Source of the Crisis: Economic Growth

Lecture IV—Source of the Crisis: Economic Growth

Introduction

1. From the beginning of agriculture up to the present decade, human beings have been consuming ever increasing amounts of energy.  This is due both to increasing population and to a steady growth in energy consumption per capita.  In the last lecture we looked at graphs of these two progressions that conveyed the sense of a virtual explosion of human energy use.
2. In light of the Second Law of Thermodynamics, these charts can also be viewed as representing ever increasing amounts of entropy discharged into the biosphere by human activity.  Before the 17th century, the biosphere was able to transfer this entropy back into space in the form of low-grade heat radiation.  With the accelerating use of fossil fuel driving the Industrial Revolution, however, increasing amounts of entropy were retained in the biosphere.  This impacted entropy shows up as global warming, ozone depletion, and loss of species diversity, along with other forms discussed in the previous lecture.
3. This growing glut of entropy poses an imminent threat to the integrity of the biosphere, and thus to the continued existence of human society as we know it.  For people prepared to see the threat, this predicament gives rise to an urgent question.  Why is human energy use increasing at such a rapid pace?  The present lecture is intended to address that question.  As we shall see, the answer comes in two parts.  First, our increasing energy use is keyed to increasing economic production.  And second, contemporary economies are actually geared for continued growth.

The correlation between energy use and GNP

1. For more than half a century now, economists have been gathering production data expressed in terms of Gross National Product (GNP).  Another measure sometimes used is Gross Domestic Product (GDP).  GDP is the total market value of goods and services produced in a given country during a given accounting period.  GNP is GDP plus income earned abroad by domestic residents minus domestic income earned by non-resident foreigners.  Simply put, GNP is value accruing to individual and corporate citizens for goods and services produced at home and abroad.
2. Different countries obviously have widely different GNPs per capita, a fact giving rise to the distinction between “developed” and “developing” countries.  Another obvious fact is that developed countries tend to consume more energy per capita than their underdeveloped counterparts.  After a few decades of data gathering, a very interesting correlation began to emerge.  Across a broad range of countries sampled, developed and developing alike, per capita energy use tends to increase with per capita GNP.  The more goods and services produced, the more energy expended in producing them.
3. In the early 1960s, the U.S. Office of Science and Technology released data on economic production and energy consumption for more than 40 countries worldwide.  These data were widely reported and have been extensively discussed.  Data for a representative subgroup of countries are shown in Chart 7.1. 
    
   

   Chart 7.1:  Correlation GNP and energy consumption

   The 15 countries on the chart are divided according to magnitude of per capita energy use:
   
4. 1. those with 50 million BTUs per capita annual energy consumption or less,
   2. those with per capita consumption between 50 and 100, and
   3. those with consumption of more than 100 BTUs.
   Countries shown have average per capita consumptions representative of other countries in their respective groups.  From these averages can be calculated BTUs expended per dollar GNP in each group. 
5. Now notice the line extended diagonally across the chart.  Give or take a few degrees slant, this line cuts through the average of each individual cluster.  The same effect would be seen on a chart including all of the 40 plus countries.  What this line shows is that the world’s economies, for the period in question (1961) averaged about 65,000 BTUs expended for each dollar GNP per capita.
6. For present purposes, there is nothing special about 1961 other than its being a year for which such data happen to be readily available.  Different figures pertain to the same countries for different periods in recent economic history.  The point to bear in mind is not where specific countries stood in 1961, nor the average 65,000 BTUs per dollar product.  The point is that production of a given amount of GNP always involves the consumption of a non-trivial amount of energy.
7. The inevitable consequence, obviously enough, is that growth in GNP entails growth in energy consumption.  And growth in energy consumption entails larger and larger amounts of entropy dumped into the biosphere for its disposal.  The implications are evident, and unmistakably ominous.
8. Not surprisingly, in view of these implications, the correlation between energy use and economic production has been a subject of controversy.  Mainstream (neoclassical) economists have been reluctant to admit more than a coincidental relation.  Neoclassical orthodoxy (more on this later) traditionally has held that environmental resources are limitless and hence do not figure in market calculations.  Among other things, this meant that volume of energy use was considered incidental to economic production.
9. By the end of last century, however, empirical studies made it increasingly evident that GNP and energy use in fact are tightly correlated.  One study backed by the U.S. Department of Energy, for instance, showed that between 1870 and 1981 U.S. energy use and GNP progressed along trajectories that ran parallel even on the level of yearly fluctuations.  (This is displayed in the lecture video.)  While other variables are always involved, by now it is apparent the economic production is directly dependent on energy consumption. 
10. This tight coupling of economic production and energy consumption has dire consequences for a biosphere already unable to rid itself of all the entropy deposited within it.  The most urgent consequence is that economic goods and services come at a cost of ecological degradation.  Given a biosphere already struggling from past abuses, higher levels of production inflict yet further damages.  Indeed, this consequence has the status of an economic principle.  We might call it the Entropy Principle of Economics.  The production of a given amount of economic goods results in a corresponding amount of ecological disorder. 
11. Once again, the connection between economic production and ecological destruction is that production requires energy and generates entropy, and that the type of entropy we are now dealing with is tantamount to environmental degradation.  In light of this chain of consequences, the seemingly most obvious response to our environmental crisis would be to cut back radically on economic production.  Once stated thus explicitly, however, this strategy encounters an immediate snag.  It runs afoul of a basic doctrine of mainstream economics, to the effect that growth is essential for a healthy economy.

