Making Sense of Economic Growth

When is a new road a good thing? Road building in Kenya.

Is a new road a good thing that will improve people’s lives, or is it environmental destruction in action? It is difficult to know using current economic measures. Road building in Kenya.

Here’s an abstract to help get us started today—though economic growth could wreck the planet, it is not necessarily going to do so. But it is sometimes difficult to differentiate between “good” growth and “bad” growth, in part because most indexes that we measure economic change with are too blunt. I’m going to suggest some alternatives here, which might bring some clarity to our understanding of economic growth, and which could help us navigate a path toward genuine prosperity.

 

Making Sense of Economic Growth

It is very common to read arguments about how dangerous economic growth is—how it is destroying the planet, how exponential growth can’t continue, and how it must be stopped. In fact, some environmentalists have long advocated various forms of “de-growth”. And yet, it is very clear that not all economic growth is bad. Growth and economic development will be critically necessary to bring poor nations out of poverty, and there are plenty of other examples of growth that simultaneously help people and help to protect the environment. On the other hand, there are certainly many cases where growth is indeed quite damaging.

 

Why Current Measures are Inadequate

Unfortunately, it’s often difficult to judge good growth from bad growth, and this is partly because the ways in which we measure growth are somewhat flawed. Since the 1930’s, growth has been most commonly measured as growth in total production of goods and services, in the form of Gross Domestic Product, or GDP. While never intended to be a measure of the overall social progress of a nation, it has been used as a proxy for that virtually since its inception (a good New York Times article about this: “The Rise and Fall of the G.D.P.“). Over the years, plenty of criticism has been directed toward GDP, as much of what it measures as positive growth is actually detrimental to society. Noted thinkers Frijof Capra and Hazel Henderson give a short summary of this argument in a report about qualitative growth

“Social costs, like those of accidents, wars, litigation, and health care, are added as positive contributions to the GDP, as are ‘defensive expenditures’ on mitigating pollution and similar externalities, and [yet] the undifferentiated growth of this crude quantitative index is considered to be the sign of a healthy economy…”

Another flaw of GDP is that it while it mostly ignores social costs, it completely ignores environmental harm, or even counts it as a positive. Partly in response to these criticisms, other indexes and measures have been developed over the decades. Examples include the Human Development Index (HDI), “Inclusive Wealth“, the Canadian Index of Wellbeing, Gross National Happiness, the list goes on. Other than HDI, which has been widely used by the United Nations since its inception in 1990, it doesn’t seem that any of these measures has quite caught on—GDP is still the dominant measure by which economic growth is discussed.

(Note, 3 May 2016—As if on cue, there are big articles in The Economist this week about GDP, “The Trouble with GDP“, and “How to Measure Prosperity“. Their focus is too narrow, though, and environment degradation is only mentioned once, and even then almost in passing.)

But, it seems that even the alternative measures above lack clarity, because we’re trying to get information about two important areas, but the trends in these two areas can obscure one another if combined into a single number, and can likewise be obscured if presented with too many numbers (for instance, the Canadian Index of Wellbeing charts eight different domains, each with eight indicators, and the proposed Key National Indicator System in the US tracks over three-hundred separate data streams…)

So let me posit that there is really only one overarching reason why people hold that economic growth is good, and only one reason why people think that it’s bad. Here’s the short version of those two arguments—

  1. When people think that economic growth is good, it is because they feel that increased economic growth will make people’s lives better. This is particularly true for people in poor nations. In general, as poor societies get wealthier they have lower birthrates, and care more for their environments. Then, particularly in countries with per-capita incomes of less than $15,000, increases in wealth also directly correspond to increases in both material well-being and in happiness. Thus, for the vast majority of people on the planet, economic growth directly corresponds with them being better off. In developed nations, economic growth is seen as a way for people to become wealthier, and by extension, to live better lives.
  2. When people think that economic growth is bad, they are worried about environmental impacts. More growth is often related to more “stuff”, and making more stuff leads to more destruction, extraction, habitat loss, and energy use (this isn’t always true, but more about that in a minute). The people who think that growth is bad also point out that we can’t grow exponentially on a finite planet, which is, in some ways, true.
Some parts of the world desperately need economic growth. A woman and her baby gathering water in the Central African Republic.

