Can Economic Growth Continue Forever? Of Course!

(Photo credit: www.LendingMemo.com)

(Photo credit: www.LendingMemo.com)

Tim Harford, who writes the Financial Times‘s  “Undercover Economist” column, has appeared on our blog many times. This guest post is part of a series adapted from his new book The Undercover Economist Strikes Back: How to Run or Ruin an Economy

Can economic growth continue forever? The internet seems to be full of physicists explaining that economists are clueless on this topic. There’s the late Albert Bartlett’s hugely popular videos – or Tom Murphy’s article “Exponential Economist Meets Finite Physicist.” The key issue is that exponential growth will eventually take you to impossible places. And by eventually, the physicists mean “sooner than we expect.”

Exponential growth is any kind of growth that compounds like interest payments. The classic example is the rice on the chessboard. According to an old story, the inventor of the game of chess was offered a reward by a delighted king. He requested a modest-sounding payment: one grain of rice on the first square of the chessboard, two on the second, four on the third, doubling each time. Yet this is actually a colossal amount—many times the annual rice production of the entire planet.

The chessboard prize was 100 percent growth per square; but 10 percent, 1 percent or even 0.0001 percent—it’s all exponential growth. And it all becomes trouble eventually, because each little bit of growth will itself be multiplied by growth in the future. As Albert Einstein, yet another physicist, is famously said to have declared (but probably did not), “the most powerful force in the universe is compound interest.”

The implication for economic growth seems obvious. Our economy grows at a few percent a year. That hasn’t presented many insuperable problems so far. But growth of a few per cent a year is nevertheless exponential growth, and eventually—the physicists worry—we’ll reach a square on the economic chessboard that we just can’t fill.

Economists understand this point perfectly well. One of the very first people to be called an economist was the Reverend Thomas Malthus, who died almost two hundred years ago. Malthus was worried about exponential population growth, and his math was incontrovertible. Fortunately, in the short term technological progress was faster than population growth. More recently population growth has been slowing down dramatically. There’s every reason to believe that the population of the planet is going to stabilize. I don’t think anybody believes zero population growth is unsustainable.

You might well respond that even if population growth stops, growth in the economy – in GDP – will continue, and fall foul of the rice-on-the-chessboard problem. But I think that here we find a serious gap in the logic of the exponential doomsayers. They’re looking at exponential growth in physical processes—things like heating, cooling, lighting, movement. This is understandable, because they are, after all, physicists. Tom Murphy’s blog post is particularly startling on this point. He points out that if our energy consumption grows at 2.3 percent a year—less than historical rates but enough to increase energy consumption tenfold each century—then the entire planet will reach boiling point in just four centuries. It’s not the greenhouse effect at work; it’s irrelevant to Professor Murphy’s point whether the energy comes from fossil fuels, solar power or fairy dust. This is simply about the waste heat given off, inevitably, when we use energy to do useful work. And it’s pretty hard to argue with the laws of thermodynamics. The calculation sounds shocking, but it’s just the rice on the chessboard all over again.

Here’s the logic lapse: energy growth is not the same as economic growth. GDP merely measures what people are willing to pay for, which is not necessarily connected to the use of energy, or any other physical resource. True, since the beginning of the industrial revolution the two have tended to go hand in hand, but there’s no logical reason why that tendency needs to continue. Indeed, it appears to have stopped already. Would you like to take a guess at energy growth per person in the United States over the last quarter of a century?

It’s not just less than 2.3 percent. It’s less than zero. The same is true for other developed economies such as Germany, Japan and the United Kingdom. Now this is partly due to offshoring to China – but the offshoring effect just doesn’t seem big enough to explain what is going on. It’s also about the changing nature of what is bought and sold in a modern economy.

Think of New York City. It’s a high-income place, and has for more than a century been a creative powerhouse: publishing, music, fashion, art, finance, software, you name it. But energy consumption per person in New York City is lower than in the United States as a whole—in fact, it’s lower than the average in any American state. Ultimately, we can do a lot of the things we value—including value in the grubby pecuniary sense of “are willing to pay lots of cash for”—without expending vast amounts of energy.

