Gross Domestic Problem: Don’t Shoot the Measurement

by Brian Czech

BrianCzechA battle is brewing on the outskirts of the general public. A rising tide of quixotic activists is trying to overthrow a time-tested American institution. Like the Battle in Seattle, where the IMF was put on public trial, this new struggle will get a lot of attention, but the institution will remain.

The “institution” in this case is a metric: GDP, or Gross Domestic Product. But GDP isn’t any old metric, like widgets assembled or the price of potatoes. GDP is thoroughly institutionalized at the center of our domestic policy arena. When fiscal and monetary policies are crafted, each is judged according to the likely effects on GDP. If something will increase GDP, it must be good and will likely be adopted. GDP growth is the king of policy goals.

The central logic of pursuing GDP growth is “a rising tide lifts all boats.” As long as GDP continues to grow, it is mathematically possible to have more jobs and increase the amount of GDP available per person. In other words, the “standard of living” can increase with GDP.

The rising tide logic made perfect sense during most of the 20th century, when there was a lot of open water and plenty of boat-building material. But such is not the case in the 21st century. Growing the GDP entails population growth or growth in consumption per person; usually both. Trying to grow the GDP these days causes as many problems as it solves. Biodiversity loss, climate change, and pollution are some of the obvious ones. Noise, congestion, and stress are too. It doesn’t look like GDP growth increases the standard of living after all, unless your idea of living standards is particularly anal.

Keystone Protest

GDP measures environmental impact and the size of our economy, not its health. Photo Credit: Stephen Melkisethian

A more nuanced problem is that GDP growth is addictive, kind of like NFL football or World Cup soccer. It has societies and governments all over the world scrambling like hamsters to keep “the score” from shrinking. Crazy things are done in the name of GDP growth: huge rivers are dammed, Keystone pipelines are built, Supreme Courts kick people out of their homes. (Remember Kelo vs. New London?) A society hell-bent on GDP growth is like a junkie doing whatever nasty thing it takes for the next high, rather than doing the right thing for himself and his family.

Yet the realization is gradually spreading that GDP growth can’t continue forever. This reality is causing societal angst and discomfort. For many, especially in the economics profession and business world, the response is denial. “The world can, in effect, get along without resources” is how Robert Solow, the Nobel prize-winning economist, put it.

But among those with their feet firmly on the ground, seeing the limits to growth materialize, the responses aren’t always prudent either. One such response has been to shoot the measurer, or to be more metaphorically accurate, to shoot the measurement of GDP. The politics of this makes for some exceptionally strange bedfellows. From tree-hugging Earth Firsters to staid Austrian-school economists to think tanks funded by the Rockefeller Brothers fund, performing an exorcism of GDP from the spirit of our political economy is all the rage.

The motives of the GDP antagonists differ wildly, reminiscent of the NRA joining the ACLU to fend off the NSA. Pro-growth, free-market economists don’t like government getting any credit for anything, and GDP calculations include government spending, so GDP must be an evil spirit. On the other end of the spectrum, no-growth proponents who see the government as a force to defeat the pro-growth capitalists (and economists) think… something quite odd. They think that, if we refuse to even acknowledge GDP, we’re less likely to be obsessed with its growth, and we can focus more on healthier goals such as better education and healthcare.

It’s shoddy logic at best. It’s akin to an alcoholic thinking, “If I don’t count those beers I drink, I’m not as likely to drink so many. Then I can focus more on my book-learning and health.”

Shall we have a toast? Let’s drink to not counting those beers!

No, the fact is that the alcoholic needs to count those beers more than ever. The diabetic needs to monitor that blood sugar. The obese patient needs to monitor that scale. You get the picture: As our economy exceeds the capacity of the planet to sustain us and future generations, we need to monitor the size of our economy more closely than ever. And there is no better measurement of the size of our economy than GDP.