Some parts of the world desperately need economic development. A woman with her baby gathering water in the Central African Republic.

When we distill these two arguments down to their essence, we see that what we really care about when we talk about economic growth are these two related things— 1) aggregate societal well-being, and 2) a healthy environment. And this makes sense—if we humans are going to live long-term sustainable and prosperous lives on this planet, then these are the two areas that we need to insure are improving, or, at the very least, not getting worse. We want to be better off, and if we want that to be more than a temporary gain, then we must take care of the planet as we go along. As we construct measures for this, the well-being number could be an aggregate of measures such as median income, education levels, health measures, job satisfaction scores, social connectedness, democratic participation, access to leisure, measures of inequality, and the like. The environmental number would be compiled from data about habitat gain or loss, soil carbon, atmospheric CO², species diversity, water and air quality, pollution rates, and other environmental health statistics.

When we conclude that these are the two underlying things that we care about when we measure growth, we can then quite clearly see the flaws in some of the ways we measure it now. GDP, for instance, only vaguely measures well-being, and doesn’t measure environmental health at all. Because of this, GDP numbers can appear positive, at the very same time that we are degrading the planet. HDI is better, and combines life expectancy, education levels, and per-capita income, which together give a good approximate of aggregate well-being, but, like GDP, it doesn’t include environmental health. Inclusive Wealth, a newer measure, includes manufactured capital, human capital, and the environment, but because the three are conflated into one indicator, growth in manufactured capital (“stuff”) can completely obscure losses in the environmental category. In that case we’re robbing Peter to pay Paul, and end up with a situation, as with GDP, where the numbers can look positive even as we’re harming the environment. Other indexes, or groups of indexes, all seem to have one form or another of these same problems.

 

The Long-Term Progress Index

It would be better, if these are the two things that we feel are key, to compile data streams in ways that give direct readouts of our progress (or lack thereof) in these two areas. Why try to infer true progress from indirect measures when we can decide what we want, and then directly measure it?

For purposes of our discussion, let’s call a two-number system, such as I’ve described, the “Long-Term Progress Index”, or LTPI. Let’s look at how LTPI would provide a way to evaluate some examples of change in the economy.

Imagine that a new type of building roof gets invented, one that costs roughly the same as roofs today, but that lasts twice as long, has no maintenance requirements, and could be recycled at the end of its useful life. Using GDP, this change would probably show up poorly, as shrinking economic activity. Over the years, we’d need fewer roofers, and fewer raw materials to make roofs out of. But these new roofs would actually be remarkably good things for all of us. Such roofs would lower people’s average expenses, would increase business productivity, and would decrease the environmental harm caused by extractive industries. So, LTPI would show this for what it would truly be—as an increase in well-being, and as an increase in environmental health; a doubly good change.

The opposite, I suppose—what if a hundred acres of wetlands in Florida are drained and  bulldozed, and a whole subdivision of McMansions is built. Per GDP, this is a boon, while in long-term sustainability terms it’s something of a disaster. LTPI would reflect the latter, with well-being perhaps staying the same (I doubt measures would show that McMansions improve people’s well-being) but with environmental measures going down.

Or, consider a case where software is developed that makes education more widespread and effective. It’s hard to say how this would show up as changes in GDP, but per LTPI it would be a good change—improved well-being, but with no likely increase in environmental harm.

Then, how about a society where physical products were produced with environmentally destructive methods, and the wealthy accrued all the gains, and inequality increased? Again, GDP would likely show progress, whereas LTPI would more accurately register reductions in both well-being and in environment health.

McMansions---not so good for us.

McMansions—not so good for us.