It’s easy to grasp why exponential economic growth is not the same as exponential energy growth. If I’m worried about money, I may turn off my heating and wear a coat and hat indoors; a bit of extra money will mean I take off the hat and coat and use more energy. But that doesn’t mean that if I win the lottery I will celebrate by boiling myself alive.

I fully agree with the environmentalists who worry that we cannot continue consuming more and more water, spewing out more and more carbon dioxide and burning more and more coal. The problem comes if we then leap to the conclusion that the economy itself cannot keep growing. Thankfully, that just doesn’t follow. 

Reprinted from The Undercover Economist Strikes Back: How to Run or Ruin an Economy by Tim Harford, published by Riverhead Books.

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  1. AJR says:

    While greens have no problem with the idea that growth can continue just because people get smarter and more efficient, Harford falls into the same logical fallacy he accuses others of. In the last two hundred years, economic growth HAS been the same as energy growth: the most spectacular increase in material wealth correlates almost exactly with the most spectacular increase in energy use because of the exponential increase in productivity you can achieve with fossil fuels compared to muscle, wind and water power. And there is just simply no substitute for the increases in productivity that fossil fuels have brought.

    To believe that economic growth is not ipso facto coupled to energy growth (which is not logically impossible, just completely lacking in evidence) is to believe by implication that increases in energy efficiency can always outrun declining stocks of fossil fuels. It is the belief in perpetual efficiency savings being found commensurate with those produced for a very limited period by fossil fuels that greens criticise, NOT the very simplistic notion that exponential growth exists in nature.

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    • greg says:

      You are kind of missing the point.

      Wealth is not physical consumption and we are already beginning to see a decoupling of it as described in the article.

      Things now include things that aren’t really things but data and are just as good as and we will pay money for.

      Economic growth is based on increase actions and movements of money in an economy and the subjective worth of that economy. Money is an illusion, it can expand as long as there are spaces for zero on the screen. Theoretically you could have more money than particular that existed in the universe, you just need to add more 0s.

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      • Charles A. says:

        But what is the purpose of that growth and what does it signify? If people still have a finite amount of time to live their lives, etc, what is the merit of continued (and infinite) economic growth?

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      • AJR says:

        But this is the same logic that says Somalia will stop being poor the moment it manages to nurture a superconductor industry. You can’t go from subsistence agriculture to everyone being employed in metadata analysis overnight.

        Critics of growth have looked at the maths and can’t find any way in which the five billion poorest people on the planet can become like the two billion richest without passing through the necessary stages of heavy industrial production, protected manufacturing growth, deindustrialisation, and finally service-led growth. If you want evidence of this look at the industrial strategies of China, India and Brazil – dirty growth first and then sow the seeds of hi-tech industry with the fruits of increased productivity. The trouble is we don’t know if all of these countries can go through each of these stages quick enough before environmental change and resource loss catches up. It is the uncertainty that makes economic growth such a weak concept.

        Data only adds value to things that are already built – we have the most productive (and as the last five years show destructive) financial services in the world in the UK, but they ultimately only add value to things, they don’t create it. For that you still have to dig things out of the ground and plough the soil. And there is only so much left.

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      • Dave says:

        what you’re describing is devaluation of the currency, not economic growth. economic growth has to be reflected in the real world or it’s not growth, just zeros on a screen, as you say.
        When pre-war Germany added several ‘zeros on the screen’ to its currency, their economy didn’t suddenly grow.

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  2. mrG says:

    this is not a new observation, the writings of R.Buckminster Fuller abound with this logic even from his earliest books. The problem is not economic growth, but, as observed here, there is the malthusian logical flaw of equating ‘wealth’ with ‘consumption’ (‘wealth’ is measured in the number of ‘energy slaves’ available for the “livingry”, the antithesis of ‘weaponry’, as applied to the maximum number of humanity at the minimum resource cost). Bucky called the process ephemerialization, the making of ever more leverage from ever less resource. Double the length of a ship, you get 8 times the cargo for only 4 times the fuel. And then there are the quantum leaps due to innovation: Malthus made a serious error in failing to predict refrigeration.

