From Our Archives: The Problem with Economic Growth

This article, written by Richard Douthwaite in May 1997, outlines some of the basic ideas that led to the founding of Feasta. It’s interesting to note how ahead of his time he was in his criticisms of growth as a measure of progress, many of which are now quite well known. Sadly, the widening inequality he describes and the many problems related to that have only worsened over time.

If any aspect of green economics makes the average person deeply unhappy, it is its claim that we have to halt economic growth. This is understandable. After all, who doesn’t find the idea of a higher income attractive? Moreover, most of us believe that economic growth is responsible for the comfortable lives the majority of people in industrialised countries enjoy today and, for the minority who aren’t so fortunate, we find it heartening to be able to tell ourselves that the extra resources generated by the next few years’ expansion should bring them up to a reasonable level too, provided the gains are properly allocated. This means that there’s no need for us to give anything up to make the poor better off, a wonderful notion as it stops us feeling guilty about our affluent life-style. And as for the Third World, surely it’s obvious that growth is necessary to raise living conditions there too?

The easiest way of handling these appealing pro-growth arguments is not to try to untangle the strands of truth, falsehood and self-interest they contain. Rather it is to tell ourselves and anyone else who will listen, that while growth seems desirable, not all growth is good. Just as the wrong form of uncontrolled human growth, cancer, can be damaging and even fatal, so can the wrong sort of economic growth. Unfortunately, the wrong sort of economic growth is the type we’ve largely been getting for at least twenty years. Why? Simply because if a largely unregulated market is left to decide which sectors of the economy are to expand and how they will do so, it’s impossible to ensure that good growth comes about.

Let me explain. Economic growth is considered to have taken place if the total value of the goods and services purchased in an economy increases over the course of a year. It makes no difference whether the extra goods and services are good goods and services or ones that it would have been better if we’d managed without. “Who are we to judge?” the economists ask. “If people want them enough to pay good money for them that should be sufficient.”

Unfortunately, however, it’s not. This failure to discriminate means that the Gross Domestic Product – the monetary value of a nation’s annual output – is a mixture of goods and bads, of costs and benefits. For example, GDP includes the value of the work generated by dealing with traffic accidents and cleaning up oil spills, and by other similar mishaps produced by the way the economic system operates. As a result, a rise in GDP these days gives very little indication whether the welfare of the population which produced it is rising as well. Indeed, researchers who have corrected GDP figures to eliminate the bads they contain have shown that on a sustainable basis, the growth process in some industrialised countries is actually making the majority of their populations worse off.

One correction these researchers make involves deducting the value of all those things which are purchased because they are needed to ameliorate damage done by the growth process itself and which leave people with no net benefit. Sound-proofing required to keep out increased traffic noise would fall into this category. So would the cost of dealing with asthma brought about by fumes.

Another removes the cost of activities which are necessary for a modern economy to function but which do not themselves give anyone any pleasure or satisfaction. Packaging materials, TV commercials, commuting to work, accountancy services, tax collectors, policemen, prison officers, all fall into this category of ‘regrettable necessities’. So too, when you think about it, do the jobs most of us perform. True, earlier economic systems had equivalents of most of them – they needed transport, packaging and policing too. But what seems to be happening is that a rising percentage of all the growth in a modern economy is swallowed up by the regrettable necessities which enable the system to carry on.

A third correction allows for changes in the value of activities people carry out for themselves. For example, if I repair my own car, only the spares I buy will contribute to GDP. On the other hand, if I get a garage to do it, the total bill will. Similarly, if I eat all my meals at home, only the cost of the food and fuel is added to the national statistics. But if my hectic job prevents that and I have to snatch a burger in McDonald’s instead, I might be worse fed but the economy seems better.

