Is Economic Growth a Delusion?
Mr. Stoll is the author of The Great Delusion: A Mad Inventor, Death in the Tropics, and the Utopian Origins of Economic Growth (2008) and Associate Professor of History at Fordham University.Unemployment reached 8.5 percent in March of this year, but add in the once full-time, now part-time laborers, it may be as high as 15 percent. Yet my fellow rail commuters somewhere between New Haven and Grand Central Terminal think they smell recovery. As one salesman put it to me, “things will come back--even better than they were before.” The impulse to undo the freefall, erase the loses, earn back the bank follows a clear logic. Get Americans spending again, stoke the Chinese factories again, send matter flowing again, and workers across the globe will work again, buy new houses again, and the positive feedback loop of prosperity will secure us in our old age, as promised, again.
In the meantime, people sleep in the woods in sight of the Metro North tracks, their laundry strung between trees, their shelters of canvas and plastic sheeting almost invisible against the grey and brown of the late winter. We hear stories of lost savings, poverty in retirement, and desperate unemployment every day.
But what if our hope for recovery stands on false assumptions? Economists tend to imagine the economy as taking place between production and consumption. But there is a larger economy of which ours is only a subset. Why then do we only speak about the economy in terms of growth? Because our history reinforces the belief in growth.
Beginning 250 years ago, political economists in Britain, France, and the United States asserted that material progress distinguished modern, commercial societies from all others. They said that the perpetual increase in wealth required only the necessary tools against the hoarding earth. Need more metal? Dig deeper mines. More fish? Use larger nets. The model held that natural capital is infinite. Advocates of economic growth acknowledged a dark side to progress. Almost all of them believed that the transfer of matter from the environment to the economy must never stop. By the 1840s--if not before--leaders in politics, business, and science asserted that growth held society together, keeping it from falling back into barbarism.
The political economists came up with their theories without asking many questions about the stuff of wealth. They appealed to Providence--the sustenance offered by a compassionate God. Their logic worked like this: Since God wanted people to manufacture things and grow rich, God will provide all the necessary raw material. Economic growth remains the heir of this mystical thinking. For while today’s economists never appeal to Providence, they remain believers. They embrace the same spooky faith that the economy grows from quarter to quarter in “normal” years and that the stuff underlying that growth has no earthly limit.
A few people in the 1990s came close to acknowledging this fact. They were not ecological economists but investment bankers working for J.P. Morgan, and in order to get around a slowdown in growth that they could not explain, they invented a series of once-obscure investment instruments now known to just about everyone. This small group of bankers realized that the long-standing loans Morgan had made to a number of major industrial firms had never delivered significant returns. Managers for these “sleepy American icons,” in the words of Jesse Eisinger, writing in Portfolio, once promised up to 20 percent on capital but never came close to delivering. Worse, the loans functioned as lines of credit, meaning that the firms could come calling on Morgan even should they falter near bankruptcy. The bank would then be obligated to throw good money after bad in order to save them.
The Morgan bankers invented credit derivatives in response to the poor prospects of American industry, the ancient source of real economic growth. Real growth came from the exponential rise in employment and the discovery of fresh capacity in the forms of forests, petroleum deposits, and hydroelectric power. These resources made it possible to build really big things: cities and suburbs throughout the Sun Belt, an energy infrastructure based on hundreds of millions of automobiles, and a torrent of consumer products. This was growth--not a positive differential in financial securities but biophysical expansion on a societal scale, a nation-shaping, world-transforming scale.
The financiers at Morgan who went looking for the old expansion succeeded only in finding new ways to manufacture debt. Only borrowed money and deepening debt gave them the boom they sought. Beneath their fabulous incomes, however, roiled a paycheck-to-paycheck struggle, in which homeowners found their costs rising relative to their incomes. The high price of tangible commodities--petroleum, metals, labor, and food--triggered the foreclosures that toppled the banks.
