no correlation between the GDP/GNP number and real wealth. Shoving money back and forth is no different from moving dirt from one pile to another and back again: A pure waste of energy.
    That’s the problem with the economics profession. It exists in a world of make-believe.

  3. merijnknibbe
    January 10, 2011 at 5:03 pm | #3

    1. Many billions still urgently need growth: clean water, better housing, health care, more and better food. There have been quite some housing bubbles – but the real long term problem is that billions of healthy, durable, energy producing, efficient, internet connected, cozy and comfortable houses still have to be build. I’m afraid that suburbia still has to see its finest hour.

    2. The west may however have enough to be healthy and happy. The problem: capitalism + technological progress does lead (if the government helps a little with roads, education and the like) to ‘new possibilities’, like this blog. Part of these are new products – from tea and coffee in seventeenth century Europe to Ipods in 21st century Africa. Part of this shows as increasing productivity, from larger and enhanced ships in the sixteenth century to robots in hospitals. This rise of productivity will go on – and without growth, quite a lot of people will become unemployed, despite worksharing and the like (though the ‘backward bending supply cure of labor’ (between about 1900 and the present typical workweeks in western countries declined from about 50/60 hours to about 35/45 hours) did solve part of this problem).

    I’m afraid we’re doomed to grow. All we can do (and have to do) is to try to make growth greener and more humane.

  4. January 10, 2011 at 7:59 pm | #4

    This 30 year old debate is finally reaching mainstream media. Watch for Ethical Markets new BEYOND GDP Survey with GlobeScan, London in 12 countries, to be released Jan 22nd. Follows the 2007 Survey for the BEYOND GDP conference in the EuroParliament (www.beyond-gdp.eu and at http://www.EthicalMarkets.com and http://www.GlobeScan.com).

    Also downloadable: QUALITATIVE GROWTH, http://WWW.ICAEW.COM which I co-authored with physicist Fritjof Capra.

  5. January 11, 2011 at 12:03 am | #5

    Yes.

    GDP/GNP is a measure of activity involving money, but says nothing about whether that activity is beneficial, useless or harmful.

    To measure our physical “standard of living” we would have to add the goods and subtract the bads, in other words do a balance sheet. At present we put all transactions in the credit side of the ledger, add them up and claim that measures our wellbeing. That’s insane.

    GDP overlooks many productive activities that do not involve money but contribute to total wellbeing, such as vegetable gardens (a small supplement for the rich but a vital food source for the poor), and the love of a non-working mother.

    If/as we reduce our assault on the planet, by using resources more efficiently and then by recycling most resources, the GDP will drop as our wellbeing increases. If we’re so rich, why are we working so long and hard, and stressing ourselves so?

    We need measures that cover all aspects of life, not just material stuff: physical, health, social, emotional, spiritual, environmental (for we are part of the environment). Only when we start using those will we redefine progress from “material increase” to “improving quality of life”.

    I wrote this earlier in the developing financial crisis: http://betternature.wordpress.com/2009/03/05/gdp-shrinks-hooray/

    Referring to comments above, the problem is not just that financial money-shuffling gets counted as a positive contribution. Many aspects of physical production are also counter-productive, such as failing to protect against pollution, then having to clean up the mess (which increases the GDP), or over-exploiting natural resources.

    GDP was less problematic when governments intervened more to ensure useful production, but free markets do not do that.

    We are not “doomed to grow” in terms of physical throughput. On the contrary, continued growth of physical throughput will doom us to collapse. We *could* continue to improve our lives qualitatively without limit – we need to make that critical distinction.

  6. merijnknibbe
    January 11, 2011 at 11:10 am | #6

    @Geoff,

    it’s a bit more complicated.

    1. Vegetable gardens are, according to the rules of national accounting, included in disposable income of households
    2. So is imputed rent of owner occupied dwellings, which accounts for the capital part of ‘home production’(houwework is, however, indeed excluded)
    3. While interest payments on mortgages are excluded from ‘production of households’

    However, monetary income and expenditure of households is calculated too, by substracting vegetable garden production, imputed rents and the like and adding mortgage payments.

    At the same time, the liquidity balance of (for instance) households is calculated by keeping track of net changes in debt and adding/substracting this to/from monetary income(this takes care of Steve Keens statement that total demand is Income plus change in debt: this can be found in the National Accounts)

    This all leads (in modern national accounts) to the balance sheets of households.

    When Keynesian economics state that consumption is a fraction of income they in fact should define income and consumption without housing and consumption/production of vegetable gardens, i.e. the monetary concept, while introducing an additional term for net borrowing.

    Some national accounts already contain estimates of a ‘green’ or ‘sustainable’ GDP, substracting for instance extraction of oil.