A fourth corrects for the natural capital the growth process uses up. Thus if changes in agriculture increase output but cause a more rapid rate of soil erosion, the value of the additional soil lost needs to be deducted from GDP. A similar deduction is required to allow for the reduction in the natural capital stock caused by burning fossil fuel and also the damage expected from its contribution to global warming. And if forests are felled more quickly than they grow, deductions should be made for this too as otherwise, in the words of The Economist in 1989, “a country that cut down all its trees, sold them as wood chips and then gambled the money away playing tiddly-winks would appear from its national accounts to have got richer”. But capital corrections are not all the one way. If people acquire more domestic capital – things like cars, washing machines and video players – the researchers add to GDP the value of the services they get from them.

Finally, the researchers allow for the fact that not all GDP ends up in national hands because interest and dividends have to be paid to investors overseas. (Some of this loss is cancelled out by equivalent payments coming the other way.) They then divide their residual by the population of the country concerned to produce what they call the Index of Sustainable Economic Welfare (ISEW), one of the best guides available to deciding whether the growth process is actually beneficial. It is certainly much, much better than raw GDP.

In 1972 James Tobin, who went on to win the Nobel Prize, and William Nordhaus, became the first economists to make corrections of this kind. Their goal was to show that there was no need to go to all the trouble to calculate an ISEW every year because it moved so closely in step with GDP that the GDP figure would do just as well. They came away convinced that this was correct.

Since then, however, there seems to have been a significant change in the way industrialised economies operate. When Clifford Cobb repeated Nordhaus and Tobin’s work in the late 1980s, he confirmed their finding that GDP and ISEW had moved in step until 1966. After that, though, the ISEW had stayed more or less constant for the next twenty years while GDP had continued to move up. And, post-1986, the United States’ ISEW had been in a slow decline although GDP climbed.

Workers in Australia, Germany and the UK have found their countries’ ISEWs are falling too. In Germany, for example, the decline began earlier than in the US – in 1981 – and has been much more rapid, over 40% in seven years. In Britain, the decline started earlier still, in 1974, and by 1990, the ISEW was only 3% above the 1950 level. It was twice it at one time. Indeed, it would have been very much lower in 1990 if the researchers had not placed a high value on activities carried out in the home. They claimed that, although almost the same amount of time was being spent in the average household on domestic chores in both years, because whoever was doing the chores could have earned higher real wages in the outside economy in 1990, the value of their domestic chores must have been proportionately higher too.

The fact that ISEWs are declining means that the growth process is now running backwards and is destroying more benefits than it creates. Put another way, although national economies are consuming more resources each year, they are using them increasingly wastefully with the result that they are producing less and less in terms of human happiness and well-being.

The truth of this is demonstrated by another index, the Fordham Index of Social Health which has been compiled for the US each year since 1985 by Marc Miringoff and colleagues at the Fordham University Graduate Center, Tarrytown, New York This assembles sixteen measures to get an overall view of human welfare at each stage of life. For children, it reports infant mortality, child abuse and poverty; for young people, it covers teenage suicides, drug use, and the high-school drop-out rate; for adults, it follows unemployment, average weekly earnings, and the proportion of those under 65 covered by health insurance. For the elderly, it reports poverty and the level of health-care costs they are required to pay. And for all groups, it covers homicides, alcohol-related road deaths, food-stamp coverage, access to affordable housing and the gap between rich and poor.

Each statistic for each year is not compared with an impossible target, such as zero homicides, but with the best figure the US has achieved for that particular category since 1970. Thus if the homicide figure for 1996 was equal to the best previous year, it would score 100. Similar calculations are made for each statistic and then an average calculated to give the overall index for the year.

The recent results have been disquieting. From 1970, the first year for which the calculation was done, to around 1977, the index was steady at over 70%. There was then a rapid decline to around 40%, which persisted between 1985 and 1994, the most recent year for which figures have been published. It is, of course, very easy to quibble about these findings. For example, why should all the factors be given an equal weighting? Who says that there should only be sixteen factors anyway? And why do they have to be these particular ones? But despite these valid questions, because the index registers a massive overall decline across so many areas, it can scarcely be denied that welfare for many Americans must have deteriorated. A Fordham Index for Ireland has also fallen since 1974. This is despite – or perhaps because of – that country’s recent rapid rate of growth.

