Center for the Advancement of the Steady State Economy
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Krugman’s Growthism

by Herman Daly

Herman Daly

 

Paul Krugman often writes sensibly and cogently about economic policy. But like many economists, he can become incoherent on the subject of growth. Consider his New York Times piece, published earlier this month:

 

…let’s talk for a minute about the overall relationship between economic growth and the environment.

Other things equal, more G.D.P. tends to mean more pollution. What transformed China into the world’s largest emitter of greenhouse gases? Explosive economic growth. But other things don’t have to be equal. There’s no necessary one-to-one relationship between growth and pollution.

People on both the left and the right often fail to understand this point…On the left, you sometimes find environmentalists asserting that to save the planet we must give up on the idea of an ever-growing economy; on the right, you often find assertions that any attempt to limit pollution will have devastating impacts on growth…[Krugman says both are wrong]…But there’s no reason we can’t become richer while reducing our impact on the environment [emphasis mine].

Krugman distances himself from “leftist” environmentalists who say we must give up the idea of an ever-growing economy, and is himself apparently unwilling to give it up. But he thinks the “right-wingers” are wrong to believe that protecting the environment will devastate growth. Krugman then advocates the more sensible goal of “becoming richer,” but fails to ask if growth in GDP is any longer really making us richer. He seems to equate, or at least fails to distinguish, “growing GDP” from “becoming richer.” Does he assume that because GDP growth did make us richer in yesterday’s empty world it must still do so in today’s full world? The usual but unjustified assumption of many economists is that a growing GDP increases measured wealth by more than it increases unmeasured “illth” (a word coined by John Ruskin to designate the opposite of wealth).

To elaborate, illth is a joint product with wealth. At the current margin, it is likely that the GDP flow component of “bads” adds to the stock of “illth” faster than the GDP flow of goods adds to the stock of wealth. We fail to measure bads and illth because there is no demand for them, consequently no market and no price, so there is no easy measure of negative value. However, what is unmeasured does not for that reason become unreal. It continues to exist, and even grow. Since we do not measure illth, I cannot prove that growth is currently making us poorer, any more than Krugman can prove that it is making us richer. I am just pointing out that his GDP growthism assumes a proposition that, while true in the past, is very doubtful today in the US.

To see why it is doubtful, just consider a catalog of negative joint products whose value should be measured under the rubric of illth: climate change from excess carbon in the atmosphere; radioactive wastes and risks of nuclear power plants; biodiversity loss; depleted mines; deforestation; eroded topsoil; dry wells, rivers and aquifers; the dead zone in the Gulf of Mexico; gyres of plastic trash in the oceans; the ozone hole; exhausting and dangerous labor; and the un-repayable debt from trying to push growth in the symbolic financial sector beyond what is possible in the real sector (not to mention military expenditures to maintain access to global resources).

Deforestation–one of the many “illths” created by continual GDP growth

These negative joint products of GDP growth go far beyond Krugman’s minimal nondescript category of “pollution.” Not only are these public bads un-subtracted, but the private anti-bads they make necessary are added to GDP! For example, the bad of eroded topsoil is not subtracted, but the anti-bad of fertilizer is added. The bad of Gulf and Arctic oil spills is not subtracted, but the anti-bad of clean-up is added. The natural capital depletion of mines, wells, forests, and fisheries is falsely accounted as income rather than capital draw-down.

Such asymmetric accounting alone is sufficient to refute growthism, but for good measure note that the growthists also neglect the most basic laws of economics, namely, the diminishing marginal benefit of income and increasing marginal cost of production. Why do they think these two curves will never intersect? Is Krugman just advocating temporary growth up to some level of optimality or sufficiency, or an ever-growing economy? If the latter, then either the surface of the Earth must grow at a rate approximating the rate of interest, or real GDP must become “angel GDP” with no physical dimension.

Krugman is correct that that there is no necessary “one-to-one relationship between growth and pollution.” But there certainly is a very strong positive correlation between real GDP growth and resource throughput (the entropic physical flow that begins with depletion and ends with pollution). Since when do economists dismiss significant correlations just because they are not “one-to-one”?

Probably we could indeed become richer (increase net wealth) while reducing our impact on the environment, as Krugman hopes. But it will be by reducing uneconomic growth (in throughput and its close correlate, GDP) rather than by increasing it. I would be glad if this were what Krugman has in mind, but I doubt that it is.

In any case, it would be good if he would specify whether he thinks current growth in real GDP is still economic in the literal sense that its benefits exceed its costs at the margin. What specifically makes him think this is so? In other words, is GDP growth currently making us richer or poorer, and how do we know?

Since GDP is a conflation of both costly and beneficial activity, should we not separate the cost and benefit items into separate accounts and compare them at the margin, instead of adding them together? How do we know that growth in GDP is a sensible goal if we do not know if the associated benefits are growing more or less rapidly than the associated costs? Mainstream economists, including Krugman, need to free their thinking from dogmatic GDP growthism.

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6 Responses to “Krugman’s Growthism”

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  2. Randy Bangert says:

    It seems strange that an entire discipline conflates costly and beneficial activity in the calculation of GDP when everything else in economics relies on cost/benefit analyses. How dysfunctional is this discipline?

  3. All true, but there is no news here, and the Genuine Progress Indicator folks try hard to do precisely the kind of accounting advocated.

