Economic Growth
GDP growth not a silver bullet

Growth is dying as the silver bullet for success. Why this may be good thing

Burgess COMMENTARY
The idea that GDP was an inadequate metric of socio-enviro-economic performance is not new. 50 years ago Kuznets talked about its limitation as did Robert Kennedy, but economists, corporate executives and investors continue with the terrible metric to this day. Why? In my years as a corporate CFO it became clear to me that reporting profit was very much easier when GDP was going up, than when it was not.
But GDP is not the only problem with socio-enviro-economic metrics. When corporate profit and stock price drive decision making to the exclusion of everything else, then there are bound to be bad outcomes for society and for the environment. My solution to this is for a modified version of double entry accountancy to be used not only for the money dimension of transactions impacting financial capital, but to have units of account and accounting for ALL capital, thus embracing the externalities that are people and society and natural resources and the environment. I call this True Value Impact Accounting. When you change the way the game is scored, you change the way the game is played! Peter Burgess 9 http://truevaluemetrics.org)
Peter Burgess

Growth is dying as the silver bullet for success. Why this may be good thing


GDP as a measure of growth fails to account for damages caused to the environment by industrial activity. Shutterstock

The idea that the economic “pie” can grow indefinitely is alluring. It means everybody can have a share without limiting anybody’s greed. Rampant inequality thus becomes socially acceptable because we hope the growth of the economy will eventually make everybody better off.

In my new book “Wellbeing Economy: Success in a World Without Growth” I point out that the “growth first” rule has dominated the world since the early 20th century. No other ideology has ever been so powerful: the obsession with growth even cut through both capitalist and socialist societies.

But what exactly is growth? Strangely enough, the notion has never been reasonably developed.

For common sense people, there is growth when – all things being equal – our overall wealth increases. Growth happens when we generate value that wasn’t there before: for instance, through the education of children, the improvement of our health or the preparation of food. A more educated, healthy and well-nourished person is certainly an example of growth.

If any of these activities generate some costs, either for us individually or for society, we should deduct them from the value we have created. In this logical approach, growth equals all gains minus all costs.

Paradoxically, our model of economic growth does exactly the opposite of what common sense suggests.

Negative values of growth

Here are some examples. If I sell my kidney for some cash, then the economy grows. But if I educate my kids, prepare and cook food for my community, improve the health conditions of my people, growth doesn’t happen.

If a country cuts and sells all its trees, it gets a boost in GDP. But nothing happens if it nurtures them.

If a country preserves open spaces like parks and nature reserves for the benefit of everybody, it does not see this increase in human and ecological wellbeing reflected in its economic performance. But if it privatises them, commercialising the resources therein and charging fees to users, then growth happens.

Preserving our infrastructure, making it durable, long-term and free adds nothing or only marginally to growth. Destroying it, rebuilding it and making people pay for using it gives the growth economy a bump forward.

Keeping people healthy has no value. Making them sick does. An effective and preventative public healthcare approach is suboptimal for growth: it’s better to have a highly unequal and dysfunctional system like in the US, which accounts for almost 20% of the country’s GDP.

Wars, conflicts, crime and corruption are friends of growth in so far as they force societies to build and buy weapons, to install security locks and to push up the prices of what government pays for tenders.

The earthquake in Fukushima like the Deep Water Horizon oil spill were manna for growth, as they required immense expenditure to clean up the mess and rebuild what was destroyed.

Disappearing growth

Against this pretty grim depiction, you may ask yourself: where is the good news? Well, the good news is that growth is disappearing, whether we like it or not. Economies are puffing along. Even China, the global locomotive, is running out of steam.

And consumption has reached limits in the so-called developed world, with fewer buyers for the commodities and goods exported by developing countries.

Energy is running out, particularly fossil fuels, and even if polluting energy sources were endless – as some supporters of shale gas, or fracking, suggest – global agreements to fight climate change require us to eliminate them soon.

As a consequence, mitigating climate change forces industrial production to contract, thus limiting growth even further. What this means is that, on the one hand, growth is disappearing due to the systemic contraction of the global economy. On the other, the future of the climate (and all of us on this planet) makes a return of growth, at least the conventional approach to industry-driven economic growth, politically and socially unacceptable.