    I think that’s usefull to make such estimates – but in the end GDP is NOT a measure of welfare of hapiness. It’s a measure of what people do: total hours, total wages, total profits, investments and the like. An economy which mainly produces weapons (i.e. Germany 1939-1945) is quite a different thing than an economy mainly producing consumption goods.

  7. redrockreason
    January 11, 2011 at 12:28 pm | #7

    Yes and no.

    Yes, because the prevalent economic system cannot survive without GNP growth. We need GNP growth to avoid ever-increasing unemployment. Without GNP growth we would see profit rates decline to zero, which means the end of capitalism as we know it.

    No, because income growth does not make people happier once they have achieved a certain level of income. Things that people happy are, for example, good health, strong relationships with family and friends, and feeling useful (as indicated by doing work that someone else is willing to pay firm). These things should be the goals of economic policy.

    @Paul: I do not think that the link between GNP growth and employment is broken. Even if it were, we’d still need GNP growth to avoid the decline in profit rates.

  8. Peter Radford
    January 11, 2011 at 9:33 pm | #8

    GNP/GDP was never the goal. It was a yardstick so we could calculate our progress towards the real goal: increasing wealth or welfare. Along the way we forgot that and allowed the measurement to become the end we were moving towards.

    All measurements are approximate, and their relevance tends to reflect the moment in which they were created. As Paul points out if our reason for keeping track of activity is to provide a context for policy then GDP needs to be updated to account for our contemporary much heavier emphasis on non-physical production. We need also to examine the effectiveness of that activity: is it too dependent on consumable resources? etc. GDP was never devised with 21st century challenges in mind, so it needs updating or replacing.

    I see this as part of a more extensive problem: economics needs to go through a thorough overhaul. Much of its conversation is stuck conceptually in an industrial age setting, even though we are many decades into a post industrial era here in the rich west. We keep recycling old arguments instead of confronting new issues.

    At business school we were all taught the old adage/cliche that you cannot manage what you cannot measure. GDP was useful as a first approximation, and was not designed to carry the burden we place on it nowadays. So before we set out to discard old measures like GDP, or create new ones, we need to agree on the objectives that they are supposed to help us move towards. Is it full employment? Is it sustainability? Is it efficiency? Is it allocation or use of resources? Is it wealth? Is it growth? All of the above?

    In other words: what is it we want our economies to achieve? Somehow I think that is a long discussion!

  9. January 11, 2011 at 11:41 pm | #9

    Merijn -
    OK, I’ll yield to your expertise on household incomes etc., though I’ve seen this subject debated. This point is more pertinent I think to poor countries. If someone moves or is displaced from a village economy to the city, much of their daily subsistence may move from non-monetary to monetary exchange. Unless those governments are more conscientious than I expect, the villager’s “economic activity” goes from not being counted to being counted, though their quality of life may have declined. Much alleged third-world growth is probably due to this factor.

    My other points remain – there needs to be a balance sheet, we need to consider far more than material throughput, and we need to (and can) decouple wellbeing from GDP

    redrockreason -
    You don’t have to have growth to have profits. Common sense says this, otherwise how would a shop keeper live in a small town that doesn’t change much from year to year. Steve Keen has demonstrated it explicitly with a money circulation model. In fact he has demonstrated the harder problem of a manufacturer borrowing funds and still making a profit, within a steady-state economy. See http://dx.doi.org/10.5018/economics-ejournal.ja.2010-31

    The unemployment-growth relationship is a short-term one. Australia’s GDP is 3 or 4 times what it was in the 1950s, but unemployment is much higher (~5%) than it was then (~1%), so in the long term there is no correlation between growth and unemployment. I think the solution has to be a social one – so that the cost of any slowdowns is spread around. Reportedly Germany has done something along these lines through the recent recession. Again, common sense says that if there is work to be done and everybody does some, why should that depend on there being more work to do next year? I think the problem is not fundamental, it is in present (inadequate) theory and present economic structures, so we should look there to fix it.

    Peter -
    I’ll state my goals for an economy, and challenge anyone to disagree: a living for everyone who desires one, and “sustainability”, meaning an economy that can survive indefinitely while the Earth thrives around it. There will be no formula for the latter, it will need to be continually monitored and adapted, just as for any species that wants to persist.

    I think the “post-industrial” issue is overstated. Someone still has to grow the food and make the trucks. Much financial paper shuffling is not productive, it is parasitic: about 1-2% of financial market activity helps to allocate resources, the rest is speculation. So in other words, there is a place for some services in an economy, but they can’t ever become dominant.

    Much more pertinent is harmful or parasitic activity. If a factory generates $2 million worth of product, and pollution that takes $1 million to clean up, that is counted as $3 million of “activity” in the GDP, whereas any sensible shop keeper would say society is only $1 million better off (though you can never properly clean up pollution, so even that is an overstatement).

