Friday 5 December 2008

Defending Economic Growth

For John Gibbons writing in the Irish Times yesterday, economic growth is "the secular religion infecting every society on Earth via globalisation". Economists are "priests of growth", "alchemists", or "sorcerers", peddling a creed that is leading us to exhaust natural resources and wreck the planet.

I think I know what Mr Gibbons is trying to say: that our consumer society, with its insatiable appetite for resources, and its spiritual emptiness, is hideous and unsustainable. Unless we change, we will bestow a damaged and depleted planet on future generations, and they will hardly forgive us for it. If these are Mr Gibbons sentiments, then we are in agreement.

But Mr Gibbons has taken aim at the wrong target. Economic growth, per se, is not the problem. Economic growth is merely an increase in value created. Its consequences are an increase in our standard of living. From economic growth we have acquired all the great things that we could never surrender – longer healthier lives, education, leisure time, the ability to travel widely. Indeed, civilisation itself could not have come about without economic growth.

The key ingredient in economic growth is innovation -- not a hike in the level of resources used. In fact, the beauty of innovation is that it allows us to do more with less. Think of how the miles per gallon has extended for a family saloon. Given the understanding we now have of climate change, we may need to reduce this to near zero. With innovation, it is possible to imagine such an outcome. Standford economist Paul Romer, one of the profession's eminent scholars on growth, explains it using an analogy:

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

The key, therefore, is innovation. But the direction innovation takes is usually driven by our values as reflected in consumer tastes or in government regulations. Today, with the evolution in technology, all cars in Ireland could be say, twice as efficient as those we drove in the 80s. But instead, many people have chosen to drive SUVs. The challenge then, is not to curtail growth, but to shape our values in ways that lead to a sustainable way of life.

The demonisation of economists is far too easy. The field of political economy is so huge that tarring all practitioners with the same dismal brush, is as naive as it is ungenerous. Remember, for every hack babbling on the radio about the housing market or interest rates, there are thousands thinking about how inflation affects unemployment, how firms can be efficient, or what developing countries need to break free from poverty.

Mr Gibbons accused economists of placing no value on forests. Economists have used the term 'externality' for something not directly involved in an economic decision or calculation. But this is merely the economists way of saying that this cost does not matter to us here and now. And this decision in turn is usually based on the values assigned by society at large.

Once we became conscious of pollution as a major negative result of production, we, as a society, forced it back into the equation. The results were stunning (rememer smog, CFCS, etc). While Mr Gibbons expects the economist to be our moral compass, I would say we need to look into our own hearts. If that forest has a value, let's express that as a society, through our elected representatives, through our membership of support groups, or by hugging the trees if necessary.

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