    Paul Krugman, bless his soul, is a genuine (“left”) liberal in a sea of neo-liberals/conservatives. Clearly, he continues to subscribe to the conventional wisdom of growth-forever, however.

    It would be interesting to have a debater between Krugman and Daly. No-growth needs all the attention it can get.

    To Randy Bangert: GDP is simply intended to take a measure of what transpires in the market. There is no intent or implication of cost/benefit. The trouble is that it has come to be taken as a measure of “progress” — a notion that has no justification.

  4. Jimmy Kelsey says:

    I often find students to be far more interested in measures such as the Genuine Progress Indicator (GPI) and Measure of Economic Well-being (MEW) than in GDP. They are still learning about whether something is measurable, do not yet realize the difference between objective and subjective values. GDP is like a ruler; it measures dollar value of whatever is sold and the ruler measures distance. Neither is of any use in measuring emotional responses, well-being or satisfaction.

  5. Prof. Daly–similar to your frustration with supposed sustainability advocates who misunderstand the basic arithmetic of growth–I believe that even those who denounce growth fail to denounce the main pillar of growth: the stock markets. I would appreciate if you or any of your associates could comment on my articles series, “Do Stock Markets Make Sustainability Impossible?” Here below is a summary and list of all 8 chapters. The main URL is: https://medium.com/@krystof_huang/stocks-vs-sustainability-1-352720c49b81 To summarize my main ideas…

    1. Far more focus is needed on denouncing stock markets. Sustainability advocates routinely denounce air pollution, large corporations, growth dependence, and even “human greed.” Meanwhile — so far as I can find— they never directly condemn stock markets. Thus never facing the obvious fact that a sustainable future can not include large stock markets. Thus also seemingly ignoring the fact that stock markets create large corporations and require growth dependence. Stock markets also mechanically require profits (and hence stock prices) to “grow or die.” Stock prices simply cannot survive either reduction or stagnation —or stock holders will divest — regardless of how angelic or non-greedy human behavior might become. This might not be a serious problem if stock markets had no greater influence than Las Vegas casino games. Unfortunately, that is obviously not the situation. Almost every nation in the world has created a stock market based economy. Reducing stock markets will not automatically remove greed or growth dependence. However, it is simply wrong to assume that the predominance of sustainability is a viable choice — until we reduce the sizes of stock markets. Technically, this is easily done by gradually introducing special income taxes on stock market gains. Cultural or political acceptance is of course a very different question. Nonetheless, should we all remain silent forever on that which is essential for human survival, just because it is unpopular?

    2. Also, unlike energy sources, stock markets do not require new technology in order to be phased out. We already have something analogous to a “bridge fuel” ready-made to replace stock markets. This is found in corporate bonds.

    3. How might it be possible to phase out stock markets? Firstly, we need for one reputable economist to write one book describing how a national economy might do just as well with bond-only investment methods. Unfortunately, not one such book seems to exist. I am not a PhD economist and have no such capability. However, perhaps my writings might inspire someone who does.

    4. The phase-out of stock markets is unlikely to find rapid acceptance in wealthy nations — but might be pioneered in developing nations such as China, India, Greece, Venezuela, Cuba, the Philippines or Indonesia. For these nations, stock markets are more clearly a sucker game. But— first we need for the very idea of reducing stock markets to be discussed and developed! Sadly, no “sustainability” leader even seems to be clearly denouncing stock markets as an obvious pillar of unsustainable growth dependence. Much less developing the concept to the point where it might be picked up by any government. The purpose of my article series is to inspire some meaningful discussion of this obvious and neglected fact.

    5. Meanwhile, what can we do in wealthy nations? Something even more powerful. We can develop “pro-sustainable corporations” that can out-compete stock market corporations. These pro-sustainable entities might be for-charity like Newman’s Own. Or they can be for-profit. In either case, the pro-sustainable corporation is defined by requiring itself to share at least half of net profits to benefit the consumers who pay for those profits. This is diametrically opposed to the stock market corporations — which are required to siphon profits out of local communities and into the stock market system. The stock market is a poker-like game in which the bulk of profits is inevitably won by the most wealthy players, via their hedge fund managers, economies of scale, advance notice of market movements, greater ability to survive downturns, and other privileges.

    6. The most important development for the survival of planet Earth could be for a for-charity pro-sustainable corporation to displace Facebook. Firstly this could divert the funds of a major corporation away from the stock market and towards environmental activism. Secondly this could become a central force for the education of millions of people. Constantly featuring popular documentaries about global warming, etc. As opposed to the current focus of Facebook — as required by stock market membership — of finding ever new ways to siphon money out of people and into the stock market.

    I have explained these ideas of “pro-sustainability” in an 8-chapter series: “Stocks Vs. Sustainability.” The first chapter summarizes the main ideas and perhaps offers enough detail for most people. Any comments, questions or suggestions are welcome. Here is a complete list of chapters…

    1. Are stock markets unsustainable?

    2. Are bonds more green than stocks?

    3. Does anybody protest stock markets?

    4. Is Wall Street free enterprise?

    5. Is investing basically irrational?

    6. Do economists want overpopulation?

    7. Can sustainability beat Wall Street?

    8. Frequently asked questions and prominent reactions.

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