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What kind of growth do we want? And why are we still having the wrong arguments?

Growth is a remarkable feature of the modern world. But many well-intentioned people still argue about whether you should first grow the economy and then worry about questions of equity or ecology or try to stop growth altogether. Here, I explore how I think growth should be thought about, arguing that the problem we should discuss is not growth as such, but rather what kinds of growth an economy should produce.

In the last few weeks I have heard quite a few apparently well-educated people discussing economic growth in ways that seem to me entirely anachronistic: one side arguing that growth is necessary for all things good, the other side arguing that it is the cause of many things bad (one example if you’re interested was the recent Moral Maze episode on BBC Radio 4). The prompt for these discussions was the very important IPCC report on climate change (largely ignored in the UK tabloid media because of a vital news item on snogging in Strictly Come Dancing). Here, probably unwisely, I set out how I think growth should be thought about.

Let’s start with the conventional positions. For one side growth is an unambiguous good. For the capitalist west, here’s Larry Summers: “It is the task of economic policy to grow the economy as rapidly, sustainably, and inclusively as possible” (in the mid-20th century Nikita Khrushchev took a fairly similar view for the communist world: “growth of industrial and agricultural production is the battering ram with which we shall smash the capitalist system”).

Growth is indeed the most remarkable feature of the modern world, and economic growth has been strongly associated with growth in life expectancy, education, and availability of the essentials of life, from food to energy. That’s why many well-intentioned people still argue that you should first grow the economy and then worry about questions of equity or ecology.

A counter-view argues that growth is bad. This view has been articulated since the early 19th century: the pursuit of growth necessarily means despoiling the environment, running down scarce resources, sacrificing life, and imprisoning people on a treadmill of hope and dissatisfaction. It’s better to be satisfied with enough and better to encourage a steady-state economy. Some of these people celebrated when Japan moved into a long period of stagnation in the 1990s and 2000s. Here perhaps was a new model of sustainability. This view—that zero growth is inherently desirable—remains popular across large parts of Green and left politics.

In my view both positions are untenable. Both misunderstand that growth is not just a peculiar genius or fetish of capitalism. It is what nature does too—the growth of plants, creatures, and ecosystems makes the natural world what it is. Where there is no growth there is no life. And growth is the very hallmark of civilization if we mean growth of knowledge, understanding and intelligence. So the problem we should discuss is not growth as such, but rather what kinds of growth an economy should produce.

What matters is not growth itself, but rather what kinds of growth an economy should produce.

This quickly gets you to the view that the economy should grow qualitatively but not necessarily quantitatively. It should grow in terms of the value of products and services, their usefulness and meaning, but not necessarily through using more matter or energy or more stuff. Indeed, this might be the definition of a truly successful 21st century economy: that all of its growth is qualitative and achieved from the creation and absorption of new knowledge, with knowledge replacing matter wherever possible (for example by reducing waste). It should grow in the sense of complexity, offering richer and more fulfilling ways to be and to live, and not just in things.

In this view there is no inherent reason why an economy should not grow 2–3 percent or more a year, without breaching any principles of sustainability (meeting the needs of the present without compromising the ability of future generations to meet their own needs, to use the simple and clear definition proposed by Gro Harlem Brundtland in her classic report from the late 1980s).

The rate of growth would be set mainly by the economy’s ability to create and absorb new knowledge, the ability to do things better, in all areas of life. Inputs of matter, energy, and time could and should decline since they are finite.

Since we know that the majority of productivity gains come from new knowledge—intangibles in all their forms—this should be obvious (and if it’s not, try reading my colleague Stian Westlake’s recent book with Jonathan Haskel on ‘Capitalism without Capital’).

Economies should be able to grow over very long periods of time primarily due to their superior ability to create and use new knowledge, even if demographic and other factors create constraints. Those parts of the economy most dependent on energy and matter (which bring with them physical limits to exponential growth) would steadily shrink as a proportion of GDP, helped by taxes and regulations as well as consumer preferences. Other parts of the economy, which are not limited in this way, would tend to grow (including most services, the creative and knowledge economies and much else).