Window of opportunity for change

Even the International Monetary Fund and mainstream neoliberal economists like Larry Summers agree that the global economy is entering a “secular stagnation”, which may very well be the dominant character of the 21st century.

This is a disastrous prospect for our economies, which have been designed to grow – or perish. But it is also a window of opportunity for change. With the disappearance of growth as the silver bullet to success, political leaders and their societies desperately need a new vision: a new narrative to engage with an uncertain future.

In my new book, I argue that as we begin to recognize the madness behind growth, we start exploring new paths. These include: forms of business that reconcile human needs with natural equilibria; production processes that emancipate people from the passive role of consumers; systems of social organisation at the local level that reconnect individuals with their communities and their ecosystems, while allowing them participate in a global network of active change makers.

This is what I call the “wellbeing economy”. In the wellbeing economy, development lies not in the exploitation of natural and human resources but in improving the quality and effectiveness of human-to-human and human-to-ecosystem interactions, supported by appropriate enabling technologies.

Fulfilling lives

Decades of research based on personal life evaluations, psychological dynamics, medical records and biological systems have produced a considerable amount of knowledge about what contributes to long and fulfilling lives.

The conclusion is: a healthy social and natural environment. As social animals, we thrive thanks to the quality and depth of our interconnectedness with friends and family as well as with our ecosystems. But of course, the quest for wellbeing is ultimately a personal one.

Only you can decide what it is. This is precisely why I believe that an economic system should empower people to choose for themselves. Contrary to the growth mantra, which has standardised development across the world, I believe an economy that aspires to achieve wellbeing should be designed but those who live it, in accordance with their values and motives.

This article is part of a series to be published following the release of Lorenzo Fioramonti’s new book: Wellbeing Economy: Success in a World Without Growth (MacMillan South Africa).
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Author Lorenzo Fioramonti Full Professor of Political Economy, University of Pretoria

Disclosure statement Lorenzo Fioramonti does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.

Partners University of Pretoria University of Pretoria provides funding as a partner of The Conversation AFRICA.

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Thomas Johnson I’ve been thinking a similar thing. In a closed system – family, country, globally – wealth (GDP) cannot increase except at the expense of other members of those individual communities. When trade is possible between communities and countries, there’s an exchange of resources or goods the other needs. But the terms of trade may not always be equally beneficial to both parties. But wealth/growth can and does increase with innovation – the exploitation of human, capital, social and/or natural resources from the idea to end product, ie, ‘generating value’ and ‘exploring new paths’. Lorenzo is absolutely correct the accepted growth paradigm everywhere is primarily to exploit natural resources and the environment, in no particular order, to create jobs, tax revenues and consumer goods we don’t need (that the last often leads to further consumer indebtedness is irrelevant to the model). The ‘triple bottom line’ and ‘sustainability’ have been part of corporate and official policy lexicon for a long time, but unfortunately, remained words. But perhaps we should not be too despondent. If change is coming to a ‘wellbeing economy’, it’s at glacial pace. I’m not confident, though. 21 hours ago Report Reply Recommend

Lorenzo Fioramonti logged in via Google In reply to Thomas Johnson Dear Thomas, thanks for your comment. Yes, our model of growth is still heavily hooked on consumption of natural resources (mostly energy but also overall material consumption). Real innovation should be about creating value by lowering our impact on the environment and exerting positive impact on society. Unfortunately, neither the impacts on nature or the depletion of these resources nor the impacts on society are ever calculated as part of growth. The only way for companies to change their behaviour is to redefine what growth means, thus developing the right incentives and sanctions and levelling the playing field between good and bad companies. 16 hours ago Report Reply Recommend

Charles Carter logged in via Google I suppose the article is overly simplistic due to the necessary brevity, but a number of important issues are raised. In many ways the current piece is similar to the eloquent RFK speech about all the things the GDP measures and what it does not measure. Our cultures and a large cadre of experts are overly enamored of that which is readily quantitated. Our materialistic consumer economies are driven by massive advertising and by envy of what our neighbor, our co-worker or the Kardashians own and do. ‘Success’ invariably means material affluence and rising financial fortunes. However in capitalism investment in innovation and the material advantages that accrue to investors rely on growth. Money being a surrogate measure of material value seemingly leads to the sort of capitalism with inherent problems as described. Sometimes I believe the only solution is a new religion to counter those tendencies and direct meaning in life for adherents, but then we have to contend with the negative effects of religions. I’ll be curious to see proposed solutions in future articles. 20 hours ago Report Reply Recommend

