23 Economic Growth
As the fossil-fuel era wanes, economic growth will become a relic of the past.
Just like a bike that finds its balance with speed, the economy needs to grow in order to remain stable, growth acting as a promise that pacifies social conflicts and creates consent for certain kinds of politics. Since economic growth is both an idea, a social process, and a material process, an agenda for social change cannot only focus on changing GDP as an indicator, which would be akin to changing the dashboard of a car running full speed towards a cliff. Escaping from the growth paradigm requires to deconstruct growth as an idea, to problematise the role it plays in broader power dynamics, and to carefully understand its relation with nature. Quite a project indeed: going against growth means reinventing most of what we know about modern economies.
Parrique (2023) The future is Degrowth
23.1 Grwoth as a positive feedback cycle
Ayres
The generic positive feedback cycle, in economics, operates as follows: cheaper resource inputs, due to discoveries, economies of scale and experience (or learning-by-doing) enable tangible goods and intangible services to be produced and delivered at ever lower cost.
This is another way of saying that resource flows are productive, which is our point of departure. Lower cost, in competitive markets, translates into lower prices for all products and services. Thanks to non-zero price elasticity, lower prices encourage higher demand. Since demand for final goods and services necessarily corresponds to the sum of factor payments, most of which go back to labor as wages and salaries, it follows that wages of labor tend to increase as output rises. This, in turn, stimulates the further substitution of natural resources, especially fossil fuels, and mechanical power produced from resource inputs, for human (and animal) labor. This continuing substitution drives further increases in scale, experience, learning and still lower costs.
Declining resource prices can have a direct impact on growth, via the positive feedback loop.
In contrast to earlier treatments that introduced (commercial) energy(exergy), or energy(exergy) and materials separately, as factors of production, we consider physical work (or `exergy services’) as the appropriate independent variable for the production function.
Ayres (2005) Accounting for Growth: The Role of Physical Work (pdf)
23.2 Undevelopment
Smith
Watching the experiences of the UK, Japan, and Italy raises the uncomfortable possibility that there’s such a thing as an “undeveloping country”. Standard economic growth theory suggests that once a country gets rich there’s no going back — getting poorer would require willful disinvestment or the forgetting of technology. But the world is more complicated than those simple models, and countries in the past have certainly seen their living standards go into long-term periods of secular decline. So it’s worth worrying whether the end stage of a some countries’ economic lives is not a permanent spot at the apex of development, but a long slow slide back into middle-income status.
Smith (2022) Are the UK, Japan, and Italy “undeveloping countries”?
23.3 Degrowth
Phillips
Rather than viewing the market’s irrational production as the source of environmental challenges, the degrowth position views the source to be economic growth.
Phillips (2022) The degrowth delusion
Hickel
The global economy is structured around growth — the idea that firms, industries and nations must increase production every year, regardless of whether it is needed. This dynamic is driving climate change and ecological breakdown. High-income economies, and the corporations and wealthy classes that dominate them, are mainly responsible for this problem and consume energy and materials at unsustainable rates1.
Yet many industrialized countries are now struggling to grow their economies, given economic convulsions caused by the COVID-19 pandemic, Russia’s invasion of Ukraine, resource scarcities and stagnating productivity improvements. Governments face a difficult situation. Their attempts to stimulate growth clash with objectives to improve human well-being and reduce environmental damage.
Researchers in ecological economics call for a different approach — degrowth. Wealthy economies should abandon growth of gross domestic product (GDP) as a goal, scale down destructive and unnecessary forms of production to reduce energy and material use, and focus economic activity around securing human needs and well-being. This approach, which has gained traction in recent years, can enable rapid decarbonization and stop ecological breakdown while improving social outcomes. It frees up energy and materials for low- and middle-income countries in which growth might still be needed for development. Degrowth is a purposeful strategy to stabilize economies and achieve social and ecological goals, unlike recession, which is chaotic and socially destabilizing and occurs when growth-dependent economies fail to grow.
Reports this year by the Intergovernmental Panel on Climate Change (IPCC) and the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) suggest that degrowth policies should be considered in the fight against climate breakdown and biodiversity loss, respectively. Policies to support such a strategy include the following.