Growth an axiom of mainstream economies

1. Mainstream economics is so-called because it is the predominant branch of economics in most major universities and because its PhDs are often recruited by government agencies and large corporations.  It traces back to the pioneering work of Adam Smith, Thomas Malthus, and John Stuart Mill, among others, and was represented in the 20th century by such notables as John Maynard Keynes, Milton Friedman, and Robert Solow.  Because of its roots in the 17th and 18th centuries, it is sometimes referrred to as neoclassical economics.  A brief history of this school may be found in Ch. 10 of the text.
2. In its contemporary manifestation, neoclassical economics is distinguished by its mathematical methodology, its assumption that economic man is essentially rational, its faith in the free market, and its axiomatic doctrine that economic growth is inherently a good thing.  This doctrine is enforced by the presence of mainstream economists in business and government and by the fact that most economies today tend to operate on free-market principles.  It is the alleged fact that free markets must grow in order to flourish that stands in the way of a general retrenchment of economic growth.
3. The question of moment in this regard is whether the alleged benefits of economic growth outweigh the ecological costs that invariably go with it.  If so, then growth should prevail, and we will have to find other ways to deal with our ecological crisis.  Possible alternatives will be considered in the subsequent lecture.  If the costs outweigh the benefits, however, then the benefits should be forfeited, and we must look for ways to avoid further economic growth.  What kind of benefits should we be thinking of in considering these alternatives?
4. Although mainstream economics tends to treat the desirability of growth as axiomatic, arguments in behalf of growth sometimes appear in its literature.  Economic growth stimulates employment, increases revenues for social services, advances standards of living, and so forth.  The general thrust of such arguments is that growth not only is good for the economy at large but also contributes to social well-being.  Let us consider a representative sample of such arguments to see whether they justify continued economic growth.

Argument (1): growth yields wealth that reduces birth rates

1. One argument advocates growth as a solution to an urgent environmental problem, that of a human population too large for the earth to support.  In the form to be considered, this argument relies on three assumptions: (1) that population levels can be controlled by human intervention, (2) that birth rates are generally lower in rich countries than in poorer, and (3) that a reduced human population would cause less damage to our ecological support systems.  On the basis of these assumptions, the argument concludes that economic growth should be fostered as a means of reducing the number of people the biosphere has to support.
2. The first assumption seems generally dubious, although it might prove true in particular circumstances.  Before the last century or two, human population was held in check by pestilence, famine, and high rates of infant mortality.  Human techniques of population control available today include infanticide, abortion, and various methods of birth control.  One gray area is that many people find techniques like these morally unacceptable, and hence will not adopt them.  Another issue is the extent to which such techniques are actually effective.  Despite draconian population control methods now imposed in China, for instance, its population still grew by 7 million in 2006.  On a scale that would make a difference, human population may be beyond human control.
3. Regarding the second assumption, while studies have shown that birth rates in wealthy countries today are generally lower than those in underdeveloped areas, what remains unclear is whether the differences are due to wealth or some other factor.  Other factors sometimes suggested are need for larger labor forces in developing countries, lack of educational opportunities, and restricted occupational roles for women.  Another possible explanation is that high birth rates are correlated with intensity of religious belief, and that poorer countries are more religious and rich countries more secular.  If this explanation is correct, then the indicated approach to population control would be to make poor countries more secular, rather than increasing their per capita incomes.
4. From an environmental perspective, the basic problem not population as such, but amount of energy expended by human activity overall.  The third assumption is that fewer people would result in less environmental damage.  Significantly fewer people undoubtedly would cause less damage to the biosphere if per capita energy use holds constant while populations decline.  But during the last century or so, per capita use has been growing exponentially like population itself.  If world population had been arrested at its 1900 level of 1.6 billion and per capita consumption continued to increase as it has in the interim, then total human consumption in 2000 still would have been substantially larger than in 1900.  And by 1900, the biosphere already was in trouble.  While growing population remains a factor, curtailing its growth will not resolve our environmental crisis.  The problem is the amount of entropy produced overall, and not the number of people producing it.
5. The gist of the present argument is that additional wealth stemming from continued economic growth could somehow be apportioned to reduce populations in currently poor countries, and that this would be good for the environment at large.  Not only are the assumptions behind this argument shaky for reasons just indicated, however, but the very idea that the environment might benefit from continued economic growth is quirky in the first place.  Economic growth is the source of the problem, and cannot be transmogrified to provide a solution.