    The Genuine Progress Indicator and its relatives adopt a balance sheet approach. While one can debate the details of how things are counted in the balance sheet, the approach is at least defensible, whereas the GDP approach of putting everything in the credit column is not defensible.

    On measuring – much more can be measured than in traditional economics. For example, people’s self-assessment of their quality of life can be surveyed, and that is perhaps the most fundamental criterion for the success of an economy. This is a very well developed subject. See for example Measuring Progress, edited by Richard Eckersley http://www.richardeckersley.com.au/main/page_books_books_page_2.html, and Hazel’s link above (thanks Hazel, you and Fritjof are long-time heroes of mine).

  10. January 12, 2011 at 9:25 am | #10

    The relative importance of one goal at the national level, such as GDP growth, when compared with other goals is a matter of politics and ideological preferences. For some of us sustainability,primarily in a non-monetary, multidimensional sense should be the primary goal at all levels from the nation, through the city (or municipality) down to the organization and individual. Monetary reductionism at all levels should be replaced by multidimensional and ethically open analysis.
    The present reliance on GDP as an indicator of nationnal performance is based upon positivism as a theory of science, neoclassical theory among paradigms in economics and a specific market ideology where actual market prices are believed to be informative. In searching for a multidimensional sustainability indicator system, we need to consider alternatives to positivism as a thoery of science, alternatives to neoclassical theory and alternatives to the dominant market ideology.
    Peter Söderbaum

  11. January 12, 2011 at 10:47 am | #11

    Geoff Davies :
    redrockreason -
    You don’t have to have growth to have profits.

    True, but you need growth to sustain a positive rate of profits. The profit rate is defined as profits/capital. No GNP growth means no growth in profits (because profits are one component of GNP). Thus, the numerator does not grow. If capital (in the denominator) continues to grow, the profit rate approaches zero. And who’s to stop capital from growing? As long as the profit rate is positive, there is an incentive to accumulate capital.
    However, thanks for the reference to the Keen article, which I’ll try to read very soon.

  12. Frank Pasquale
    January 12, 2011 at 6:42 pm | #12

    One quick question for the debaters: if global GDP were divided evenly among citizens, what would be the average purchasing power of each individual? If you believe that resource constraints impose anything like a zero-sum game on growth, then it’s hard to cheer continued growth in the developed world.

    In the US recently, most growth has gone to the very top of the income scale, which has used a lot of those gains to cement its political influence. Well-distributed growth is key.

    I think the ultimate goal here is to have a certain guaranteed minimum of access to health care, food, shelter, and communications to all. Obsession with growth tends to distract us from this.

    I highly recommend Andrew J. Sutter’s article “Unlimited Growth and Innovation: Paradise or Paradox?”:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1709285

    I think he is right to say that the long-term goals expressed in mainstream economic worth celebrating growth are meaningless. Unless you buy into some sort of transhumanist utopian vision where unlimited growth in productivity creates beings whose lives are billions of times more worthwhile than ours, growth is not a valid summum bonum for macro policy.

  13. January 13, 2011 at 6:05 am | #13

    redrockreason-

    I invite you to step out of the world of abstractions, where you and others seem to have been taught to live, and to consider a real-world economy, though a slightly simplified one. Suppose an island economy has two factories, one that makes useful things like pots and bicycles, and another that makes plastic fantastic whizgigs for exchange as gifts during a festival season. (There are also farmers.) The PFWs last about a month, before they are broken and discarded. The people are under the delusion that they must make more and more PFWs each year, in order that they will become “richer”, and to reduce unemployment.

    One day sanity breaks out. The people stop making PFWs. They share the remaining work around, which allows them to work only a few hours a day. They sit in the shade or play games or make art works or otherwise enjoy themselves the rest of the time.

    Now you might say the profit rate of the island dropped when they stopped making PFWs, because “profits” would have fallen but the capital investment of the second factory remains. On the other hand they no longer have to maintain the second factory, and they won’t have to build a new one when it wears out. So the required capital investment drops and their profit rate does not go to zero.

    You assumed capital investment would continue to grow, but why would it need to, in a sane world where we stopped overpopulating the planet, over-extracting its resources and over-exerting ourselves? If a reasonable world doesn’t fit the abstractions, perhaps it’s the abstractions that need to be looked at.

    • January 13, 2011 at 7:15 am | #14

      @Geoff Davies

      I would certainly enjoy living in this island economy of yours, but unfortunately I happen to live in the real world, where people do not share the fruits of their labour evenly. They constantly fight over income distribution, and those who happen to own capital argue that they should receive more income than those who don’t. This is called profit. As long as there’s profit to be earned, people have an incentive to accumulate capital. And those who already own capital will do everything – everything – to ensure that the profit rate remains positive. If you can convince people to give up capital ownership and to forgo the profits they could otherwise earn, you can certainly stop growth. But you have an awful lot of convincing to do.