Reduce less-necessary production. This means scaling down destructive sectors such as fossil fuels, mass-produced meat and dairy, fast fashion, advertising, cars and aviation, including private jets. At the same time, there is a need to end the planned obsolescence of products, lengthen their lifespans and reduce the purchasing power of the rich.
Improve public services. It is necessary to ensure universal access to high-quality health care, education, housing, transportation, Internet, renewable energy and nutritious food. Universal public services can deliver strong social outcomes without high levels of resource use.
Introduce a green jobs guarantee. This would train and mobilize labour around urgent social and ecological objectives, such as installing renewables, insulating buildings, regenerating ecosystems and improving social care. A programme of this type would end unemployment and ensure a just transition out of jobs for workers in declining industries or ‘sunset sectors’, such as those contingent on fossil fuels. It could be paired with a universal income policy.
Reduce working time. This could be achieved by lowering the retirement age, encouraging part-time working or adopting a four-day working week. These measures would lower carbon emissions and free people to engage in care and other welfare-improving activities. They would also stabilize employment as less-necessary production declines.
Enable sustainable development. This requires cancelling unfair and unpayable debts of low- and middle-income countries, curbing unequal exchange in international trade and creating conditions for productive capacity to be reoriented towards achieving social objectives.
Some countries, regions and cities have already introduced elements of these policies. Many European nations guarantee free health care and education; Vienna and Singapore are renowned for high-quality public housing; and nearly 100 cities worldwide offer free public transport. Job guarantee schemes have been used by many nations in the past, and experiments with basic incomes and shorter working hours are under way in Finland, Sweden and New Zealand.
But implementing a more comprehensive strategy of degrowth — in a safe and just way — faces five key research challenges, as we outline here.
- Remove dependencies on growth
- Fund public services
- Manage working-time reductions
- Reshape provisioning systems
- Political feasibility and opposition
Government action is crucial. This is a challenge, because those in power have ideologies rooted in mainstream neoclassical economics, and tend to have limited exposure to researchers who explore economics from other angles. Political space will be needed to debate and understand alternatives, and to develop policy responses.
Strong social movements are necessary. Forms of decision-making that are decentralized, small-scale and direct, such as citizens’ assemblies, would help to highlight public views about more equitable economies
Addressing the question of how to prosper without growth will require a massive mobilization of researchers in all disciplines.
Hickel (2022) Degrowth can work — here’s how science can help
23.4 Growth without Economic Growth
Key messages
- The ongoing ‘Great Acceleration’ [1] in loss of biodiversity, climate change, pollution and loss of natural capital is tightly coupled to economic activities and economic growth.
- Full decoupling of economic growth and resource consumption may not be possible.
- Doughnut economics, post-growth and degrowth are alternatives to mainstream conceptions of economic growth that offer valuable insights.
- The European Green Deal and other political initiatives for a sustainable future require not only technological change but also changes in consumption and social practices.
- Growth is culturally, politically and institutionally ingrained. Change requires us to address these barriers democratically. The various communities that live simply offer inspiration for social innovation.
23.5 Ditching Economic Growth
Russel
Growth may be central to mainstream economics but nature has paid the price through pollution, waste and climate change. Some economists say it’s time for a completely different approach.
It was only in the mid-20th century, in the wake of the shattering impact of World Wars and when capitalism and communism were competing for global dominance, that we began to measure the success of an economy in terms of gross national product, or GDP.
The faster GDP was rising, the better an economy could be said to be performing. But something happens as all that economic activity expands. The amount of energy and resources we use also increase.
Ever since the industrial revolution, fossil fuels have set us on a course of furiously expanding production, which has also meant more waste and more pollution. Historically, greenhouse gas emissions have risen alongside GDP. As economies have grown richer, nature has paid the price.
And as the climate crisis has become ever-harder to ignore, more people are questioning whether infinite economic growth is possible on a planet of finite resources.
Zero-emissions with twice the GDP
“The Intergovernmental Panel on Climate Change in their Fifth Assessment, have 116 mitigation scenarios with a chance of staying below the 2 degree Celsius threshold. All of those scenarios assume 2-3% GDP growth rates,” says Jon Erickson, an ecological economist at the Gund Institute for Environment in Vermont, adding that this implies doubling the global economy by somewhere around 2050 .