Early in the crisis, leaders in finance and government referred to the downturn as a “correction,” a word typically applied to a fall of between 10 and 20 percent during an overall bull-market. My definition differs by degree. The financial collapse represents a correction toward the real capacity of the economy to produce value. And since the spectacular value of the peak never rested on hard matter, there can be no going back without inflating the same bubble, causing the same misery.
In the mean time we have come to live boom lives--driving boom cars, building boom houses, and developing boom expectations for boom retirements. Tens of millions of people made decisions assuming that the actual value of the economy would support their material lives, yet that value never actually existed.
The correction increasingly looks like a transition from one economy to another. No utopia awaits us. There will always be scarcity, conflict, and the freedom and excitement of markets. But after exhausting the Earth for two centuries, capitalism is running out of people and places to mine. It thrives on untapped capacities of a kind that no longer exist. Put another way, growth has ceased; or if it has not exactly ceased, it no longer confers any benefit on the vast majority of people. As Herman Daly, Bill McKibben, and James Gustav Speth have recently argued, our growth is not economic but uneconomic. It reduces our real wealth and undermines our stability. In this sense, growth costs much more in its social and environmental externalities than it creates in human happiness.
Perhaps in this moment we can accept two truths long offered by experience but rarely acknowledged. First, economies can produce only so much wealth and the Earth offers few untapped places for employing capital. Second, vast inequalities of wealth are economically and socially unstable. Predictions of a short and painless recovery deny both truths and leave the underling causes of the crisis unexamined, making others like it inevitable.
Transitional thinking would mark this recession as a meaningful and hopeful event--not just another crash and bust. Government would rededicate itself to the general welfare (not corporate welfare), to democracy (not capitalism). The two, after all, are not the same (as China demonstrates), and they have often run counter to each other in American history. Finance in decline and democracy ascendant--not betting back to a false normality--might be nothing to fear.
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P Agathocles - 7/14/2009
I'm deeply underwhelmed by this article by Steven Stoll. I agree that the question regarding infinite progress is a great question to be asked, and a concept we take for granted, but the author doesn't provide any evidence to support his view besides anecdotal vignettes and hypotheses. Moreover, the article seems to misunderstand both growth economics and structured finance. Let me take a few examples.
(1) "The Morgan bankers invented credit derivatives in response to the poor prospects of American industry, the ancient source of real economic growth. Real growth came from the exponential rise in employment and the discovery of fresh capacity in the forms of forests, petroleum deposits, and hydroelectric power."
The author commits several fallacies here, in my opinion.
First, real growth does not simply come simply from the increasing use of inputs to production (resources, labor, and capital). By far, the largest share in economic growth is derived from technological development and the growth in human capital--that is, the manner in which we organize our economic activity (in the broad sense) and the development of new knowledge and skills. Good references for both the theoretical and empirical underpinnings of economic growth and development economics are: (a) Romer, Advanced Macroeconomics and (b) Barro/Sala-i-Martin, Economic Growth. Nonetheless, since many of the resources we use as inputs into production are finite, I agree with the author that we will have to come to grips with this finiteness and move towards renewable sources of energy and more abundant resources.
Second, the author is making a historical fallacy. We did not witness a productivity slowdown in the 1990s. In fact, the 1980s and 1990s marked a return to a growth in labor and capital productivity from the anemic 1970s when productivity stalled. The consensus seems to be that this increase in productivity was due to new technologies and increases in trade.
Lastly, the author misunderstands structured finance. Structured finance can be used responsibly and is not necessarily an instrument for creating more debt. In its original form, it was a method for sharing and diversifying risks towards those who were most able to carry them. A great example is an interest rate swap. Suppose Sears is paying interest at a variable rate, but receiving fixed interest payments from the consumers to whom it gave credit. To lock in a fixed interest rate, it will construct an interest rate swap to covert that variable interest rate into a fixed interest rate. Sears is consequently hedged from interest rate risk, and it has made a prudent decision not to keep a risk that could possibly be detrimental to its operations. The real problem is that in the intervening two decades, these instruments have been (1) severely abused and contorted, (2) marketed towards people who were least able to understand these products, and (3) became increasingly more opaque as regulatory and due-diligence quality declined.
