Bill Gates’ Point
Bill Gates says “it is very difficult to compare the value of baskets of goods across different time periods”. One surprising conclusion, “that GDP understates growth”, notwithstanding, he also points to a book by Simon Fraser University prof Morton Jerven, “Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It” and concludes that we should not focus on GDP in estimating “growth”, at least insofar as policy planning for poor countries is concerned.
I don’t know why this argument is limited to poor countries.
What Growth Is
Conventionally when one speaks of “growth” one is speaking of an increase in economic throughput.
In a growth scenario, the aggregate amount of economic transactions is not simply maintained year over year (which would be enough for wealth to increase). Rather, ongoing “growth” usually means an increase in the aggregate amount of economic transactions year over year, which means, presuming most of this activity is worthwhile, that wealth not only accumulates but that the accumulation always accelerates.
(Geeky elaboration: economic throughput is measured in units like dollars per year, so the growth is in dollars per year per year and the growth rate, which is what all the talk is about, is dollars per year per year divided by dollars per year which is dimensionally a pure rate. Since wealth is measured in dollars, the growth rate is dimensionally equivalent to the second derivative of wealth, which needs to be kept roughly constant. If this doesn’t give you a moment’s pause, you probably don’t understand what I just said.)
Alternative Definitions of Growth
Apparently, Mr. Gates is using the word “growth” in a different sense than the conventional one, and accordingly I don’t have grounds in the article for disagreeing with him.
That said, I don’t endorse the article either, as Mr. Gates is to my reading unclear on what he actually does mean by “growth”. Consequently I cannot evaluate whether his implicit goal that we *ought* to be making “judgments about which economic policies lead to growth” makes sense. He has rejected the conventional rigorous definition without providing an alternative.
“Nous devons admettre qu’une fois les besoins de base satisfaits,
l’évolution de l’humanité n’est pas une question d’avoir plus,
mais plutôt d’être plus.”
(I think it’s one of those statements from the heart that sounds better in French. That’s from The Earth Charter: “We must realize that when basic needs have been met, human development is primarily about being more, not having more.”)
It is always possible to improve the extent to which a society is thriving. Humans in supportive circumstances, where a good balance between the cooperative and the competitive has been struck, generally do good things and occasionally do great things. Spiritual, artistic, intellectual growth, these pursuits have proven boundless. We can always “grow” in some sense.
The Conventional Version
By contrast, when we look at the conventional meaning of “growth” as an active goal for society, governments in thrall to economism believe it is their mission, indeed their key mission, to maintain a positive time derivative of economic throughput in units commensurable with dollars per year. Indeed, people expect this – it allows them to “invest” in the economy and thereby profit from its growth. It allows financial organizations as we understand them to exist.
Many people outside the governing elites deem it impossible to maintain an economy in which that quantity remains positive indefinitely in the long-term mean. In other words, we believe that no useful measure, specifically no medium of exchange, that reliably allocates crucial resources (water, food, shelter) can grow exponentially indefinitely.
Growth in the conventional sense is used as a proxy for the rate at which the rate at which wealth increases increases. That is, growing wealth is implicitly not enough. Our financial institutions are built around the idea of something like exponentially growing wealth. This in fact makes sense in less developed places so it has been very useful. But its utility clearly fails when bumping up against natural limits.
The idea that meaningful wealth can have a constant “acceleration” on a finite physical domain forever is highly dubious. Such growth seems at first blush unsustainable in exactly the same sense as any growing exponential is unsustainable in nature.
No Longer Generating Real Wealth
It’s important to acknowledge that there is real progress in the poorest countries, and that we need more of it. Obviously, though in the economically dominant countries (which dominate the averages) we do not have anything like accelerating improvement in well-being, even though we continue to manage to have “growth”. SOmething else must be growing.
The reason we are still in business, then, is that the GDP does not distinguish between activities that are physically productive and those that are merely symbolic activities, that are in demand for some reason.
If there is any sense in which economic growth in the conventional definition can be maintained indefinitely, it must increasingly be focused on symbolic rather than substantive wealth. This doesn’t really solve the problem of burnt-in growth though.
In a symbol-based system, provision of actual physical goods like food and shelter becomes economically secondary and hence unreliable. Arguably we see this now, with far more resources being devoted to upgrading the Chinese diet to a meat-based one, than to feeding the countries which remain poor with the coarse grains that they need. As physical goods become cheap relative to symbolic ones, the winners of the symbolism game, mostly inadvertently and thoughtlessly, abuse the real, physical, biological world.