Lorenzo Fioramonti logged in via Google In reply to Charles Carter Dear Charles, I share your frustration and at times feel that a cultural revolution is really needed. But a precondition to that revolution is to make the invisible costs of the current industrial model as well as the inherent virtues of new business innovations VISIBLE. Unfortunately, the current growth model HIDES the real costs and gives an unfair advantage to dirty industries, triggering all sorts of perverse incentives in society. What if statistics were to reveal that some of the leading industries in today’s world are taking away wealth rather than creating it? What if they revealed that jobs, good jobs, are not created by large polluting industries but by small and microenterprises? Would it still be acceptable to subside them in the name of growth, if a different growth model based on wellbeing showed that they make no positive contribution at all? 15 hours ago Report Reply Recommend

Ross Gordon logged in via Google No, no, and no again, but it is amazing how smoke and mirror figures can obscure reality. Firstly let me agree with the statement that if you make people sick the economy grows, taking tobacco as an example, the more tobacco that you sell, the more land is put to tobacco use, the tobacco farmers get rich, they employ more workers, then hospitals have more work because of the ill effects of tobacco and more hospital and nurses and doctors are required etc, etc etc, that is the model that is proposed. Who can doubt such a perfect model. Well I for one do so, what you have is a model where the economy is reliant on ill conceived behaviour which in the short term (how long is this short) produces a bigger GDP. However when there is an intervention in this cycle the resultant catastrophe is so catastrophic that far more of the wealth that was created is destroyed.Lets continue with the tobacco example, if no interventions had been made in the continued exponential use of tobacco products, then at a point in time, there would be more production employed in addressing the negative effects of tobacco use than the economy could provide, resulting in a diminuation of valid growth stats, that is productivity would fall, as far too much time would have to be assigned to these negative effects.On the basis that 20% of the American economy is based on health care, that is interventions, where only 5% would be needed to intervene for natural or normal health care, America would become 15% more productive. 19 hours ago Report Reply Recommend

Lorenzo Fioramonti logged in via Google In reply to Ross Gordon Dear Ross, thanks for your comment. I’m not sure however where you got your data. My argument is based on scientific evidence and also be supported by common sense. If an economy began to eliminate unwanted expenses, it would see its GDP and the growth thereof negatively affected. Studies that apply the genuine progress indicator, which deducts unwanted expenses from GDP, show clearly that since the late 1970s most economies globally have growth because of these unwanted expenses. An economy that shifted from a state of waste to one of optimization (e.g. to ensure people stay healthy, schools and hospitals are efficient, products are used for a longer period of time, avoiding wase and so on) would see a contraction in GDP. The only way to avoid this contraction would be to create industries that fixes all problems, so that both the processes that create problems and those that fix them contribute to growth. What you say is also true: economies that pursue growth at all costs (which I think is what you refer to with the metaphor of tobacco smoke) end up destroying themselves, ultimately killing growth too. This is exactly what happens in many resource rich African countries, from Nigeria to Mozambique, which have ‘smoked’ themselves to death. This is entirely coherent with my argument. 15 hours ago Report Reply Recommend

Charles Carter logged in via Google In reply to Ross Gordon Yeah, a few problems with your argument as I see it. First, tobacco may not be the best example.Plenty of data exist to show loss of productivity due to tobacco use but the majority of illness and debility due to tobacco takes place late in life, often after retirement. And monies spent on healthcare are part of the GDP regardless of need, cause of illness, price, utilization (over- or under-). It’s perfectly conceivable that our economy would grow if we encouraged more smoking. There is no inherent mechanism in capitalism nor GDP measurement to self- correct except in the marketplace. I see the point of the article as relating the fact that prices/ costs fail to reflect costs to our world or to our society as a whole, both short-term and long-term. GDP is value-neutral. Increasing our nuclear arsenal, commercial development of Yosemite national park, sales of alcohol to minors could all increase our GDP. 12 hours ago Report Reply Recommend