These scenarios rely not just on switching to renewables, but also on the large-scale extraction of massive volumes of carbon from the atmosphere using as-yet unproven technology, which Erickson describes as “wildly unrealistic.”
“None of those models and the IPCC community even bother simulating a scenario where the global economy contracts, stabilizes and maybe even degrows,” Erickson says. “Yet that’s probably the one realistic scenario that would significantly affect greenhouse gas emissions.”
It is easy to see why the idea that we must keep growing is hard to give up. When economic activity declines and we go into recession, people lose their jobs and are plunged into poverty.
Yet those arguing for “degrowth” — a managed contraction of economic activity— say it doesn’t have to be this way.
ime for a different approach?
Federico Demaria, an economist at the Autonomous University of Barcelona, who has authored several books on degrowth, says that neoclassical economics — which has dominated economic discourse over recent decades, has “never looked at the question of how an economy could be managed without growth. It only looked at questions like, why do economies grow? If it’s not growing, how can we make it grow? Or, how can we make it grow even faster?”
These have become pertinent questions even — or especially — for wealthy, industrialized economies, where growth has slowed over recent decades. “What the mainstream economists are doing is just trying to relaunch growth,” Demaria says.
A different approach, which aims to rein in growth without inflicting the pain that recession has traditionally entailed, comes from the field of ecological economics.
Embedding economics in ecology
Neoclassical economic models picture economies as closed systems, with no inputs of materials or energy and no outputs of pollution and waste. But ecological economists insist there is no real separation between economy and ecology. After all, if we destroy the planet that feeds us, economic activity will collapse pretty quickly too.
In an effort to fix this oversight, Demaria is among those devising new economic models that include factors like emissions and resources use. They are also working in things like social equality, debt, deficits and monetary systems, which have social impacts, and play into cycles of boom and bust.
Degrowthers argue that we do have to tighten our belts — and it doesn’t have to be painful. If we could reverse the central logic of economic systems that prioritize growth over human and ecological wellbeing, they don’t believe we would miss the furious activity that’s keeping a minority of the human population in must-have products and ever-more material wealth.
Russel (2020) Climate crisis: Is it time to ditch economic growth?
23.6 Growth Waves
Schwartz
The fifth Schumpeterian growth wave, which was built on information and communication technologies (ICT) as well as traditional and first-generation bio-engineered pharmaceuticals, has exhausted much of its growth impulse.
A potential sixth wave built on artificial intelligence (AI), machine learning (ML), and second-generation biotech (CRISPR) as general-purpose technologies.
Joseph Schumpeter’s analysis of dynamic change in capitalist economies—what he termed “creative destruction”— sheds light on the economic risks facing the core firms in these seven economies[Big dominant firm in small country]. Schumpeter argued that the central puzzle in economics was explaining the sources of dynamic growth. In an economy that actually embodied the starting assumptions of mainstream economics—small, competitive firms with no barriers to entry and no pricing power—profits would fall to the cost of capital plus some managerial wage for owner-operators. In essence, profits would only cover depreciation. Consequently, extensive and intensive growth would slow to the rate of population growth plus some gains from the normal productivity creep that incremental innovation produced for firms—in short, the kind of economic slump that prompted the secular stagnation debate of the 2010s. This circular economy, as Schumpeter called it, would never produce the periodic eruptions of rapid technological change and growth that he observed in the two centuries after the industrial revolution. As he put it, in these circumstances, you could add as many stagecoaches as you wanted to the economy but never get to a railroad.