I won’t go on with examples here, but you can see how this system could help us make better sense of “economic growth”. In case after case, LTPI would give a more accurate indication of whether changes were in our true best interests, or not. Likewise, such a system clearly shows that not all economic growth is bad. Growth due to efficiency improvements, for example, is nearly always good for people and for the planet. (This is one reason why electric vehicles hold such promise. Total energy efficiencies for electric vehicles, when fuel transportation costs are included, are more than five times higher than those for cars that run on gasoline.)

 

The Only Way Forward: Radical Decoupling

If we accept that these two measures—one for well-being, and one for environmental health—are the essence of what we care about when we discuss and measure economic growth, then this leads to another logical truth. It is related to this—in an ideal situation societies should keep either number from getting worse, as worsening numbers would indicate that their people were worse off, or that their environment was being degraded, or both. Likewise, if growth in one area came at the expense of the other, then this wouldn’t be true progress. And, given that population is still growing, and our current production methods still destructive, there is only one way for either or both numbers to advance, while neither goes backwards, and that is for economic progress to radically decouple from its environmental effects

This logical truth shows one basic path forward for humanity, one main goal that will work to solve nearly all of our problems, and that is to radically decouple. As such, it should be the focus of nearly all of our efforts.

Tim Jackson's book, where he popularized the use of the term "decoupling" in an environmental context.

Tim Jackson’s book, where he popularized the use of the term “decoupling” in an environmental context. I don’t agree with all of his ideas, though, including his main idea that growth must stop.

A word about “decoupling”—I think it was Tim Jackson who first popularized the term with regard to the economy and the environment, and he discussed two types. First, there is what he called “relative decoupling”, where we damage the environment less per unit of economic output. However, in this case overall environmental health can still be worsening as economic output increases, even though we might be doing better per unit of output. Then, he discusses “absolute decoupling”, where actual total damage to the environment was declining, even as economic growth occurred.

To fix the planet, we need, at a minimum, to achieve some degree of absolute decoupling. To these two terms, though, let me add this third one—“radical decoupling“, where we make dramatic advances in separating economic activity from environmental health, part of which would involve active environmental restoration. This radical decoupling is necessary, because the current path of the planet, from an environmental perspective, is downhill, and perhaps accelerating in that direction. World population is beginning to level off, but we are still on track to add billions to the planet in the coming century. These two facts make it clear that a bit of absolute decoupling just won’t be enough—if we don’t have economic development AND make dramatic improvements in how we interact with the environment, then it is inevitable that both per-capita well-being  and environmental health will drop. In fact, this point about the necessity of radical decoupling is true regardless of whether one agrees or disagrees with the idea here of a two-number index to measure progress—it is truly the only viable path forward.

But, on the good side, with radical decoupling we have a fairly bright future. Picture the logical conclusion here, the immanent teleology of decoupling, so to speak, which we might simply call “complete decoupling”. Imagine an electric vehicle that is made completely with recycled metals and materials, and made in a factory that is powered by renewable energy. The car itself is also powered with renewable electricity, and is driven on a road that uses some technology that makes it extremely durable. In such a situation, driving would have no impact, no matter how far or often you drove. I do realize that for this to be true, everything related to the creation of the car and the road and the renewable energy would also have to have no impact, but I’m just throwing the idea out there as food for thought. These same principles hold true for every aspect of every person’s life on the planet. There is no theoretical economic or environmental barrier that would prevent every person from having clean water, food, medical care, leisure, and a good life.

Again, picture a hypothetical completely decoupled world, far in the future, where energy comes from something like fusion, and billions and billions of people live under the surface of the planet, while the surface, with all its oceans and green continents and teeming wildlife, is left untouched, except for humans to carefully visit. No law of physics prevents an economy from growing to this point, within reason. For instance, we don’t have a shortage of iron and steel on the planet, much of the entire earth is made of iron. We just need to extract it, and use it, in ways that aren’t damaging. (Tom Murphy has argued here and here that growth such as this is impossible without continued growth in energy use, and that such energy use would eventually overheat the planet. Maybe. That point would be way, way down the line, and it seems that by then we would find a way to radiate heat back into space… Either way, I’m just not worried about it at this juncture.)