Due to the fundamental structure of the economy, the size of the economy – as measured by GDP – is a perfectly valid indicator of environmental impact. Agricultural and extractive sectors form the base, which must expand to support the growth of manufacturing and service sectors – yes even the “information economy.” This structure, which is the closest thing in economics to an inescapable law of physics, gives us the “trophic theory of money,” which says that the level of expenditure (GDP, in other words) is proportionate to environmental impact including such tangibles as biodiversity loss, climate change, and pollution in the aggregate.

Those who think technological progress can somehow decouple GDP growth from environmental impact haven’t thought hard enough about the relationship between technological progress and the GDP growth that was based on pre-existing levels of technology. The two go hand in hand, which again in the 20th century was a fine thing. The two going hand in hand in the 21st century tells us nothing except that technological progress cannot reconcile the conflict between economic growth and environmental protection.

So let’s not shoot the measurer or the measurement. Let our friends in the Bureau of Economic Analysis calculate GDP as consistently as they’ve done for over 80 years. They perform a valuable service, and GDP is an invaluable metric. Instead of shooting it, let’s help to ensure the appropriate attitude toward ever-growing GDP: that is, a growing sense of alarm and a concomitant determination to stabilize the size of this economic ship before it sinks as surely as the Titanic.

Uneconomic Growth Deepens Depression

by Herman Daly

Herman DalyThe US and Western Europe are in a recession threatening to become a depression as bad as that of the 1930s. Therefore we look to Keynesian policies as the cure, namely stimulate consumption and investment—that is, stimulate growth of the economy. It seemed to work in the past, so why not now? Should not ecological economics and steady-state ideas give way to Keynesian growth economics in view of the present crisis?

Certainly not! Why? Because we no longer live in the empty world of the 1930s — we live in a full world. Furthermore, in the 1930s the goal was full employment and growth was the means to it. Nowadays growth itself has become the goal and the means to it are off-shoring of jobs, automation, mergers, union busting, importing cheap labor, and other employment-cutting policies. The former goal of full employment has been sacrificed to the modern ideology of “growth in share holder value.”

Growth has filled the world with us and our products. I was born in 1938, and in my lifetime world population has tripled. That is unprecedented. But even more unprecedented is the growth in populations of artifacts — “our stuff” — cars, houses, livestock, refrigerators, TVs, cell phones, ships, airplanes, etc. These populations of things have vastly more than tripled. The matter-energy embodied in these living and nonliving populations was extracted from the ecosystem. The matter-energy required to maintain and replace these stocks also comes from the ecosystem. The populations or stocks of all these things have in common that they are what physicists call “dissipative structures” — i.e., their natural tendency, thanks to the entropy law, is to fall apart, to die, to dissipate. The dissipated matter-energy returns to the ecosystem as waste, to be reabsorbed by natural cycles or accumulated as pollution. All these dissipative structures exist in the midst of an entropic throughput of matter-energy that both depletes and pollutes the finite ecosphere of which the economy is a wholly contained subsystem. When the subsystem outgrows the regenerative capacity of the parent system then further growth becomes biophysically impossible.

But long before growth becomes impossible it becomes uneconomic — it begins to cost more than it is worth at the margin. We refer to growth in the economy as “economic growth,” — even after such growth has become uneconomic in the more basic sense of increasing illth faster than wealth. That is where we are now, but we are unable to recognize it.

Why this inability? Partly because our national accounting system, GDP, only measures “economic activity,” not true income, much less welfare. Rather than separate costs from benefits and compare them at the margin we just add up all final goods and services, including anti-bads (without subtracting the bads that made the anti-bad necessary). Also depletion of natural capital and natural services are counted as income, as are financial transactions that are nothing but bets on debts, and then further bets on those bets.

Also since no one wants to buy illth, it has no market price and is often ignored. But illth is a joint product with wealth and is everywhere: nuclear wastes, the dead zone in the Gulf of Mexico, gyres of plastic trash in the oceans, the ozone hole, biodiversity loss, climate change from excess carbon in the atmosphere, depleted mines, eroded topsoil, dry wells, exhausting and dangerous labor, exploding debt, etc. Standard economists claim that the solution to poverty is more growth — without ever asking if growth still makes us richer, as it did back when the world was empty and the goal was full employment, rather than growth itself. Or has growth begun to make us poorer in a world that is now too full of us, and all our products, counted or not in GDP?