Steve Koch Professor of Economics, University of Pretoria The above thesis makes two points… Unfortunately, one is entirely incorrect, and, because of that, damages the usefulness of the other. The first is that there is probably a better way to imagine well-being. This is neither new nor particularly disagreeable. The ‘happiness’ literature has shown, for example, that income is not a great predictor of happiness, although being at least as well off as your neighbour has been. The second is that we need this “new” idea, because economic growth is stagnating (when calculated in the usual way) and because the definition of growth leads us to count (mostly, implied by author) bad things, but not good things. Part of this, of course, was suggested by Malthus so long ago that we tend to forget it. It has also been debunked. Yes, there are cycles, but technology really does change the opportunities available. The other part of this is ‘selective’ in how it understands GDP, focusing only on the short term rather than the long term, and even then missing it. “Keeping people healthy has no value. Making them sick does. An effective and preventative public healthcare approach is suboptimal for growth: it’s better to have a highly unequal and dysfunctional system like in the US, which accounts for almost 20% of the country’s GDP.” There is quite a difference between the level of GDP and the growth rate of GDP. Yes, the US health care system is unequal and dysfunctional, and covers near 20% of output. But, that has nothing to do with economic growth. Nothing. Healthy people are “better” workers, and are paid more (income is one way to count GDP). Thus, they also tend to spend more (to bring it back to your focus on expenditure). So, yes, keeping people healthy has value, and plenty of it; this point has been made in economics at least since the 1960s. The dysfunction you note has more to do with politics, and who has power (doctors, lawyers and bankers) than it does with economic growth. “As a consequence, mitigating climate change forces industrial production to contract, thus limiting growth even further.” Although President Trump seems to fully believe this argument, it, again, misses the point that mitigating climate change opens the door to other technologies, and a new growth path… The political argument, again, ‘trumps’ the economic discussion. During times of low economic growth, there is generally less willingness to sacrifice in the short term for long term gain (that is somewhat uncertain). If you believe your final point, that “we” should be allowed to decide, then it would also seem that we should be less prescriptive in our statements… 7 hours ago Report Reply Recommend

Lorenzo Fioramonti logged in via Google In reply to Steve Koch Dear Steve, thanks for your comment. My article makes two points, but not the way you summarize them: 1) Growth is largely disappearing from the global economy. 2) This forces us to find new ways to prosper as societies. As you know, people like me have never been persuaded that the current model of growth (and there can be many different ones, but we chose the one dictated by what GDP measures), but we always swam against the tide of conventional wisdom. Now that growth in GDP is disappearing, we can finally start a more constructive debate. And we can start developing real innovations, not the simplistic green growth ideas that many economists are fond of. Malthus had made a correct point, that there are limits to material consumption. That’s a physical fact that mainstream economists have always disregarded. But he suggested wrong solutions, because he couldn’t think of alternatives to the status quo. The Club of Rome took it a step further, but still fell back on conventional solutions. Now we have the technologies and innovative business practices that can help up build an economy that focuses directly on optimizing wellbeing. By conventional GDP standards, this economy may very well be seen as ‘degrowing’, but by more intelligent standards it will be seen as developing well and sustainably. In my next articles you will see that what I think about green growth, decoupling and other untested ‘myths’ that you seem to indicate as a preferred way forward. 6 hours ago Report Reply Recommend

Gary Kendall logged in via Google Good to see the author engaging with comments on this piece in a constructive way. None of the comments (yet) seem to have yet countered the central thesis, despite attempts to set up disagreements. I would add that the primacy of growth is largely a function of the debt-based monetary system that requires the future to be larger than the present in order to service the interest. Since all money is loaned into existence against a promise to repay the principal plus interest, at the system level money and debt cancel to zero, meaning that interest cannot be repaid with money - it can only be extinguished through the transfer of non-financial capital (e.g. physical resources and/or the application of human labour). This has the effect of sustaining the profit motive and provides an engine for innovation, but also an acceleration in throughput of materials and energy (and attendant waste). To the extent that such things are finite (including the sinks into which we dispense our waste), it’s uncontroversial to state that we cannot sustained such growth indefinitely. We seem to have been able to outrun (or at least, keep up with) the interest burden - until now - by increasing efficiency and innovating new forms of value creation. 4 hours ago Report Reply Recommend

Lorenzo Fioramonti logged in via Google In reply to Gary Kendall I agree with you, Gary. This is why in my book Wellbeing Economy, I dedicate an entire section to the money system and how to change it to support an economy that ‘grows’ in wellbeing but not in material consumption. More with the next articles. Stay tuned!