      • merijnknibbe
        January 13, 2011 at 9:39 am | #15

        Back to National Accounting: we should not mix up “profits” with rents. Profits (for instance: part of the ‘mixed income’ of the self employed) are also seen as the reward for labor and the use of capital, not just ownership of capital: the difference between land rent and the profit of a farmer renting the land.

        Post 1945, Georgist inspired policies of people like Sicco Mansholt (main architect of the Common Agricultural Policy of the EU, by the way) led the Dutch government to cap rent incomes, while promoting labor and profit incomes. Recently, land rent rules have been neo-liberalized, with predictable results. Mixed income of farmers is down, property income is up. ‘Share holder value’, i.e maximizing property income, is of course one of the ideologies behind such policies.

        How to classify bank bonuses as income? Quite a question! I’m inclined to follow the ideas of the taxservice, who classify income from theft, robbery and blackmail as labor income and tax it accordingly.

      • January 14, 2011 at 6:16 am | #16

        redrockreason -
        You seem to be arguing from the core myths of “capitalism” (whatever that is, it’s a very ill-defined term).

        Myth 1: the only thing that motivates anyone to do anything is Profit, and specifically the prospect of lots of it making one very rich. Rubbish, learn about real human beings.

        Myth 2: “capitalists” accumulate capital (profit?) and re-invest it. Well much or most investment these days seems to be borrowed, or created out of thin air by banks. It should be called Debtism, not Capitalism.

        Myth 3: only “capitalists” will ever accumulate a surplus and productively re-invest it. People are motivated by a desire to provide well for their children, by love for their family, by regard for their community, etc., and can organise themselves in a variety of ways that are quite productive. Check the Mondragon cooperatives in the Basque country for only one example.

        btw I don’t advocate socialism, just sensibly managed markets.

  14. January 14, 2011 at 7:10 am | #17

    @merijnknibbe:
    You caught me there, I was using the word “profits” somewhat loosely. I was referring to income from capital ownership only, not mixed income of self-employed people.

    @Geoff Davies
    I appreciate your comments, but I would appreciate them even more if you directed them at what I’ve actually said, not what “people like me” may have said somewhere, sometime, to someone. The fact that I’m posting comments on a blog like this should tell you that I’m not your cliché economist who got indoctrinated with neoclassical theory and neoliberal ideology and lost contact with the real world. As it happens, I do not live in a world of abstraction, I do not believe in myths, I am quite well informed about what happens in the real world, and I have studied a number of alternative economic theories. Please save you ammo for the real targets.

  15. January 16, 2011 at 9:25 am | #18

    redrockreason-
    OK, I may be 20% guilty to lumping you with others, but otherwise I’m responding to what you’ve written.

    First, you argued that the profit rate would trend to zero because capital would keep increasing even if profit did not. My model island economy was recognisable as a simplification of consumer capitalism overlain on a basic, sufficient economy, and I used it to argue that capital did not have to keep increasing. You dismissed it with the claims such as people “constantly fight over income distribution” and “those who already own capital will do everything – everything – to ensure that the profit rate remains positive.”

    But I didn’t argue that the profit rate would be negative in my island economy. I argued it can remain positive (and non-negligible) even if activity and capital decline. Perhaps you meant profit (or rent) would not be maximised, and that would be true.

    Later I argued that modern “capitalism” proceeds as much or more by debt than by the accumulation of capital to which you appeal, as the fundamental driver of modern economies. You haven’t responded to that.

    You portray people as simply greedy, motivated only by material gain, and by gaining more than others. I dispute that characterisation of people, as do whole fields of psychology, sociology, anthropology and so on. People are social animals and, like all mammals, we balance a tension between our individual needs and the needs of the group. If we all behave completely selfishly, a la homo economicus, then we cease to be social creatures and we regress basically to the state of reptiles. The 19th and 20th century contest between total competition and total cooperation are equally deluded and equally doomed.

    People cooperate all the time, in many contexts, at the same time as they compete in many ways. Our system pushes people towards selfish competition and seriously unbalances our lives, with many well-known social costs.

    Two things *must* apply, if we are to survive. One, we move beyond the superficial and sterile debate about whether people just compete or just cooperate. It is well known, outside of the narrow confines of economics, that they do both. Two, we limit and reduce our assault on the Earth. You can say it’s impossible, and if you’re right we’re doomed. I say people in other times and places have lived according to other world views, so we’re not forever tied to this one. I also say we don’t have to repeat the past, we can adopt a sensible world view and use clever technologies appropriately, working with nature instead of against it.

    If we don’t do these things our industrial civilisation cannot survive.

  16. January 17, 2011 at 12:39 am | #19

    redrockreason-

    An afterthought, having slept on this. I see my tone has been a bit patronising. I apologise for that. I’ll keep it more respectful.

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