Does growth now increase illth faster than wealth? This is a threatening question, because if growth has become uneconomic then the solution to poverty becomes sharing now, not growth in the future. Sharing is frequently referred to as “class warfare.” But it is really the alternative to the class warfare that will result from the current uneconomic growth in which the dwindling benefits are privatized to the elite, while the exploding costs are socialized to the poor, the future, and to other species.

Finally, I eagerly submit that even if we limit quantitative physical throughput (growth) it should still be possible to experience qualitative improvement (development) thanks to technological advance and to ethical improvement of our priorities. I think therefore we should urge policies to limit the quantitative growth of throughput, thereby raising resource prices, in order to increase resource efficiency, to force the path of progress from growth to development, from bigger to better, and to stop the present folly of continuing uneconomic growth. A policy of quantitative limits on throughput (cap-auction-trade) will also block the erosion of initial resource savings resulting from efficiency improvements (the rebound effect or Jevons paradox). In addition the auction will raise much revenue and make it possible to tax value added (labor and capital) less because in effect we will have shifted the tax base to resource throughput. Value added is a good, so stop taxing it. Depletion and pollution, the two ends of the throughput, are bads, so tax them. If you are a technological optimist please have the courage of your convictions and join us in advocating policies that give incentive to the resource-saving technologies that you believe are within easy reach. You may be right — I hope you are. Let’s find out. If you turn out to be wrong, there is really no downside, because it was still necessary to limit throughput to avoid uneconomic growth.

Technological Progress for Dummies, Part II

More than One Kind of Nut

by Brian Czech

“Failure breeds success,” I hope some famous person once said. For I have failed to accomplish the goal set out in Part 1 of Technological Progress for Dummies. The goal was to summarize an article — in plain language and in less than a thousand words — that described why technological progress cannot reconcile the conflict between economic growth and environmental protection. I found I couldn’t do it without several thousand words, and too much plain language is as difficult to digest as a dollop of jargon. As for the article itself, it’s long and full of jargon.

And now for the successful offspring of such abject failure. (Drumroll, please.) I can successfully say that most folks have tightened a nut or two.

In the old days you would have used a monkey wrench. Then a tidbit of technological progress happened and you had a box wrench, which allowed you to tighten that nut a tad more efficiently. When they finally invented the ratcheting socket wrench, you were really in business. It seemed like you could tighten far more nuts with the same amount of elbow grease; five nuts to one when you threw in some coffee!

Such is the basic pattern of technological progress. Invention and innovation allow you to do more with less. Well ok, maybe not actually “less.” If you tighten five nuts to one, you’re prone to using five times the nuts. And the ratchet set is something you have to add to the toolbox. But you can definitely tighten more nuts without working harder, so in workaday parlance, you’re doing “more with less.” If you want to get technical about it, you could say you’re producing more output per unit input. Your productivity is increasing.

For the economy as a whole, productivity increases with technological progress. It’s an impressive process; nearly awesome at some points in history. It makes us proud of the human race, boosts our confidence, makes us think the sky is the limit. Many are even led to believe we can grow the economy without impacting the environment. After all, if we can do more with less, how about doing more with a lot less?

And why stop there? If we invent and innovate enough, maybe we can do more with no more! We can just keep growing GDP without using any more wood, water, minerals, petroleum — natural resources in general. No more steel, nuts, or tools. No more stuff, no more energy.

It’s reminiscent of the alcoholic announcing, “I’m not drinkin’ any more, but just as much.” We may not be using more natural resources to produce more goods and services, but if we’re still using the same amount we can’t really say we’ve stopped impacting the environment, can we? Especially since we had to dig deeper for the minerals, drill deeper for the petroleum, etc. And notice we haven’t even mentioned the flow of pollution (and won’t, to keep things simpler.)