    So far so good, but Bucky pointed out another flaw in our society that subverts this dream: 90% of the wealth is ‘stolen’ by middlemen who add nothing to the wealth, if anything, they frustrate it so as to extract their fees. (cf Grunch of Giants)

    but there is still hope: a report out of MIT this week looked at the economics of networks and concluded that the middlemen only survive when the network is sparcely connected, when the avenues to connect livingry to humanity can be gated and channelled; as the Internet increasingly connects individuals routing around the middlemen, a new economy emerges based on a meritocracy, an economy where the innovators can be directly rewarded by their clients restoring that missing 90% economic drain.

    Oh what we couldn’t do if we just had ten times our current budget! :)

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  3. James says:

    A question that ought to be asked, though, is how does economic growth continue when we run out of more stuff that people (sensible ones, anyway) are willing to pay for? (As for example, I live quite comfortably while spending about $25K per year, even though I make a good bit more). We already have a large segment of the economy, the advertising industry, devoted to persuading people to buy far more than they reasonably can use. When closets and garages are sutffed with things bought and used once, what then?

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    • steve cebalt says:

      Great question, James. This came up in family discussions recently when we were mystified by the very young 20-something man who turned down a $3 billion offer from Facebook to buy the Snapchat app that the man had invented and owns. By the way, Snapchat earns zero dollars. Economically, the difference for one person in having $3 billion vs. zero is as vast as the sea; once you get past $3 billion, how much are the additional dollars really worth to a person? He risked the app going bust by advances in technology or by Facebook developing its own version, perhaps making his worth nothing, for the potential for a payday that includes marginal dollars above $3 billion sometime down the road. I guess it is thinking like that that makes the economy limitless? I dunno, it puzzles me….

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    • Kieron G. says:

      We buy things like experiences and information-based products such as games and other media.

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      • James says:

        But the realities of physics & biology put a limit on the number of books, games, movies, & so on that a person can actually consume in a year. Moreover, technology should continue to make those things cheaper. For example, if 300 years ago you wished to be able to listen to a Bach concerto whenever you wished, you had to be a duke who could afford to maintain a chamber orchestra. 30 years ago you needed several pounds of vinyl and a shelf full of precision electromechanical equipment. Nowadays you spend a few bucks for (at the small end) a gadget the size of your thumb, and a few minutes of internet time.

        So while the total music economy may have increased due to a greatly-increased number of consumers, the per capita cost has decreased by many orders of magnitude. Hold the population fixed, and music (or other media) expenditures will decrease.

        Similar logic applies to experiences. That is, there are cheap to free experiences that provide as much or more enjoyment than do expensive ones. (For instance, many people might prefer backpacking in the wilderness to a stay in an expensive resort.) Since the number of experiences are limited by time, there would seem to be an upper limit to the experience economy, too.

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  4. Eric R says:

    ” Yet this is actually a colossal amount—many times the annual rice production of the entire planet.”

    Per Wikipedia, we [as a planet] grow about 700 million tons of rice per year. Figuring 22,000 grains of rice per pound, that is 3.1×10^16 — that would get you to the 55th square.

    At current production levels, it would take 595 years to grow enough rice– which is good because you’d need a good portion of that time to construct a huge chess board :)

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  5. Charles A. says:

    As a non-economist but regular reader of this blog, this is something I’ve always been curious about. In a world with finite resources, what does infinite economic growth even signify? Why would that ever be desirable?

    On another level the same goes for corporate growth. I don’t understand the compulsion of corporations to be The Biggest One with The Most Money, when ultimately they’re playing a zero sum game (re: resources, not necessarily dollars or whatever) and taking resources from other people.

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    • ghasynchroduck says:

      I’ve often wondered the same thing. Even products that don’t appear to be physical still have a physical presence such as software, digital music, anything living in the cloud and therefore are limited. As far as I’m aware economies always exist because there is an exchange of products and ideas, both of which are infinite in possibility, but not in creation. So if the number of people on the planet is limited (and therefore the number of ideas generated is also limited) due to physical realities, and the resources of goods on the planet is limited as well how can there be an infinite amount of goods, services, and ideas? How can economies truly have infinite potential when the things they depend upon don’t?