Argument (2): Growth reduces inequities in wealth among nations

1. Another argument purports to justify growth as a means of reducing disparities of income between richer and poorer nations.  For example, in 2000 the U.S. had a per capita GNP of more than $36,000, while that of Zambia was less than $1,000.  In the view of some mainstream economists, the main reason for such discrepancies is that economies in developed countries have been able to grown more efficiently over longer periods of time.  As poorer countries undergo development, the argument goes, their growth in income eventually will overcome these differences.  Economic growth is thus cast as an instrument of equity, elevating poor countries to the ranks of developed nations.
2. One obvious problem with this argument is that it justifies growth in poorer countries at best.  Since disparities like this are due to the wealth of some countries no less than the poverty of others, a similar argument could be made for restricting economic growth in wealthier countries instead.  In any case, growth in developed countries cannot be justified by the needs of their less fortunate counterparts.
3. From an environmental standpoint, furthermore, the argument from equity falls short of justifying further growth even in developing countries.  Here’s why.  Whereas rich countries contain only about one-fourth of the world’s population, they account for roughly four-fifths of its totally energy consumption.  Simple calculations show that if consumption in underdeveloped countries were raised to the same level (the four-fifths now enjoyed by the privileged one-quarter), then energy use worldwide would more than triple.  Since the biosphere cannot handle the entropy resulting from total energy consumption at its current level, tripling that amount would be all the more catastrophic.

Argument (3): Growth increases social well-being

1. A favorite argument among advocates of economic growth portrays growth as an avenue to social well-being.  Among benefits commonly cited are longer and healthier lives, more jobs at better wages, and more tax money available for health care and education.  A recent book by a prominent economics professor (B.M. Friedman of Harvard) even advocates growth as a basis for moral improvement.
2. Let us consider first one of the more tangible benefits, the creation of new jobs.  Although jobs come and go regardless of economic circumstances, the problem with growth as a source of jobs is that large corporations today often increase their profits by eliminating existing jobs instead.  In contemporary parlance, this is known as “downsizing.”  A companion tactic is so-called “outsourcing,” which amounts to transferring jobs to areas where labor is cheaper.  Locally, this constitutes a loss of jobs.
3. On the level of the economy at large, growth is equivalent to increased production, which is often accomplished by increased automation.  Inasmuch as automation is a way of doing things without people, increased automation leads to fewer jobs for human workers.  Under certain circumstances, of course, loss of jobs to automation might be countered by increased employment in other sectors of the economy.  An example in recent times is the large scale transition from manual labor to work requiring computer skills.  For massive job loss to be compensated in this way, however, is probably an exception rather than a general rule.  The upshot is that growth is not a reliable source of additional jobs. 
4. Another way in which growth might possibly enhance social well-being is by providing services like education, health care, and public transportation.  Services like this are usually subsidized by taxes.  Inasmuch as economic growth generally goes hand in hand with an increased tax base, it can be argued that growth enables an expansion of social services.
5. But this argument runs counter to empirical data.  A recent (2001) study showed that the five countries with the highest per capita GDP (including the U.S.) spent about 18% of their total product on social services, while the five countries (including Denmark and Sweden) with highest expenditure on social services had per capita GDPs averaging $20,000 less than the former group.  In upshot, the five wealthiest countries spent 36% less of their total GDP on social services than those ranking highest in that regard, while the latter had per capita GDPs 55% lower than the wealthier group.  Among other things, this shows that greater national wealth does not translate into larger expenditures on social services.
6. Another source of doubt about the supposed link between economic performance and social well-being is the finding of several studies that personal satisfaction varies independently of absolute income.  To the extent that personal contentment depends on economic considerations in the first place, it seems that people judge their well-being in comparison with their compatriots rather than on a absolute basis.  Thus, for example, people with annual income of $10,000 living in a society with an average income of $5,000 will tend to be happier than other people making $10,000 in a society averaging $20,000.  Here is one more reason why economic growth cannot be justified by social benefits supposedly following in its train.  Greater wealth does not translate into greater contentment.

Conclusion

Needless to say, this brief survey does not exhaust the arguments that might be mounted in behalf of economic growth.  But perhaps enough as been said to show that the case for continued growth is not strong enough to override our urgent need to cut back on the amount of energy being consumed by human activity.  Whatever its momentary advantages, the path of continued growth is not worth following given its present tendency to veer in the direction of self-destruction.