So it’s time for the really big guns. Now we’re going to produce more, not only with way less, not only with no more, but with nothing at all! We’ll just beam it all up. Why not? After all, research and development expenditures in the United States alone are some $300 billion per year. That oughta buy us out of any problem, including this one! That’s why economists like Robert L. Bradley, Jr. announce, “Natural resources originate from the mind, not from the ground, and therefore are not depletable.”

Now if you’re a scientist worth your stellarator, you can see through the subterfuge in a nanosecond. The first law of thermodynamics tells you there’s no producing something from nothing. You can’t even get perfectly efficient with the resources you do use, because that would violate the second law of thermodynamics. So there’s a limit to technological progress — doing more with less — as it applies to the full collection of materials at our disposal along with the energy we receive from the sun.

The problem remains, however, that for purposes of plain language, the laws of thermodynamics and even the phrase “laws of thermodynamics” don’t cut it. Only in plain language can we make a difference in everyday life and public policy. That’s why President Obama signed the Plain Language Act of 2010.

So here’s some more nuts and bolts. Remember how doing “more with less” leads to five times the nuts? Tell your local Robert L. Bradley, Jr. that we shall all refuse to tighten five times the nuts without five times the bolts and washers, along with additional material to be tightened. And if we’re assembling things for market — quite necessary for GDP growth — we’re now assembling more of them. That leads to more transportation, storage, and retail services. More electricity all around, too, along with the wiring, fuses, bulbs and such. Plus that power plant in the background, with all the nuts and bolts therein.

Now with this type of expansion going on everywhere that the proverbial nuts are tightened (all around the world, in other words), information services help to orchestrate it all. Everybody better have a computer, cell phone, and Twitter feed. Operating at this level, you may as well start advertising, too. Banking, insurance, and other service sectors will also play an expanded role.

Notice that, in addition to not even mentioning the flow of pollution, we also haven’t mentioned the agricultural sector — farming in plain language. But of course we’re going to need plenty of it, to feed all the folks with the manufacturing and service jobs. With all the food they’ll have to produce, they’ll need cell phones and GPS units in the air-conditioned cabs of those 30-foot-wide combines. And plenty of extra nuts and bolts.

So that old ’90’s notion that we could keep growing the “Information Economy” without using more resources — and without any more environmental impact — was like a highly productive conversion of grass into bullpies. All that information, which was supposed to beam us up to Shangri-La, was nothing if not tied into the regular old economy down on the farm and everywhere else in the Land of Nuts and Bolts. The computer was nothing more than the ratcheting socket wrench of the IT sector, which was distributing marching orders for an ever-larger ecological footprint.

At a thousand words now, I’m thinking this is all the success my failure can breed. Enough for one column at least. Someday I may also find a way to convert that earlier-mentioned article, condensing concepts such as niche breadth, trophic levels, and economies of scale into plain language of a thousand words or less, refuting the macroeconomic environmental Kuznets curve and solving the Jevons paradox (which really isn’t so paradoxical) in the process.

But it’ll drive some nuts. In fact, many more nuts, albeit more efficiently.

Technological Progress for Dummies

by Brian Czech

Not you, CASSE signatory. You’re no dummy. You already know that the fundamental conflict between economic growth and environmental protection can’t be overcome with technological progress.

But we’re all dummies about something. Most of us are dummies about toothpick manufacturing, for example. Toothpick dummies range from presidents to pot-scrubbers. So do plasma physics dummies, Arabic language dummies, and root canal instrument dummies. So don’t take this the wrong way if you think technological progress can overcome the conflict between economic growth and environmental protection. You may be wrong about that, but you are legion!

Now among dummies, there’s dumb and dumber. That’s just the way it is. But toothpick dummies and other specific dummies can be smart overall. So the generally smart and smarter are specifically dumb and dumber.

Technological progress sure brings out the dumb in the smarter. This I discovered by trying to get scientific organizations to adopt positions on economic growth. Invariably, the biggest hurdle was the notion that, with technological progress, economic growth and environmental protection could go hand-in-hand.

