"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Tuesday, May 8, 2007

Anonymous Contribution: In Defense of Growth

Inel passes along this anonymous contribution, in an effort to answer one of my perennial questions about the conventional wisdom in economics. It's interesting and polite, but it still seems to see everything on a pretty narrow Marxism/capitalism axis with the limits set by sustainability as a sort of afterthought.

In short, I can't agree but I think it's worth reading.

Growing GDP is an economic, political and philosophical issue


* GDP has a definition in economics (I forget specifics but its easy to find a definition) as the gross output of a nation. You could in theory say that you could measure spending rather than output to define the “economic size” of a nation.
* It is the bluntest tool used for comparing the wealth of nations.
* Real GDP is net of inflation: for example GDP growth of 5% at a time when inflation is 10% would indicate the national economy is shrinking.
* The “economy” of a nation is a complex organism with many compensating and conflicting trends, drivers and results: GDP helps to give a blunt measure of size and growth (each year and over the long term). Most economies are valued in dollars to make international comparisons possible.


* Political systems vary.
* Managed (command-style) economies are goal driven rather than economically driven. For example, USSR used to have a five year plan (etc) which defined success in meeting quotas such as tank production, wheat harvest, etc. In such political systems, the obsession with output was regardless of cost, damage and lives lost. It was not a good system.
* Political systems based on shared wealth, production, workload have all failed. Leaders and oligarchs inevitably distort the system for their own ends because of human nature (temptation and the ability to abuse their position). It always happens – look at Africa and Eastern Europe. Such systems are utopian and not practical. Such systems killed 100m people in the 20th century though bad implementation of ideals.
* Open, democratic political systems have done best (historically) during a period of free markets and international competition / cooperation through trade. The most extreme example of this is the globalization of the past 20 years.
* In such democracies, growth is a sign of progress. The opposite of growth leads to electoral failure. Growth may be defined in more terms than just GDP: for example – unemployment levels, quality of state services (health, education, benefits). There are also intangible measures (“equality of opportunity”, “social mobility”, etc)
* State spending in democratic countries is always under pressure: look at increasing healthcare costs. Therefore in general, improvements in state provision require GDP (output) growth and such growth is driven by rising expectations of the citizen.
* By definition, the average citizen (measured by mean income) earns less than half the population – the other 50% earn even less. In an open society (democratic institutions, freedom of speech, reasonable policing), most people will aspire to better things. These aspirations provide a permanent driver for economic advancement, driving demand for increased GDP.

Philosophy: Two major issues arise for me in this discussion about GDP

Society vs. the Individual

o One’s view on the role of the individual in society generally guides one’s politics more than anything else. The US is highly individualistic, Sweden has a more collective society. There is no right answer. I am more of an individualist because I am able-bodied and successful, and feel society does best when the best and brightest are encouraged to achieve: scientifically, economically, creatively. Beyond a certain point social initiatives by government limit choice, suppress excellence and dumb down the potential to a reasonable average.
o Systems which say for example we should have net-neutral economies (no real growth in GDP) will inevitably place limitations on the freedom of the individual. Inventors will be prevented from inventing stuff that provides economic advantage against other countries; there will have to be quotas on creativity, invention and ultimately freedom. I believe the implications of a forced “non-growth” are dangerous.
o A parallel discussion concerns population: it is clear that fewer people (as well as fixing global warming) provides better resource allocation for us all. The morality of implementing such a strategy has implications best seen in China over the past 40 years with single child quotas that have led to mass abortion and infanticide. Its morally unacceptable to pursue such a strategy.
o In conclusion, GDP growth matters less than GDP neutrality / contraction: the latter leads people, and their elected officials to ask why we are not advancing and so GDP growth is the logical goal for modern democracies.

Nationalism vs. ‘Internationalism’

o The other approach here is to question the nature of nation-states. If we had a world government, there would be less national rivalry, less emphasis on growth for national pride, less need to compare.
o Lessons of the EU show both sides of this issue.
o It is great that EU expansion brings many people together, the Euro and tax harmonization strive to minimize the petty differences between countries. On the other hand, the EU failed to agree a constitution and now has a major rethink about future strategy.
o I believe the EU constitution story is relevant: on the whole, people do not want to be equalized and homogenized. They will put up with being average if there is a chance to be better off: it is more important to have the opportunity than to achieve the goal.

So, I do not believe a voluntary or mandatory scheme to reduce GDP growth to acceptable levels (or zero) is feasible or desirable. I think the best opportunity for tackling climate change is to use the forces of greed and ambition and risk-taking to our advantage. I just do not know how."

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