Economic Musings VIII: Is there a limit to economic growth?

Something which puzzles many thinkers and frightens many young people concerned about waste or the pillaging of our natural resources is the question: can “an economy” (whatever that is – we’ll come to that in a minute) grow indefinitely?

How can there be unlimited economic growth if we’ve never heard of unlimited growth in, say, an elephant?

(See statistical material in our References section!)

Indeed this whole issue cannot easily be discussed if we have no generally agreed upon measure of the “size” of an economy. The typical measures are artificial aggregates such as “gross” (or “net”) domestic product (GDP). Not only have the definitions of these aggregates shifted considerably since their inception (and let’s not forget, these ideas go back to the physiocrats, a school of thought that with respect to most of its teachings “modern” economic theory claims to have superseded), also the underlying monetary measures are far too unstable as to be comparable over time, e.g. between centuries, countries or even continents.

When the services rendered by a demolition company or the increased output of a coffinmaker during an epidemic are elements of an aggregate reflecting economic growth then indeed it is difficult to see how commensurability of all the input variables of aggregates such as GDP, GNP etc. is meant to be achieved.

But we can set these academic debates aside by simply asking the question. “is there a natural limit to the growth in wealth and welfare that humankind can achieve?” even if we cannot agree on the “cardinal numbers” expressing the absolute size of an “economy” but by agreeing unequivocally that “economy A at time t was smaller than the same economy A’ is today at time t’ ” (i.e. by applying an ordinal scale), so that we may ask, is there a “natural limit” to such growth e.g. because resources, geographic space or other variables are limiting factors or because there is a law whereby every growth eventually ends by approximating a maximum asymptotically?

Certainly when trying to compare one period with the next in terms of relative wealth all one can do is rely on some monetary measure, e.g. try and calculate the amount of goods owned by a country’s people, corporations or public institutions. When you do this on a global scale you need not even deduct the debt with which these goods have been financed and which has not yet been paid back in full because no doubt at least the tangible goods exist even if someone else still holds title to them, in other words, a house’s net worth does not change due to the fact that “it belongs to the bank” by virtue of a mortgage to the tune of 100% of its market value or even more.

Now one may argue that that house could be overvalued because current market prices are inflationary. Indeed, as long as money can be created freely because it is not bound to (or backed by) a “tertium comparationis” such as gold, so long we can never be sure if we compare “value” on the same basis historically.

In order to overcome this issue for the moment let’s just assume all participants in that undertaking of comparative measurement could agree on a general measure such as the gold standard or anything else that is generally agreed to be of “comparable value over time”.

Because if we cannot agree that one can somehow compare two historic periods economically in terms of “net worth” created or “owned” then we may as well not try and discuss if economic growth can be indefinite, because we cannot agree on something “definite” from where then to explore the category of the “indefinite”.

The limiting factors to economic growth

If we want to imagine unlimited growth we might as well start thinking about its limiting factors and then trying –in our imagination– to see if they can be neutralised in any way.

That in theory does not prove that there are no other limiting factors that might exist alongside the ones we analysed but of which we would only become aware at a future date; so theoretically that way we cannot prove rigorously that economic growth would be indefinite, but still it might help to deal with some of the most obvious limiting factors to growth as many see them today.

In the 1970s I read an article on how the per capita income in Austria was about one quarter of that in the US and still if one would compare the “average” Austrian with the average US citizen both might feel equally well off. The article then went on to show that also energy consumption “per head” was only a fraction of that in the US thus trying to debunk the myth that higher energy consumption was a necessary ingredient to societal or economic progress (an argument the pro-nuclear advocates used at the time to “prove” the need for more utilities, esp. since electricity consumption looked even more closely related to e.g. GDP etc. and at that time seemed to grow at about 7% per year – that growth has long abated, by the way, and still all the respective “economies” have since grown considerably stronger in spite of it).

When Lenin began the Russian revolution in 1917 nations counted their wealth or economic health in tons of steel and coal, later it was the production or the consumption of oil, the amount of cement or concrete produced, now it’s a mix of anything that can be transformed into a higher form of energy, esp. electricity, with the “health” of the national car industry or something else equally arbitrary thrown into the bargain. Others proclaim the ascent of the “information age”, still others try to measure “human capital” and so on.

The problem with all these “measures” is that they fail to be comparable over time because personal predilections and preferences vary so greatly over time. The tulipmania in the late 1630s or early 1640s in the Netherlands would not be conceivable had there not been a general predilection among the general Dutch population for tulips in the first place (which actually continues to this day to some extent).

It is very unlikely that the same tulip bulb would have caused a mania in, say, Togo at the time while in the South Pacific a colonialist around that same time could maybe have called himself a rich man had he brought a chest of glass beads with him.

What we may safely say though is that any of the limiting factors called upon in the past to motivate a limitation on economic growth (like Malthus’ law and the dwindling energy resources) have until now been overcome by humankind’s ingenuity in finding a ready substitute before each limiting factor actually became a final bottleneck. So far there is no reason to believe that any such factor could not over time be overcome by a substitute, either as a product or by changing to a new or enhanced process rendering that limiting factor meaningless.