And frankly, it is an extremely difficult notion to refute, at least in plain language. It’s different if you’re a physicist; you probably get it immediately. You know that, no matter how much invention and innovation, you can’t make something from nothing and you can’t get perpetually more efficient. You know it because you’re steeped in the first two laws of thermodynamics.

But there we go, with “laws of thermodynamics,” already outside the vernacular, way beyond plain language. Few among us are physicists. Legion are we thermodynamic dummies, from presidents to pot-scrubbers.

That doesn’t mean you must be a physicist to get it. Farmers tend to get it too, as do many people who work with their hands, city or country. The fact that you can’t make something from nothing, that you can’t have your cake and eat it too, is really a matter of common sense. Or it should be.

The problem is that common sense is not very common any more. It’s been vanquished by disingenuous marketers, truth-bending politicians, and scholarly “smart-dummies” (generally smart, specifically dumb on technological progress) who have legions thinking there is no limit to economic growth. But surely it’s not far below the surface. Surely there is latent common sense to invoke.

For several years in the early 2000’s, I looked high and low for a thorough explanation of why technological progress could not reconcile the conflict between economic growth and environmental protection. I felt I had common sense — horse sense, farm sense, construction sense — and I couldn’t believe the best-selling authors blathering about perpetual growth in the “information economy” and the politicians chanting the mantra, “there is no conflict between growing the economy and protecting the environment.” All this was based on a fuzzy notion of technological progress, and had most Americans (64% according to a Roper poll) believing there was no limit to economic growth. So I searched for scientific literature to refute the fallacious rhetoric.

Much to my chagrin, there was almost nothing. There were rigorous explanations for limits to growth, most notably by our Daly News namesake. Herman Daly had used laws of thermodynamics to demonstrate limits to growth and to advocate a steady state economy. He and others also described how economic growth required natural capital, which helped to explain the basic trade-off between growth and environmental protection. All this implied that technological progress could not reconcile the trade-off, at least in the long run, and here and there were statements to that effect.

There were also critiques of technological progress that were focused less on limits to growth and more on cultural impacts. Perhaps the most famous was by E. F. Schumacher in Small is Beautiful. Schumacher called for “appropriate technology.”

Yet there seemed to be a missing concept. Nowhere was there a thorough, rigorous, and compelling explanation for why technological progress could not allow a nation, or the world, to continue growing the economy without necessarily degrading the environment in the process. After all, there seemed to be many examples of technological progress that helped protect the environment, even in the midst of rapid economic growth. These examples, along with the lack of a rigorous trade-off thesis, explained why legions were unwilling to acknowledge limits to growth, or even a trade-off between economic growth and environmental protection.

It also explains why very smart dummies in academia, government, and the private sector are paid handsomely for “science and technology policy” affairs. These folks are often brilliant in general terms, and about many specific topics, yet many are dumber than a boot about the relationships among economic growth, technological progress, and environmental protection. Invariably they recognize that economic growth and technological progress are tightly linked, and they know that many new technologies are “greener.” They therefore figure it’s a slam dunk that economic growth may be reconciled with environmental protection via technological progress. For them, the object of science and technology policy is to steer science toward providing technological progress, thereby growing the economy and protecting the environment. It’s a classic win-win!

Partly because they’re paid so handsomely, jetting from conference to conference, most others think they must be experts on the subject. They should, therefore, be believed. Meanwhile, because their win-win message is political gold, politicians find them useful. Smart-dummies are appointed to high governmental posts, becoming more credible yet in the eyes of the public.

If you go to a typical science and technology policy conference, you’ll find one group of speakers talking about where the money for science is coming from or could come from. Another group will point to where the money is going; what kind of science is being conducted, who is conducting it, and what new technologies are coming online as a result. Another group will address what it means to the environment, and another will address what it means to the economy. Keynote speakers weave these threads into the tired message that we need newer technology and therefore more science – we’ll just have to find funding for it – so we can continue growing the economy while protecting the environment. Then it’s time for wine and hors d’ oeuvres and planning for the next highfalutin conference.

