Reinventing Prosperity. Graeme Maxton
output of rich nations is consumer goods and services, economic growth is normally associated with consumption growth—not least because the media often wrongly portrays economic growth and consumption growth as the same thing. But it is not always like this. In times of war, for example, GDP often grows spectacularly because of increased production of military equipment, while consumption declines.
Many people forget that GDP is a measure of the level of activity in an economy, not the level of happiness or the standard of living. GDP certainly increases when more consumer goods and services are produced, but it also increases when prisons are built, when warships are launched and guns are fired, when road accident victims are treated, and when dikes are rebuilt after flood damage.
One particularly important example of an activity that boosts GDP but does not improve well-being is the repair and adaptation work needed in response to climate change.
When GDP rises, there is economic growth. Higher GDP normally requires more labor, which means more jobs and more wages. This means people have more money to spend, leading to higher consumption. The owners of businesses make higher profits, and stock markets tend to rise. More tax is paid, so governments can build new roads and more schools. The economy is running along nicely, in other words.
If the economic engine coughs, and GDP falls, it is usually a sign that something needs to change. Some sectors of the economy have expanded too rapidly perhaps, or people have borrowed too much, or house prices have risen too fast, or companies have failed to invest in new technologies and become uncompetitive.
On such occasions, governments sometimes choose to step in. They might lower interest rates to make it more attractive for investors to initiate new projects or put interest rates up to dampen the housing market. They might offer support to local industries to help them become competitive again.
Or they might do nothing at all.
A modern market economy is, after all, largely self-correcting, thanks to Scottish moral philosopher and historian Adam Smith’s famous invisible hand.1 If house prices are too high, they will eventually drop back to more sensible levels by themselves. If people have borrowed too much, they will eventually start paying back what they owe or declare themselves bankrupt. If businesses become hopelessly uncompetitive, they will go bust.
The good, “up” part of the economic cycle leads to rising production and investment. This brings greater profits, higher tax revenues, rising stock markets, and more jobs. More jobs lead to more consumption.
The bad, “down” part of the cycle works the other way. When people have too many debts, they cut back on their spending and start paying back their loans. Because they buy less, inventories become too full, so factories cut production. Business profits decline and investment falls. Stock markets fall back, unemployment rises, and tax revenues shrink. The downwards spiral continues like this, sometimes for years, until the imbalance that caused the slowdown has been addressed and the system is back near the starting point.
But once there, the cycle restarts and growth resumes. Typically, this cycle repeats itself every four to eight years.
To understand what is happening in their economies, societies track GDP, and so the output of goods and services has become the principal measure of social development. But GDP was never intended to be a measure of well-being. Simon Kuznets, who was the chief architect of the United States’ national accounting system and developed the idea of measuring GDP in 1934, cautioned against using it as an indicator of general progress. It was developed for Roosevelt’s government to demonstrate that the U.S. economy could provide enough war supplies and still maintain a healthy output of goods and services for consumers. Increasing GDP was never meant to be a goal for modern societies.
In recent decades, GDP has become increasingly important and most people assume that almost all economic growth is good. Growth is not just necessary, they believe, but essential. They assume that increased output leads to higher living standards. This is because they have also been told that there is a trickle-down effect, that the riches created through increased production spread throughout society, narrowing the gap between rich and poor. And they have been told that faster economic growth will create more jobs and reduce unemployment. Because people assume it does all this, GDP has become almost divine. The belief that society should pursue economic growth at all costs is not only assumed to be true, but the underlying assumptions about what it achieves are also rarely questioned.
As we will show, these assumptions were (mostly) correct between 1950 and the early 1980s, but things have changed since then. The pursuit of increased output has actually widened inequality and led to higher levels of unemployment while damaging the environment. It has also increased the number of people living in poverty in much of the developing world.
We will explain how and why this has happened in the coming chapters. For now, however, we will look at one of the first assumptions that people need to ditch to understand what is going on: the idea that economic growth is always good.
Why do most people believe that economic growth is good?
People believe that economic growth is good because it has historically led to rising incomes, higher employment, and safer pensions for most people.
Economic growth certainly has many benefits. But it is not always socially advantageous. What society counts as economic growth is frequently very damaging, whereas what it fails to count, and subsequently ignores, is often vitally important.
When someone builds a house, this generates economic growth—an increase in GDP. If the house falls down because it is badly built, however, the loss is ignored because the collapse did not require any human effort, equipment, or resources. It does not reduce GDP. But building it or deliberately knocking it down adds to GDP because both require labor and equipment.
It may seem counterintuitive, but gigantic storms, such as Hurricane Sandy, which devastated parts of the Caribbean and the U.S. east coast in 2012, are good for economic growth. The destruction they bring is ignored, while the increase in output that comes from rebuilding adds to economic growth.
Building a prison contributes to GDP. If people burn the rain forests and plant oil palm trees, this also adds to GDP. Similarly, the removal of nuclear waste from contaminated ground adds to GDP.
So, housing more prisoners, creating ecological devastation, and cleaning up after radioactive leaks are good for economic growth.
A parent raising a child does not generate any economic growth. Teaching a child to be a good member of society, helping them develop a sense of morality, or imparting good manners are without any value, in terms of GDP. If the child is raised by a paid nanny, however, or learns to read and write at school, this adds to GDP.
From a GDP perspective, nature is worth only what can be extracted, or built upon, because everything needs to have a monetary value before it can be included. So when people build homes on flood plains or drive cargo ships through seas where there were once ice caps, GDP increases and economists and commentators are delighted because the new homes and trade generate economic growth. The value of the lost wetlands and polar ice caps is not counted.
Nor does GDP growth take any account of inequality. If there is rising wealth in an economy, but it all goes to the richest 1%, the unequal distribution is not reflected in GDP. Neither does economic growth take into account people’s health or happiness. When it comes to GDP, as long as the economy grows, that is all that matters.
To highlight how unhelpful measuring GDP can be, French historian Alfred Sauvy2 pointed out that a man who marries his cleaner reduces his nation’s GDP. His wife will still clean the house, but she will no longer be paid and so will not be counted. Her work becomes economically irrelevant.
Although it may be difficult to believe, societies’ focus on economic growth is a very recent phenomenon. The pace of economic growth experienced in the last thirty years is also extremely unusual. Between 1980 and 2007, the world had the fastest and the most sustained period of economic growth in more than two thousand years.
To many people, the pursuit of economic growth has become almost natural,