So I believe conceptually it is safe to say that it is conceivable although not amenable to rigorous proof that any such limiting factors can be overcome. This also goes for human productivity which over the centuries also has risen constantly so that the workforce available at any point in time, while maybe having been a bottleneck for a short period, was not the limiting factor in the long haul.

Indeed there may be a time when the population cannot grow anymore although when I was a child and the world population was believed to be 3 billion this limit was thought to be 8 billion and now that we soon seem to have exceeded these 8 billion some put it at a “final” 20 billion. Still others predict that it will sooner or later shrink and stabilise at a much lower level, again due to shrinking resources – personally I believe all these predictions to secretly rely on a “Malthusian law in disguise” since all these forecasts were always outdated by the time the respective futurologist’s books were sold out. (“Prediction is very difficult, especially if it’s about the future” – Niels Bohr, also: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” – Evan Esar)

But even if the population could not grow, why could not each of its members grow richer?

Indeed there is not much of a secret to the reason why theoretically economic growth is potentially indefinite (in the absence of nuclear wars, or natural catastrophes like a huge meteoric impact).

The reason is actually quite simple: if each generation leaves the next generation better off than it itself was when it started to earn or create its own wealth then surely there is no conceivable reason why with each new generation the world should not be a (however slightly) “richer” or wealthier place.

The prerequisites of lasting human welfare

The question is, what will each generation leave to the next that is more valuable than the legacy it once inherited itself from its own ancestor generation?

While this of course can be “anything” that endures from one generation to the next a few things are easy to imagine (one can add to these examples indefinitely which again suggests there is unlimited potential for value creation):

a) Human knowledge certainly grows from one generation to the next provided it is not wilfully destroyed (like the library in Alexandria etc.) – and there is certainly no natural end to the growth of human knowledge, hence not to intellectual property (be it privately owned or already in the public domain).

b) When you inherit a house from your parents the attic may be empty and the basement have bare stone walls etc.; now you might begin to change the attic into another bedroom and plaster the basement walls, even add a bar or hobby or utility rooms etc.

c) With each generation of technical appliances their complexity generally increases; even if their price is often at the same time driven down by higher productivity and competition still most people would count this as economic progress.

d) At the same time productivity as a rule increases with each new technological cycle and again this allows humankind to create values on an ever larger scale, while not necessarily wasting or using more resources in the process. There is as yet no conceivable end to the growth in industrial productivity nor in the service industries.

In general, all value that is not depreciated as fast as the same or a new generation creates more and additional value will remain as a residue carried over from one period into the next and each consecutive generation can add to that indefinitely. There at least is no logical contradiction in that proposition nor does human history so far contradict this statement in fact. That some of humankind’s activities destroy the environment, eradicate species or prove harmful to others is not a contradiction. This is but the aftereffect of missing or at least incomplete accountability as will be described in some detail in an upcoming article about political and economic order. If there were a level playing field for all economic participants then no one could profit from destroying wealth but would depend on adding to it in order to have something to sell in the marketplace. In these circumstances then an economy cannot but grow in the sense that each generation will necessarily add (and leave to the next) more value through its industry and ingenuity than it would wilfully want to see destroyed over the same period or which would become depreciated by wear or obsolescence.

Epistemological dimensions of economic growth

Now what is the reason that unlimited growth is possible?

I have heard it say by environmentalists that economies are like rain forests: while there is constant growth there is also constant decay and if man had left them alone then they would on average have contained roughly the same biological mass until “the end of time”. A tree, while aspiring to outgrow its competitors also would never grow beyond a certain height resulting in a seemingly even leaf canopy etc.

Initially we posed the question why there can be unlimited progress if there is no such thing as unlimited growth in, say, an elephant? Well an elephant is predefined at the time of its conception. While they may vary wildly in size there is a maximum size above which the elephant could not live. But each elephant can multiply indefinitely, in theory at least. But isn’t population growth itself restrained, eventually, by limiting factors (q.v. the rain forest)? Indeed it is, but the same restraints do not apply to human progress. Whenever human progress runs into such limitations then it adds another dimension in which again it can grow until it needs to explore yet another dimension and so on. If ever there is an end to adding new dimensions again we cannot know or shall we say, that is beyond proof, however, again, there is no logical reason why there should be. So … „q.e.d.“ ?

The only problem nowadays is that all this depends on all actors being able to “read the scales”, i.e. to know when to add value where and this becomes increasingly difficult because the common denominator, money, itself has been largely stripped of its intrinsic value so as to render it a dangerous means of judging market perspectives. State intervention in the form of subsidies adds another layer of fog and entices large parts of the economy to undertake investments that do not reflect the combined preferences of market participants but reflect the predilections of state planners. So progress and wealth creation is not an automatic process in the face of constant state intervention because … “Progress is precisely the things which the rules and regulations did not foresee” (Ludwig von Mises).