Clearly we have to look elsewhere for a clear description of why the conflict between economic growth and environmental protection cannot be reconciled with technological progress. Ideally this description would not rely exclusively on the laws of thermodynamics, either, but could be put in much plainer language. That would make it relevant to the public and policy makers.

When I found no such description during those years around 2000, I decided to attempt it myself. The experience was daunting and taught me how easy it would be to slip into accepting the idea of perpetual economic growth, or at least the idea of reconciling growth with environmental protection for extended periods of time. But I got lucky in stumbling upon an overlooked concept — maybe the overlooked concept in these matters. It’s a concept necessary to explain how economic growth and technological progress can continue in lockstep, but not without environmental degradation. It’s actually a well-known concept in the economics profession, but hadn’t been applied to the issue at hand. I stumbled upon it while studying the methods and findings of national income accounting, especially the findings of the late Edward Denison, a pioneer in the measurement of GDP.

Now I won’t claim that the concept — “economies of scale” — is exactly plain language either. Yet it is much plainer than laws of thermodynamics. For one thing, far more citizens are businessmen than physicists, and economies of scale resonate with them.

I wrote it all up in a peer-reviewed paper published in 2008 for the journal Conservation Biology. The paper isn’t plasma physics, but neither is it plain language. So I haven’t yet completed the plain-language part of the task. There’s no better place to try than the Daly News.

Frankly, I’m not sure I can do it, and I’m not sure it can be done by anyone. The topic may be just tricky enough to defy the vernacular. We’ll see how it goes in the conclusion of this two-part column next week…

Not Production, Not Consumption, but Transformation

by Herman Daly

Herman DalyWell-established words can be misleading. In economics “production and consumption” are such common terms that it is easy to forget that they do not really mean what they literally say. Physically we do not produce anything; we just use energy to rearrange matter into a more useful form. Production really means transformation of what is already here. Likewise, consumption merely reflects the disarrangement of carefully structured materials by the wear and tear of use into a less useful form — another transformation, this time from useful product into worn out product and waste. Of course one might say that we are producing and consuming “value” or “utility”, not really physical things. However, value is always added to something physical, namely resources, by labor and capital, which are also physical things ultimately made from the same low-entropy energy and materials that go into products. Nor does the service sector escape physical dimensions — services are always rendered by something or somebody. To abstract from physical dimensions and focus only on utility is to throw out the baby and pour bathwater on the diaper.

If we were to speak of a “transformation function” rather than a production function then we would naturally have to specify what is being transformed, into what, by the agency of what? Natural resource flows are transformed into flows of goods (and wastes), by the fund agents of labor and capital. A transformation function must show both the agents of transformation (funds of labor and capital that are not themselves transformed into the product but are needed to effect the transformation), and the flow of resources that are indeed physically embodied in the flow of products, or waste. This distinction between fund and flow factors immediately reveals their complementary roles as efficient cause and material cause — any substitution between them is very limited. You cannot bake the same cake with half the flour, eggs, etc. by doubling the number of cooks and the size of the oven. One natural resource can often substitute for another, and capital can often substitute for labor or vice versa, but more labor and capital can hardly substitute for a smaller resource flow, beyond the very limited extent of sweeping up and re-using process waste such as scraps, sawdust, etc. which ought to have already been accounted for in specifying a technically efficient production function. In most textbooks the production function depicts output as a function of inputs, undifferentiated as to their fund or flow nature, and all considered fundamentally substitutable.

But if the usual production function does not distinguish fund agents of transformation from the flow of natural resources being transformed, then how does it envisage the process of converting factor inputs into product outputs? Usually by multiplying them together, as in the Cobb-Douglas and other multiplicative functions. What could be more natural linguistically than multiplying “factors” to get a “product”? But this is mathematics, not economics. There is absolutely nothing analogous to multiplication going on in what we customarily call production — there is only transformation. Try to multiply the resource flow by labor or capital to get product outflow and your “production function” will have immediately run afoul of the law of conservation of mass. Perhaps to escape such incongruities most production functions contain only labor and capital, omitting resources entirely. We can now bake our cake with only the cook and her oven, no ingredients to be transformed at all! You can multiply cooks times ovens all you want and you still won’t get a meal.