So why is the growth process actually damaging the thing it was meant to improve – human well-being? The reason stems from the point I made earlier which was that in a market economy, individual companies make the decisions which bring their own, and thus the country’s, growth about. One important way firms use to grow is to introduce new technologies. For example, if a firm develops a process which allows ten workers in its own highly automated plant to do the work of a thousand scattered in independent workshops around the country and which gives the required rate of financial return on the investment required, it will put it into use. The fact that 990 people lose their self-respect and means of livelihood as a result is none of its concern. Nor is the fact that the extra profit it makes could well be inadequate to compensate the 990 for their losses, even if some mechanism could be found for taxing it and distributing it to them. In other words, the technology the firm chose to use has made one group – its shareholders – richer, at the expense of a greater loss to a greater number: its workers and their families. Moreover, the rest of us are losers too as we will have to carry the cost of supporting the 990 workers through the social welfare system.

Although it is easy to see how the adoption of such technologies could mean that growth destroys more benefits than it creates, firms have been introducing new processes for hundreds of years and, as we have seen, it is only within the past two decades or so that ISEWs have fallen despite increases in per capita GNP. What has changed? The answer can be given in one word: Globalisation, a process which has destroyed almost every government’s ability to maintain a healthy balance between the interests of corporations and the welfare of its citizens. In most countries scarcely a day goes by without a politician or businessperson announcing that unless the road network is improved, or social welfare benefits reduced so that taxes can be cut, or the use of genetically-modified organisms permitted, or the school curriculum made more relevant to the work-place, or the rate of increase in wages moderated, the economy will become uncompetitive in world markets. In other words, we are being told that unless we give up or change something important to us, we, or those close to us, might find ourselves impoverished and/or out of work. Essentially, we are being threatened, and anyone looking for a handy way of spotting when an economy starts running backwards has only to look for the point at which credible promises of a rosier future get out-numbered by phrases which start with ‘unless’ and don’t even pretend that a brighter tomorrow will come about if we agree to go along with whatever is being proposed.

The threats, which involve a choice between two unsatisfactory outcomes, are always made by people who pretend ‘There Is No Alternative’. They are lying, of course, because there are many other ways in which the production and exchange of goods and services could be organised. Moreover, if we make the sacrifice being asked of us this time, they will come back repeatedly to ask us to make further sacrifices if only because people in other countries are also being asked to make environmental, financial and social sacrifices to maintain their competitiveness with us. If we agree to allow a motorway to be built, or social welfare provisions to be cut, pressure will be put on them to provide equivalent financial savings to firms operating in their countries. If they do, the pressure for further cuts will be switched back to us. Round and round the cycle of immiseration will go, screwing the majority down and leaving only a very wealthy minority better off.

The cycle has gone surprisingly far already. Real wages in the US have fallen more than 10% since 1985 and the gap between the well-to-do and everyone else has been growing steadily for more than fifteen years, roughly the period that the ISEW has been falling. If American society is analysed by dividing it into five groups each representing 20% of the population, the incomes of the wealthiest 20% rose 26% between 1979 and 1995, while the incomes of the middle 20% rose only 1% and the incomes of the bottom 20% actually decreased 9%. And if you look at the amount Americans own rather than what they earn, an astonishing 99% of the new assets created by the growth process between 1983 and 1992 was captured by the richest 20% of the people. The share of all the country’s assets owned by the richest one per cent rose from 20 per cent to 36 per cent between 1975 and 1995.

Very similar changes have taken place in Britain. In the twenty years between 1971 and 1991, real disposable incomes – that is after taxes, National Insurance and pension contributions – rose by 80% but most of the gains went to the top 20%, whose share of national income increased from 35% to 43%.¹ Meanwhile, the share of the bottom 20% fell from 10% to 6%. This had serious effects on their health. Mortality in social class I – professionals – fell by 36% from 438 deaths to 282 for every 100,000 people between 1970-2 and 1991-3, according to government figures. During the same period, however, the mortality in social class V – the unskilled – increased by 2% from 798 to 816. This means that the gap between these two groups widened from an almost two-fold differential in 1970-2 to and almost three-fold one twenty years later. In the early 1980s, this gap was equivalent to a five-year difference in life expectancy for a twenty-year-old.² So not only was the growth process running backwards, but it was actually killing people at the bottom of the social pecking order.