Dynamic growth required radical innovation in five key, interconnected areas: new modes of transportation, new energy sources, new consumer goods, new general purpose production technologies, and, though he underemphasized this, new legal organization or governance structures for firms. Writing on the eve of the Second World War, Schumpeter identified four such revolutions that had so far taken place. The first initiated the industrial revolution, centering on canals, water mills, textiles, and other household nondurables, with small owner-operated factories collecting handicraft producers under one roof. The second, in the mid-1800s, focused on steam power, railroads, and iron goods, as well as larger but still owner-operated factories using custom made machinery. The third, towards the end of the 1800s, emerged from electricity, steel steamships, urban trams, bicycles and chemicals, and saw the rise of large corporations which began to separate ownership and management. The fourth wave centered on internal combustion engines for land and air transport, petroleum, mass consumption of consumer durables like vehicles, continuous flow-assembly line production, and vertically integrated and often multidivisional firms with full separation of ownership and management. This wave began in the United States, most famously with Ford’s Model T, and spread to Europe and Japan. The transition periods between each of these growth spurts all saw increased domestic or international conflict and decreased investment in ageing growth sectors. Thus the transition from wave three to wave four saw the beginning of industrial unions and coincided with rising interimperial conflict that eventually produced World War I.
The fifth wave began in the US in the 1960s with the development of the semiconductor chip, and soon spread globally. It is based on connectivity via electronics (ICT), negative energy consumption via digitalization, pharmaceuticals and first-generation biotechnologies, software and semiconductors, global supply chains, and de jure vertically disintegrated firms with de facto control by lead firms. This era’s iconic product, the smartphone, embodies the whole range of electronics products developed from the 1940s onward in a compact and relatively cheap form.
There are many reasons to think this fifth wave is nearing exhaustion.
Smartphone sales levelled off in 2018 and then declined somewhat, signalling replacement sales rather than growth. Despite the annual iPhone launch hype, most of the improvements to smartphones in recent years are largely marginal. Roughly 80 percent of the world’s population has 4G access—if they can pay for it. The entire global electronics industry is linked to personal computers and smartphones, which account for roughly half of global chip sales.
Similarly, new pharmaceutical discovery levelled off in the 2000s, with most new drugs being copies or modifications of older drugs.2
Mark I and Mark II Innovation
Creating the huge reticulation networks that made new energy and transport sources useful required equally huge investments. One mile of railroad was pointless, 100 miles was revolutionary. Schumpeter, in his earlier works, argued that only entrepreneurs hyping potential monopoly profits could induce bankers to finance these huge investments. He called this the Mark I model, in which small start-up firms run by visionaries upend existing incumbents. Many of the current software giants fit this pattern, but it also characterized the earliest days of Ford. Later, Schumpeter noted that high-profit corporations could channel their monopoly profits to dedicated internal research labs and generate the same kind of revolutionary innovation—his Mark II innovation model. Here, think of ATT’s Bell Labs, which invented the transistor.
Software aside, we largely live in a world that combines both Mark I and Mark II innovation in a complex web that mostly favors larger firms. Typically, states promote radical innovation, often by funding basic research in university labs and their small firms spin-offs—classic Mark I innovation. But larger firms then typically provide those small firms with more funding to develop a commercializable product that their own Mark II R&D teams will perfect. While these smaller firms often get the publication glory, the larger firms usually get the bulk of patents and thus profits.
Schumpeter’s two pathways to radical innovation are more intermingled today than in the past, when vertically integrated firms were rather sealed off from both universities and small firms. These days, much Mark I innovation is often captured by the larger firms through acqui-hires, acquisition, or copycat innovation and litigation.
Success in generating high-value exports and their associated profits permits these societies to exchange a small volume of high-value exports for a much larger volume of lower-value imports.
The overlap of high profitability and profit share, export share and R&D share, is not accidental. It indicates past competitiveness and near monopoly or dominant positions in world markets. Profits fund the R&D that enables dominance and thus continued above average shares of global profits; those profits fund high levels of per capita income—among others, all those researcher jobs. And they fund, in some cases, extensive welfare states or at least state-education funding that generates the human capital those researchers possess, and which is the basis for past and potentially future dominance in high-tech sectors.
The franchise economy
The shift from the fourth (mass production) to the fifth (ICT) Schumpeterian wave involved changes in corporate strategy and structure that had significant knock-on effects. Chief among them, it boosted income inequality and increased the degree to which firms’ profitability depended on the legal regime around intellectual property (IPRs—patent, copyright, brand, and trademark). In the Fordist era, corporate strategy aimed at monopoly or oligopoly profits through control over large masses of physical capital arranged into continuous flow, assembly line systems. Profitability rested on running those systems at something close to their full capacity. This pushed firms to vertically integrate and negotiate peace with their typically unionized labor forces, which in turn reduced income inequality and funded internal research labs.