How did this nonsense come into economics? I suspect it represents a confusion between the production function as a theoretical analytical description of the physical process of transformation (a recipe), and production function as a mere statistical correlation between outputs and inputs. The latter is common in macroeconomics, the former in microeconomics, although that is not a hard and fast rule because the distinction between a theoretical description and a statistical correlation is often ignored in both areas. The statistical approach usually includes only labor and capital as factor inputs, and then discovers that these two factors “explain” only 60% of the historical change in output, leaving a 40% residual to be explained by “something else”. No problem, say the growth economists, that large residual is “obviously” a measure of technological progress. However, the statistical residual is in fact a measure of everything that is not capital and labor — including specifically the quantity and quality of resources transformed. Increased resource use gets counted in the residual and attributed to technological progress. Then that same measure of technical progress is appealed to in order to demonstrate the unimportance of resources! If we thought in terms of a transformation function, rather than production ex nihilo it would be hard to make such an error.

The basic points just made were developed more rigorously forty years ago by Nicholas Georgescu-Roegen in his fund-flow critique of the neoclassical production function. Neoclassical growth economists have never answered his critique. Why bring it up again, and what is the relevance to steady-state economics? It is worth raising the issue again precisely because it has never been answered. What kind of a science is it that can get away with ignoring a fundamental critique for forty years? It is relevant to steady-state economics because it views production as physical transformation subject to biophysical limits and the laws of thermodynamics. Also it shows that the force of resource scarcity is in the nature of a limiting factor, and not so easy to escape by substitution of capital for resources, as often claimed by neoclassical growth economists.

Breathing Room Economics

When I graduated from college, I was trapped underneath a mountain of debt. I had no money in the bank, $25,000 worth of student loans, and an interesting, but low-paying job doing research on economic and environmental policy. I’m sure many students today look at that $25,000 figure longingly, as they struggle with debts upwards of $100,000. But for me, the $25,000 was huge. After adding up rent, food, loan repayment, and other basic expenses, I didn’t have any money left at the end of each month. It became obvious very quickly that I was stuck – I didn’t have something that I truly desired: breathing room.

In order to reclaim some breathing room, I decided to make paying off my student loans a top priority. I worked hard, cut expenses to the bone, and put as much extra money as possible toward those loans. I paid them off in 3 years and found myself with that much-desired and often elusive breathing room. How did I use it? I took an entire summer off from work and rode a tandem bicycle with my girlfriend (now wife) across the country – a trip that changed my life for the better, but that’s a story for another day.

The search for breathing room drives much of what we do in the economy as households, businesses and governmental organizations. We have pursued economic growth (increasing production and consumption of goods and services) as a policy to gain breathing room. But, paradoxically, economic growth is now using up the very breathing room that we’ve been chasing and hoping to save for the future.

Every person, perhaps even every living organism, is interested in a little bit of breathing room – a chance to live life away from the edge of the cliff. In his book, The Beak of the Finch, Jonathan Weiner has written:

The lucky individual that finds a different seed, or nook, or niche, will fly up and out from beneath the Sisyphean rock of competition. It will tend to flourish and so will its descendants – that is, those that inherit the lucky character that had set it a little apart.

Weiner’s quote provides an eloquent evolutionary perspective on the benefit of establishing some breathing room. Nature imposes a lattice of limits upon life; there is only so much energy available, so many non-renewable resources, and a fixed speed at which renewable resources can be regenerated. Figuring out how to secure leeway within this lattice is a grand goal of all creatures, be they sunflower sprouts, chickadees, or human beings.