(2) "The financial collapse represents a correction toward the real capacity of the economy to produce value. And since the spectacular value of the peak never rested on hard matter, there can be no going back without inflating the same bubble, causing the same misery."
Here, the author is falling into the Malthusian fallacy. Malthus argued that there was only one real base rate of economic production per capita that the economy could handle. Supposing that economic growth increased, he argued that population growth would increase so as to bring real GDP per capita back down to its base level. Malthus’ fallacy is that he did not take into account the same factors that this author forgets—namely, technology and human capital (among others).
However, Stoll’s argument here is in fact more convoluted than Malthus’. Malthus at least postulated the population growth mechanism as a regulating factor on economic growth. The author doesn’t postulate any such factor. Stoll simply argues that it is asset price bubbles that fuel economic growth, which when popped bring the economy back to its base level. If this were the case, the growth in real GDP through time would be a fluctuating line around an average value of zero. Stoll’s statement regarding economic growth in this passage cannot account for economic growth at all. Clearly, this is not the case. Chart real GDP growth from the FRED (Federal Reserve Economic Data) database if you’re not convinced that it’s positive.
(3) “Perhaps in this moment we can accept two truths long offered by experience but rarely acknowledged. First, economies can produce only so much wealth and the Earth offers few untapped places for employing capital. Second, vast inequalities of wealth are economically and socially unstable.”
Despite disagreeing with the author on much of his reasoning, I do believe that the conclusions are somewhat correct. Stoll provides a lot of cookie-cutter, nicely packaged conclusions, but I think reality is far more nuanced.
(a) I do believe that at some point, we will hit into a capital crunch. The earth only has so many resources. Now, the question is, how long will that take (after all, we have a ridiculous amount of some resources like iron), and can we switch to renewable sources of energy. I think the more pressing problem is the renewable energy problem than the non-energy natural resource one. But, then again, I am on less familiar terrain here, and I would likely defer to those more expert than I.
(b) No disagreement here that vast inequalities of wealth are economically and socially unstable.
DeWayne Edward Benson - 5/30/2009
We are no longer in a Capitalist scheme of ever growing population enabling ever increasing investment in production to fill ever growing consumption.
Today we see (our) oil in other lands (nothing new here), except that US-Elite outsourcing US-Industry & Technology has established (other) Empires competing with US-Empire for dwindling resources and unsustainable economies. The US 'FIAT' economy would be better called "Check Kiting."
Not only this, but past Super Power greed and lack of stewardship, along with world wide polution has begun a situation no longer deniable of ecologic calamity, also intensifying world wide.
Couple this with a population problem worldwide, instigating an evident and growing social calamity, makes those with rose colored glasses at best dreamers with little substantive input regarding the realities of today.
Lawrence Brooks Hughes - 5/28/2009
"Vast inequalities of wealth are economically and socially unstable."
Here you must be talking about the Kingdom of Saudia Arabia or the Republic of Mexico. You can't be talking about the United States, because we have long been THE most stable country anywhere in the world. Even in the dreadful 1930s you never saw desperate people rioting in the streets of America, marching with pitchforks, as it were.
If you want to see turmoil here, just employ Robin Hood methods like President Barack Obama has started to use, and rob from the rich to give to the poor. This idiocy cannot fail to creat economic and social unrest, along with even more terrible declines in long term investment than we have already seen--a formula guarenteed to put the kibosh on human progress. (and freedom).
And by the way, if you want to put more investments into the ground, there is no shortage of opportunity here. Just look at the Rocky Mountains, Alaska and the Gulf.
Our heavy industry has been stalled since about 1950, and all our largest enterprises were built in the era of Carnagie, Ford and Rockefeller. That's because the feds have had such atrocious tax laws governing invested capital. In the late 19th century, and early 20th, when this country vaulted ahead of all others in industrial might, there was a good deal more in it for investors than there is today, and mighty unions, connected at the hip with coercive governments did not combine to put a damper on progress... If we ever again have a government that lets capital rip, you will be astonished by the speedy increase in general prosperity.