 

Policy Implications of a Measure Such as LTPI

So my chain of reasoning to this point goes something like this—the two things that we really care about when we think about economic growth are aggregate well-being, and environmental health. To improve these, particularly in light of a growing population, we must begin to radically decouple, year upon year. If we radically decouple, and keep both aggregate well-being and environmental health improving, then there is no logical limit to how happy, prosperous, and sustainable we could become. A reliable measure like LTPI could greatly enhance this effort. In fact, it might be indispensable; what did Deming say,  “you cannot manage what you cannot measure”?

With a measure like LTPI, there would be policy implications that are in many ways at odds with much of what we see today. To improve LTPI numbers (and to get radical decoupling), we would need to focus on, and would need government support of, among other things—

  1. Conservation and efficiency.
  2. Renewable energy and the phasing out of fossil fuels.
  3. 100% recycling, and cradle-to-cradle product cycles.
  4. Pollution and other environmental protection laws.
  5. Habitat preservation, and limiting the human footprint in terms of area.
  6. Efforts to limit consumerism and related advertising, as both work counter to the direction we need to go.
  7. Active environmental restoration of degraded areas. (An example.)
  8. Shifts toward restorative agriculture. (Another example.)
  9. A shift toward something like Democratic Socialism, where the power of markets is harnessed, democracy is maximized, and individual well-being is valued and protected.
  10. Changes in taxation/subsidies in support of these efforts, including putting a price on carbon, progressive income taxes to help limit income inequality, and government support to ease employment dislocations associated with forced economic shifts.
  11. Reasonable controls on the finance system, so that the system serves to facilitate positive economic change, rather than to be a vehicle for personal enrichment that comes with grave economic risks for society as a whole.

By comparison, setting policy solely according to its effects on GDP is like driving blind, and hoping that you get where you’re going (and you probably aren’t going to).

Bureau of Land Management stream restoration project, Brush Creek, Oregon.

Bureau of Land Management stream restoration project, Brush Creek, Oregon—an example of active restoration of degraded areas.

By extension, those who advocate degrowth, or even a steady-state economy, are wrong, too. These ideas are just too simplistic, and risk throwing the baby out with the bath water. Many types of growth involve efficiency improvements, or new technologies or focuses, that benefit both people and the planet. It would be foolhardy to limit such advances due to some blanket principle against growth.

Now, a word of caution here—our current path shows that we humans are currently managing, at best, a slight bit of relative decoupling. We are nowhere near absolute decoupling, let alone anything that would qualify as radical decoupling. So as we move ahead, we must tread very, very carefully. Many of our economic options are bad ones in terms of long-term sustainability. If we exceed the carrying capacity of the planet, as we likely already are, then there is danger that at some point a self-reinforcing downward spiral of damage will begin. Because of this, there is an urgency to this topic; not only must we take immediate and continuous steps toward radical decoupling, but we must begin to do this quickly. During this transition period, as we arrest or redirect growth that isn’t helpful, there might indeed be a slowdown or even reduction in “growth” as measured by GDP. When this happens, we need to not doubt ourselves, and trust that if LTPI-style indicators of well-being and environmental health are going up, that we are indeed better off.

Indeed, if we did begin to radically decouple, the result would be, almost by default, huge gains in the human condition, for all of the planet’s billions. And to guide this effort, a widely accepted index that measured well-being and environmental health would be of great benefit.

Forward to a better world...

Forward, to a better world…

 

Top image credit: Computerwhiz417, “Road construction”, Kenya, Flickr Creative Commons. Image has been cropped.
Woman gathering water: Hdptcar, “Woman with child collecting water”, Central African Republic, Flickr Creative Commons.
House: Paul Sableman, “McMansion”, Flickr Creative Commons.
Stream: Bureau of Land Management, “Brush Creek Watershed Restoration”, Flickr Creative Commons.
Footbridge: Mike Bean, “Stagshaw Garden”, Flickr Creative Commons.