But as more and more firms adopted this vertically integrated, unionized structure, profits began to decline. Workers revolted against the monotony and pace of assembly line production, and decolonization enabled raw-materials producers to push up prices, disrupting energy and metals markets. Put simply, once everyone adopted a Fordist product and production structure, the world ran out of cheap oil and docile semi-skilled assembly-line workers.
Firms reacted to this militance by changing their corporate structure. They shrank their labor forces and opted to subcontract or offshore their low-wage, low-skill workforce. Similarly, they expelled physical assets—machines—used for producing undifferentiated goods into spin-off firms.
At the same time, they began seeking more durable monopolies based on IPRs produced by a labor force high in human capital and supported by an army of subcontractors. This shift, which both coincided with and enabled the emergence of the fifth Schumpeterian wave, produced what I call a franchise structure.
In the franchise economy, lead firms with lots of human capital, few actual employees, and substantial intellectual property portfolios outsource much of production to two other generic types of subordinated firms. Second layer firms are typically more capital-intensive firms with some barrier to entry for their production processes. Third layer firms are labor intensive firms producing undifferentiated goods and services. The lead firm orchestrates almost everything in its value chain without bearing any of the risk of holding that physical capital or dealing with masses of workers.
While the shift to a franchise structure was good for firms with robust IPR portfolios and, by extension, for the high human-capital intensity of the workforce. It was less good for workers and firms producing undifferentiated goods and services. Downsizing meant shifting relatively well-paying jobs to low-wage countries, hollowing out the middle of the income distribution.
The sixth Schumpeterian wave, should it indeed appear, poses serious risks for the largest, export-focused firms of our seven economies. Presently, a narrow set of IPR-based firms in the Mark II model does the forward-looking investment in R&D that enables the transformation and scaling up of Mark I innovation required to catch that wave. It also generates both the jobs and the revenues needed to sustain a politically acceptable level of imports, employment, and growth in general. The potential inability of the big, highly profitable firms that anchor local research ecosystems to transition from their current production model to the novel production models emerging will have serious consequences.
This risk extends beyond the “innovator’s dilemma.” Domestically, the loss of core manufacturing jobs in the second layer of the franchise economy has provoked populist backlashes. In both Israel and Sweden, this has empowered parties hostile to state-led industrial policy favoring highly paid knowledge workers.
Growing geopolitical tension between the United States and China has prompted efforts to reshore or “near-shore” the ICT sector, particularly semiconductor production. All told, this probably tilts the global playing field towards firms from the larger and more geopolitically powerful countries.
For the pawns of the global economy—smaller economies without national champions like Nokia or Samsung, and without oil-fund assets as in Norway—these challenges are even more pronounced. They enter this race with greater headwinds, weighed down by external debt, relatively untrained workers, and, in the worst cases, an over-reliance on unprocessed raw materials exports.
Schwartz (2023) The Nokia Risk
Schmelzer
Economic growth as a policy goal, as well as the broader societal obsession with growth as we know it today, are relatively new developments that can be traced to attempts in the middle of the twentieth century to stabilize and plan capitalist economies through state intervention, to measure capitalist economies against state socialist ones, and to appease the increasingly militant working class. It was only through the new idea that ‘the economy’ could be measured through GDP that it became possible to justify the belief that growth is natural, necessary, good, and unlimited.
We need to analyse economic growth as three interlinked processes that have evolved dynamically over time. First, growth is a relatively recent idea, the hegemony of which is the core ideology of capitalism, justifying the belief that growth is natural, necessary, and good, and that growth, as the increase of output and the development of productive forces, is linked to progress and emancipation. Second, growth is a social process that has long preceded the current hegemony of growth in contemporary society: a specific set of social relations resulting from and driving capitalist accumulation that stabilizes modern societies dynamically and at the same time makes them dependent on expansive dynamics of growth, intensification, and acceleration. Third, growth is a material process – the ever-expanding use of land, resources, and energy and the related build-up of physical stocks – which fundamentally transforms the planet and increasingly threatens to undermine the foundations of growth itself.