The gap between rich and poor has widened in the so-called developing countries as well. In Thailand, for example, where, in the two decades before the 1997 crash, very rapid growth had taken place , the ratio of share of income of the richest 10 per cent to the poorest 10 per cent rose from 17 times to 38 times.

The gap between rich and poor countries is growing too. During the past three decades, the poorest 20 per cent of countries have seen their share of global income decline from 2.3 per cent to 1.4 per cent. As a result, the ratio of the income of the richest 20 per cent of countries to the poorest 20 per cent has more than doubled. It rose from 30:1 to 61:1. In more than a hundred countries, the average income per person in 1995 was lower than it had been fifteen years previously, according to the 1996 Human Development Report. More than a quarter of humanity — 1.6 billion people — were worse off despite the fact that between 1960 and 1993, total global income had increased six-fold.

Three incontestable conclusions can be drawn from all this. The first is that the growth process is making life worse for a significant proportion of the world’s population and no better for all but a tiny minority of the rest. The second is that those who argue that existence of widespread poverty makes growth necessary are either blissfully ignorant of what the process is currently doing or are cynically manipulating us for their own selfish ends. A fairer distribution of wealth and income would be a far more effective way of dealing with poverty than growth in its present form. And the third conclusion? That opposing the present pattern of growth by standing firm against the erosion of income levels, social structures and the environment that globalisation is bringing about is, quite literally, a matter of life and death for millions of people.

So what would happen if we resisted the threats and refused to give transnational corporations what are effectively subsidies so that they can reap as attractive return on their capital in our country as they can get elsewhere in the world? The answer is that unemployment could rise in the way they say it would. But this is not inevitable. If local capital was mobilised to make up for any missing transnational investment spending, or if the overall level of demand was maintained by, say, generating extra spending among the poor, the number of people in work could be maintained.

True, if transnationals stopped bringing investment funds into the country it could mean a shortage of foreign exchange developed. However, if the government allowed the exchange value of the currency to fall, it would not only correct this but, by increasing exports and deterring imports, help stop the threatened rise in unemployment. In short, the transnationals’ actions could be readily rendered harmless given the national will. Significantly, though, this devaluation-based strategy will be much more difficult to carry out in countries in the European Union which join the European single currency system. Perhaps this is the reason the Euro is being promoted so hard even though very few benefits are expected to arise from its use.

What all this means is that Greens have no need to be against growth. They just have to be against the main type of growth taking place at present. If firms can produce a greater value of goods and services without:

• reducing the number of people they employ
• cutting wages and other employee benefits
• increasing the amount of energy and raw materials they use
• needing more transport services
• shifting the distribution of income in favour of the better off
• releasing genetically-engineered organisms into the environment
• patenting life-forms
• using technologies that make work less interesting and fulfilling
• increasing the amount of waste that goes to landfill or into the environment
• driving smaller firms out of business or damaging local economies
• allowing chemicals which are not quickly and harmlessly broken down into safe and stable constituents to leave their factories.
• purchasing goods or services from parts of the world where prices are subsidised because environmental, social or working conditions are significantly inferior to those in the countries they are supplying
• increasing human, animal or plant exposure to nuclear and electro-magnetic radiation
• making production and supply systems less sustainable than they are already
• and several more conditions you’ll be able to think of yourself

then the growth that results is fine. But if any of the above conditions cannot be met, and the damage done in consequence is not heavily outweighed by gains in other areas, their expansion proposals have to be trenchantly opposed.

The fact that so many conditions have to be satisfied before we can be reasonably sure that growth will turn out to be beneficial says a lot about why the process has been so damaging recently. As the old song says about a good man, good growth is hard to find. ————————————————————————

(Written May, 1997 with minor revision later)

1 Social Trends, 1994, HMSO.
2 British Medical Journal, January 4, 1997.