      As someone with a degree in math I totally understand the idea of infinity with exponential models, but I don’t see a true exponential model here. I see numerous constraints…I just want to know more. I don’t see a compelling argument that demonstrates to me that the economy is completely independent of physical items and therefore a true exponential model.

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    • Braeden says:

      The world of economics, however, is not made up of finite resources, and this I think is where most people misunderstand the infinite growth model. Because the world does not have finite resources, infinite growth is fully possible, and all efficient transactions are not zero sum.

      To an economist, things like ideas, thoughts, education, and invention all count as resources. They are called “human capital”. And human capital is not necessarily “taken” from other people. It is what ultimately makes humans unique and capable of infinite growth. The best part is that, unlike oil, coal, or whatever other resource, human capital will not dry up in the foreseeable future. Additionally, it undeniably enhances the value of the finite resources that we operate under. This is why a gold necklace is worth more than its weight in gold and the internet is worth more than the copper wires that connect it.

      Belief in infinite growth is, in my opinion, the same as belief in the infinite potential of human ingenuity.

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    • Mark Bahner says:

      “As a non-economist but regular reader of this blog, this is something I’ve always been curious about. In a world with finite resources, what does infinite economic growth even signify? Why would that ever be desirable?”

      Infinite economic growth means the ability to satisfy desires becomes virtually limitless. For example, if you needed a heart and lung transplant, but didn’t have any insurance, you’d be in real trouble. But if anyone in Bill Gates’ family needed similar medical treatment, money to pay for it wouldn’t be a problem. Or imagine if you couldn’t get a human heart, and needed an artificial one for a while until a human heart became available. Bill Gates could simply plunk down $1 million, or $10 million, or $50 million, and get that artificial heart (plus installation).

      With infinite economic growth, there would be tremendous money spent not just on long life, but on long healthy life. So people would live very long, and in very good physical shape. Perhaps infinitely long.

      Another aspect of infinite economic growth would be work. There would be no incentive for anyone to do anything they did not enjoy doing, so people would only work on things they enjoyed. That would probably mean jobs like garbage collection would be fully automated.

      Another aspect of infinite economic growth is the likelihood that the Moon and Mars would be “terraformed”.

      One potential downside of infinite economic growth would be that people would also have the ability to cause great harm. Imagine if everyone could afford to buy enough nuclear bombs to destroy the world. This type of action might be prevented by knowing what everyone was thinking…but of course everyone would have an infinite amount of money to thwart other people knowing what they’re thinking.

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  6. Voice of Reason says:

    I think that the scientist’s fallacy is that they forget what the economy is. They think that it’s just this blob of goo that keeps growing and growing. It’s really very non-linear and is always evolving. In fact, when it improves, and solves its own problems, it has technically “grown.” No computer in the world will ever be too small to calculate a growing number on an Excel sheet, but that doesn’t mean that what we use and consume has to grow. A hundred years ago, you were doing well when you could acquire more and more things, but then all of the sudden everything went on the computer, then everything went online. In both cases the economy exploded, but the size of our foot print shrunk. As we move more things from real space into the cloud, the economy will grow, and our physical presence will shrink.

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    • Steve Cebalt says:

      Hi Voice of Reason. The real fallacy, I think, is that no on really understands physics, and no one really understands economics. I’d wager, though, that most economists would agree with that statement, and most physicists would not.

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      • MW says:

        I’d take you up on that wager any day.

        The only way I’d lose is if physicists believe economics is understood.

        No research physicist would claim we fully understand physics, as the contrary is the very justification for their job.

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      • Phil Persinger says:

        Steve–

        “Anyone who is not shocked by quantum theory has not understood it.”

        — Niels Bohr

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  7. neil21 says:

    A basic understanding of urbanism – how humans arrange themselves on the landscape – is useful here. While increased energy use appears to have gone hand in hand with 20thC economic growth, we also sprawled horribly in that time. Spaced out towers/bungalows/warehouses connected by freeways replaced rowhouses framing streets and squares as the standard village/town/city development pattern.