In order to participate in modern bounty, then, one must participate in the game of creating symbolic wealth. (Producing physical goods is increasingly unrewarding, as can easily be observed by comparing the lifestyles of lawyers and tax accountants with those of farmers and plumbers.) Thus, the “growth” in question must necessarily be a growth in wasted effort. We cannot be better off in aggregate in any material way because the world has no room further growth. We hide this by, more or less inadvertently, making an increasingly dominant fraction of the growth out of symbolic and nonproductive activities.
I suggest that in managing economic activity, what we really want to measure is wealth, not throughput. Capital, not GDP, and certainly not growth in GDP.
Not only is it quite possible for a high GDP scenario to destroy rather than accumulate capital, but it seems that this describes precisely what is happening, especially once you account for natural capital.
Nature Prefers a Steady State; Finance Doesn’t
Once a reasonable level of comfort is attained, I wonder if a case cannot be made that wealth is maximized in a quasi-steady state economy. That seems to be the lesson of ecology. A mimetic economy would be one that most resembled a healthy ecosystem – maximizing individual freedom of action subject to a constraint of aggregate limits. Nature shows us that natural wealth gradually accumulates in such circumstances. Could economies function like that?
The real trouble is that a transition to such an economy completely disrupts the bases for our financial institutions. The presumption that “growth” (defined as ever-increasing GDP) is the goal is so ingrained in economic, financial and governmental circles, that the constant hum of skepticism from those of us educated in other fields is easily dismissed. The obvious and widely held idea among intelligent people that indefinite growth is either meaningless or impossible makes no inroads while being met with no rebuttal.
This amazing circumstance traces back to how the idea is ingrained in the system; in the economic, financial, administrative and governance sectors any questioning of growth as the central goal of all activity is dismissed as nonsensical. To many or perhaps most of the rest of us, it’s obviously a fantasy.
Mr Gates’s Point Is More General than He Admits
It’s remarkable to see Mr. Gates challenge the growth shibboleth in the context of the poorest nations, where it makes the most sense, and ignore it in the most advanced countries where it does the most damage. Of course, Mr. Gates is among the world’s leading beneficiaries from the transition from a real economy to an imaginary, symbolic one. He’s hardly the one to challenge it.
Still, his point “it is very difficult to compare the value of baskets of goods across different time periods” is a very good one, and one I have made myself. It is still harder to compare these “baskets” across scenarios. There is no meaningful exchange rate between a dollar in the A2 scenario and a dollar in the B1 scenario. Hypothetical worlds cannot participate in inter-hypothetical trade.
Consider two future worlds, one in which the atmosphere is somewhat toxic in such a way that the toxins can be filtered out, and one in which it isn’t, in which individual consumption on axes other than breathing is the same. In the toxic world, a great deal of effort and expense is dedicated to atmosphere purification, fixed filters, mobile filters, masks, and disposal of the detritus. Otherwise everything is comparable; similar level of technology, similar housing stock, similar consumption. In the toxic world, GDP is higher, and everyone has to work harder to pay for the air filtration. They are more stressed, less happy, and wealthier. Between now and these comparable futures, the toxic one will have achieved higher growth.
We Need an Alternative to Growth
The absurd decisions that financial practice insistently foists upon us (and that the most influential part of our society appears to accept as axiomatic) seem to be leading us to the toxic world. We are destroying ourselves propping up the financial sector, whose insatiable greed is structural and whose demands are ultimately impossible. The trouble is that this all used to work very well, and we have a hard time imagining things being any other way. (*)
UPDATE May 9 Huh. Well renowned economist Joseph Stiglitz neatly makes a liar out of me, by saying pretty much exactly what I am trying to say, and much more clearly! But a day later. So insofar as I know I get precedence! (It’s almost certainly a coincidence; I doubt he needs to steal my ideas!)
If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. We may also be confronted with false choices, seeing trade-offs between output and environmental protection that don’t exist. By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy.
Recent methodological advances have enabled us to assess better what contributes to citizens’ sense of well-being, and to gather the data needed to make such assessments on a regular basis. These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness.
Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment.
FURTHER UPDATE – In response to offline criticisms, let me hasten to point out that Mr. Gates’ actions in helping to develop Africa are enormously valuable and I join almost everyone else on earth in my deep respect and gratitude for his efforts. I am simply pointing out that his observations in the first paragraph have broader applicability. I disagree, though, with his claim that GDP underestimates growth in the advanced countries. I rather agree with Stiglitz that “In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions.”
(*) = That’s what they said on Easter Island as well.
Portrait of Bill Gates from Wikimedia Commons by World Economic Forum is in the Creative Commons under CC BY-NC-SA 2.0. Mr. Gates does not necessarily agree with this article, though of course we’d be happy to hear from him!
My all time favorite enviro-cartoon is used by permission of its author, Marc Roberts. A full sized version is here.