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.


ghasynchroduck

So, because the economy is no longer (or will soon be no longer) linked to tangible things that it is more like a pure mathematical exponential equation where there is no limit as the economy continues to an infinite future.

...I'll have to contemplate this for a while longer.

John P

What happens when we run out of room to grow? By that I mean, what happens when the underdeveloped parts of the world reach the same or similar levels of development as everyone else? That's when I think we'll hit the wall in economic growth.

steve cebalt

1. I love this thread; it makes me re-think things that I thought I understood, like "economic growth." Now I have no real idea what that REALLY means, but I'm more curious than before.

2. I do understand the GDP benchmark, however, for the less-metaphysical parts of this discussion, and I get and the difference between linear growth (say, 5%, doubling in 20 years), vs exponential growth (5% = 132x growth in 20 years) in an economy. As noted in the linked article, exponential growth is dependent on at least one condition: "our current debt-based financial system of interest and loans." We seem to assume that exponential growth based on debt is the better option of the two for prosperity.

Are we right in that assumption, since the driver is debt? Should we challenge that assumption? Must growth be "exponential"?

I think of the frequent poster James, above, who lives prosperously and at a low consumption level, well BELOW his means. His wealth (income & IRA) may rise exponentially, but his level of prosperity is defined by him at about $25,000 per year. Could more of us do this in a less-exponential economy, thus avoiding this existential physics-economics conundrum altogether?

Finally, I'd be interested if others know of studies (links) of societies (islanders, isolated tribes, subsistence farmers, the Amish, perhaps) who do not rely on exponential growth, or perhaps any growth at all, in their economies? MUST all economies grow? Is growth an essential condition? Must a surplus economy lead to a LOSS of prosperity, as this discussion seems to suggest to me?

Sorry if these questions/comments seem naïve. I'll bet they are less naïve than they seem at first blush.

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Phil Persinger

Steve--

Exponential growth quickly becomes asymptotic-- and none of us knows what lies at that end of the curve...

As I never tire of pushing this book on others, I suggest you read Lewis Hyde's "The Gift" for a philosophical/historical discussion of money and culture.

His thesis is that there is no necessary connection between money and culture, that our own culture is just one example of many different attitudes toward wealth and that, in fact, there are sub-cultures in Western societies for which wealth is not the main goal in life.

It's possible to allow this discussion to go to far, as it nearly has with your battle of the sciences (economics and physics). While on the one hand I personally don't believe that economics deals realistically on the scale of everyday people, on the other hand there is a body of physicists who are moving towards an almost Berkeley-an view that nothing-- at all-- is "real."

http://en.wikipedia.org/wiki/Many-minds_interpretation

(I apologize for not providing a more apposite web-site, but I'm straying way above my pay-grade here as it is.)

Nothing to get hung about...

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Alex

The first question you need to ask is how you measure "size" of the economy. If it is a nominal size in terms of some monetary unit (e.g. dollars), you can for sure grow infinitely via inflation. This extreme obviously isn't what we are talking about though, and some other definition of size of the economy makes more sense.

I'd say true growth of the economy means more goods, services, and to account for the mentioned creative industry, more information generated and processed. These three domains can decouple growth from resource use via increased efficiency for a while. However, for each domain a theoretical perfect efficiency must exist, beyond which adding goods, services, or processing power will again result in increased use of resources.

Likewise economic activity can, within limits, move from physical goods to services to information. This may result in a temporary reduction of resource consumption. However, once activity has shifted to the maximum extent possible towards information processing and the efficiency of information processing is maxed out, further growth of the economy will again require increased resources.

If you accept the above definition of the size of economy then it seems that the planet has allot of potential for growth left via efficiency and shifting of activity into less resource intensive domains. However, theoretical limits of efficiency (regardless of domain), imply that infinite economic growth is not possible on the planet. The only remaining option for infinite growth is then the expansion of the economic sphere into space. This can mean human colonies in space or also off-planet manufacturing or computing facilities.

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MW

What does this economic growth really mean?

If we look back in time to when the economy was 1/10th of its current size per capita, in what sense are we (on average) 10 times as wealthy now as we were then? We don't get to work a 4 hour week instead of 40. If we spend 10% of our income to feed ourselves, it doesn't follow that this ancestor spent 100% of their income on food.

On the other hand, there are things we can do now which our ancestor could not have done at any price. I can open a window onto a near-photographic quality world rendered in real time and wander through it (blowing stuff up.) I can stand in the middle of a forest and talk to someone in the middle of an ocean on the far side of the world using a device that weighs a few grams. I can look at my baby and be 98% confident she'll live to adulthood, and 100% confident she won't get smallpox.

How much richer do those things make me? Why claim 10 times, rather than 2 times or 100 times richer?

If economic growth has no necessary proportionality to anything in the human condition, then there is no reason it can't continue exponentially forever.

(Incidentally, 10 times is 116 years at 2% compound or 59 years at 4%, so that 10 times poorer ancestor is probably your great grandparent.)

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Oliver H

"If economic growth has no necessary proportionality to anything in the human condition, then there is no reason it can’t continue exponentially forever."

If that's the case, however, that begs the question whether "economic growth" is a useful concept to begin with or just an arbitrary thingamajig with which economists justify their own recommendations in a fit of circular logic.

Jonathan

the point is, we are already boiling ourselves and still don't stop (yes, there IS climate change and there could be tipping points that lead to a cascade effect and everything could turn faster as we think and before we know we slip into a new ice age) The other point is, that it's scientificly prooven that after a certain point of wealth is reached, which doesn't include owning smartphones, tv, bmw or anything like that, the actual LUCK doesn't grow anymore. Instead consume becomes a similar behaviour like cocaine. THAT is what we should be concerned about. In this system we forget about the really important things.
Also the economic system of today is actually built to grow, it cannot stop. It can crash, which it does every few decades and what we recently experienced, but it can't stop growing. And a financial crash leads into trouble, people not only loose work and all but also money has to be burnt to push economy to keep the unhealthy system alive. What usually happens then is war (which first of all is expensive and secondly destroys a lot of stuff that can be built up again so the economy gets going). It's actually quite simple to understand what at economy schools they still don't teach, but how the economy is NOT working is actually quite easy to understand. And everyone that tells you otherwise and throws complicated economists words on your head that even him doesn't understand properly wants either disinform you or is lying to him or herself and tries to legitimate the whole "free markets" story for his or her own good.
what I want to say is, dear author, please stop with your reactionism and let the youths (including me) paint a new and better future because we are tired of being stuck in this ellbow-system, even if some may don't actually know it, but we all feel it I am sure ;-) And no, for the older generation and all the americans, I am definitly not a comunist (although there are quite a few great ideas behind it) ;-)

ah yeah, if you wanna know more, google for "margret kennedy" who knows how to explain the whole story quite well and spent her life only on analysing and teaching about the money system.

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Shane L

A small side note: several people are questioning the need for economic growth at all, on the grounds that we should seek that system that benefits people and is sustainable. Yet I would have thought that a major reason governments seek economic growth is because they want to be in a position to defeat rival countries in war.

Those countries that abandon economic growth as a goal may make themselves vulnerable to rival countries that continue to grow. So while there are international tensions there could be an incentive for states to seek growth, however unsustainable, to prevent rival states from overwhelming them.

Steve Cebalt

"We have not succeeded in answering all our problems. The answers we have found only serve to raise a whole set of new questions. In some ways we feel we are as confused as ever, but we believe we are confused on a higher level and about more important things."

-- Earl C. Kelley