    Fortunately the story of the 21st Century will be the rediscovery of traditional urbanism, of how we arranged ourselves on the land – arrangements discovered through thousands of years of trial and error – prior to 1950, following the realisation that that arrangement (coupled with modern sanitation, street surfacing materials and mass electric transit) reflects innate evolved human psychological preferences like sociability, refuge and prospect, freedom of choice etc.

    Energy use does not ineluctably correlate with economic growth, and often it doesn’t even correlate well with quality of life. A little walkable car-free neighborhood of thin streets, durable buildings that share walls and capture sunlight consumes far less energy than an area the same size in NYC or San Jose.

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    • James says:

      On the contrary, assuming that population growth & related problems can be controlled, the 21st century will mark the beginning of the post-urban era. Humans in general don’t want to live in cities: they gathered into cities because communication was limited to the speed of foot or horse, so they had to live in close proximity. As faster transport – rail and then automobile – became available, those who could afford the new technology began the process of sprawl. Now that communication makes it increasingly possible to do many jobs from anywhere on the planet, what use are cities?

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    • J1 says:

      Your understanding of urbanism rests on assumptions of stasis that will almost certainly prove false; our previous arrangements were less the result of trial and error than of necessity. It’s more likely we’ll find new ways to organize ourselves. In any case, suburban areas provide far more sociability, refuge and prospect, etc. than do urban areas. I didn’t know anywhere near as many of my neighbors when I lived in an apartment closer to downtown as I do out here in the burbs, to take just one example. If those are your motivators, expect more suburbs, not fewer. It’ll be interesting to see the degree (if any) to which developing countries bypass urban development for development that is effectively suburban in nature. Historically we’ve seen mass migration to large cities as countries grow wealthier. I wonder if that will continue.

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  8. Eric M. Jones says:

    Jean-Luc Picard, said, “The economics of the future are somewhat different,” he replies. “You see, money doesn’t exist in the twenty-fourth century … The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of humanity.”

    Recently I watch the display of Donald Trump’s obnoxious wealth on the Smithsonian “Mighty Planes” Episode: Trump 757.

    I hope the future comes quickly.

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    • Kieron G. says:

      The same Jean-Luc Picard with a wealthy collection of artifacts. How very old fashioned and materialistic of him.

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      • Eric M. Jones says:

        >>Kieron G. The same Jean-Luc Picard with a wealthy collection of artifacts. How very old fashioned and materialistic of him.

        They showed what…half a dozen artifacts? You must watch Fox TV.

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      • Phil Persinger says:

        Kieron–

        It was always my impression that these were either items given to him or artifacts he’d personally excavated as an amateur archeologist– but then I was never actually allowed into the captain’s ready room…

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    • J1 says:

      Unless we hit the singularity and materialism can be programmed out of us, I wouldn’t count on the acquisition of wealth ever ceasing to be a driving force in any realm other than science fiction. Indeed, if we’re ever able to produce artificially intelligent machines, it’ll probably be their driving force.

      Our concept of what constitutes wealth will probably change though.

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    • James says:

      “Recently I watch the display of Donald Trump’s obnoxious wealth…”

      I think you are conflating two things that have no real connection. It is not wealth that is obnoxious, but Trump himself. He would likely remain just as obnoxious if he were reduced to poverty – and indeed, I have known a good many poor but obnoxious people in my life.

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      • Phil Persinger says:

        James–

        But everything about Trump is amplified by his wealth and his constant flaunting of it. You are certainly right about his essential obnoxiousness, but that feature would be known only to the neighborhood kids if he were just the guy chasing them off the lawn of his split-level….

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      • James says:

        Sure, but wealth is neutral: it just amplifies whatever a person is and/or wants to do, good or bad. Whether it’s funding research into curing 3rd world diseases, building electric cars or rockets, funding extreme left/right wing politics, or stuffing lots of cocaine up your nose while surrounded by scantily-clad women: a person can do that more effectively, and noticably, with a few billion dollars at his disposal.

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