The story of human striving, whether considered in the context of an individual or an entire economy, features the quest for breathing room as a central theme. Attainment of breathing room bestows a greater level of security, a wider array of choices for how to spend time and allocate resources, and greater possibilities for meeting needs. Early economists such as Adam Smith and Francois Quesnay recognized the importance of breathing room in the form of agricultural surplus. It is precisely this agricultural surplus that allows for the division of labor. Without being occupied by hunting, gathering, growing, or otherwise obtaining sustenance, people can spend their time and energy on other productive activities. Division of labor, in turn, has generated efficiencies and economic growth that have, in the past, provided even greater quantities of breathing room.

The emergence of breathing room in the economy has given rise to a choice, not unlike the financial situation I created when I paid off my student loans: what do we do with it? In the economy of a single household, this choice might take the form of purchasing more goods and services. It might also take the form of working fewer hours, spending more time on leisure activities, and sharing extra resources with family, friends or community members.

What about the whole economy, then? An economy is essentially a very large household (the word economy actually derives from the Greek for household). A household contains a small number of people interacting with one another and consuming a quantity of goods and services. An economy is simply a larger number of people (the entire population of the economy) consuming a larger quantity of goods and services (the measure of the size of an economy, GDP, can be calculated by multiplying population by per capita consumption). The same choices that exist for a household also exist for the economy as a whole when deciding what to do with breathing room.

The economy of the United States and many other nations around the globe, however, don’t recognize the range of choices. We tend to spend our breathing room the same way in an unending and unsound cycle of economic growth. When we have breathing room, we use it to expand the scale of the economic enterprise; we plow it right back into economic growth, and we have to stare down the possibility of running out of air.

The cycle is composed of these steps:

1. We grow the economy by increasing the production and consumption of goods and services (generally indicated by increasing real GDP).

2. As the economy grows, it begins to bump up against ecological limits, and we experience the negative effects of that growth. Examples include excessive and unhealthy pollution, loss of natural resources, degradation of ecosystems, poverty and famine.

3. We use technological innovation, which is intimately connected to economic growth, to push back the limits to growth. The most stunning example of this step in the cycle is the green revolution, in which Norman Borlaug and colleagues developed a variety of farming techniques to increase agricultural output and world food supplies.

4. We establish breathing room. In the case of Borlaug’s innovations, malnutrition, famines and starvation were avoided.

5. We use our breathing room to go on growing the economy and the cycle repeats itself. After the green revolution, human population, production and consumption continued their exponential upward march.

A critical change, however, occurs each time through the cycle. Ecological limits become more imposing, as the consequences of growth shift from the local to the global scale – instead of worrying about a local river catching fire, we are now worried about destabilizing the climate of the entire planet. In turn, the technological innovation needed to deal with these consequences becomes more complex. As population continues to increase, stocks of natural capital continue to decline, and technological solutions require increasing complexity, the prospects of achieving lasting breathing room become more and more precarious.

Why, then, must we spend our breathing room on growth? What about short-circuiting this cycle of growth? The economy is a human construct, and growth of the economy is not an ironclad natural law – it is a human choice to grow the economy. Granted our institutions and culture are geared for growth. Cessation of growth is avoided at all costs for fear of unemployment and social instability, but with growth working like a huge vacuum cleaner sucking up all our breathing room, perhaps it is time to get to work on changing our institutions and culture. With the right economic framework in place, we can take our breathing room and cut out steps one and two of the cycle. In a steady state economy, we can use our breathing room for innovation and development, rather than for growth.

Breathe easy and move beyond growth. Credit: Saguaro Pictures

Progress and prosperity are not about ever-increasing consumption of goods and services. True progress and real prosperity are about meeting needs, achieving a high quality of life for all people, and sustaining natural resources and useful infrastructure to provide opportunities for future generations. Breathing room is the main ingredient in the recipe for progress and prosperity. Unmindful pursuit of economic growth is eating up this main ingredient before we can even finish preheating the oven. Establishing a steady state economy, with stable population and stable throughput of energy and materials, is the way to protect our breathing room. The sooner we get started on the transition, the sooner we can all breathe a little easier.