Doing this isn’t easy, and much is known about the many dynamic patterns (like rebound effects) that make it so hard to reduce addiction to energy and materials. But across the world a huge amount of effort has gone into designing decarbonization trajectories that allow for a steady transition and mitigate some of these effects.

Here is an obviously more plausible position than the alternatives which either say we have to first grow the economy and then worry about the environment, or that we should stop growth now. Yet it’s largely missing from the mental models of many commentators.

There’s even less engagement with other lessons of growth from the natural world; like the importance of including and even encouraging cycles of birth and death; encouraging systems in which the waste from one form of life becomes the fuel for another; encouraging kinds of growth which are not just about becoming bigger, but are about deepening (like the roots of a plant). But I’ll leave these for another time.

Economics grew up as a discipline without many tools for judging the quality as opposed to the quantity of growth. But we now need to be more precise about which kinds of growth are productive, providing us with value, and which kinds of growth destroy value. Classical and neoclassical economics tend to see all goods as providing utility. But a more rigorous view judges all goods according to their balance of positive and negative effects on value (or positive and negative externalities in the language of economics).

Five types of good

At least five very different types of good are aggregated together in current measures of GDP (and usually combined in most economic discourse). Distinguishing them is key to better understanding what counts as good growth.

Positive externalities

The first category includes goods that become more valuable if others are also consuming them—like telephones and other network technologies. Because of their “positive externalities,” there is a case for judging growth in consumption of these as more valuable to an economy than growth of other kinds of consumption. Health can be of this kind; it’s valuable for me if other people don’t carry dangerous infectious diseases, or if they are brought up to avoid impulsive violence. Many communications technologies create a lot of indirect value, and their dynamic impact on growth during some periods reflects this special quality. Publicly available knowledge, Marx’s “general intellect,” also provides positive externalities of this kind. Again, it’s valuable for me or you to be surrounded by other knowledgeable people. Precisely how this additional value should be measured is not straightforward; but it’s striking to see the imbalance between how stock markets value the great network companies (like Google and eBay), and how their activities are valued in GDP.

Everyday goods

A second category encompasses more normal commodities like clothing or tins of baked beans. Whether or not I consume these doesn’t have much impact for better or worse on other people. These are the types of good around which most economics is shaped. Their profitability can be improved by reducing inputs or increasing the extent to which they are reused or recycled. But their external effects are modest.

Ambiguous goods

In a third category are goods that destroy value for some while creating it for others. These include cars (which create pollution, noise, and dislocation for those who don’t own them), airlines (which disproportionately worsen climate change) and many other industries. Economics recognizes that they produce “negative externalities.” It measures these when doing exercises in cost-benefit analysis, and policy makers try to internalize them through taxes or regulations. But only the most obvious, and material, externalities are recognized in economics; and even the ones that are recognized aren’t measured in GDP or company accounts.

Positional goods

A fourth category is what the economist Fred Hirsch called “positional goods,” whose value comes from their exclusivity; stately homes and tropical islands developed for luxury tourism are classic examples as is getting on the guest list for the best parties or membership of the most exclusive golf clubs. Their scarcity can be physical—meaning that a good is scarce in some absolute or socially imposed sense (such as land used for pleasure and personal enjoyment), or the scarcity can be social—meaning that it can be subject to congestion or crowding through more extensive use (as in the case of a privileged education). More spending on positional goods is unlikely to increase overall well-being, and may actually diminish it. As Fred Hirsch wrote, “it is a case of everyone in the crowd standing on tip toe and no one getting a better view”; “if all do follow…everyone expends more resources and ends up with the same position.”

Harmful goods

Finally, there are goods whose very value comes from the negative externalities, or effects, created for others. At the extreme are weapons: teenagers buy knives and nations build nuclear missiles to frighten others. Their negative impact on lived value is not an unfortunate by-product but rather integral.

These types of good run in a continuum from ones, like network technologies, that create lived value greater than their apparent value in the market, to those that tend to destroy lived value. It should be self-evident that these very different kinds of good cannot simply be aggregated into a single thing to be called “growth.” Yet traditional measures of GDP make no distinctions between them and nor do our debates, apart from a limited measurement of externalities. They conflate quality and quantity; they ignore both positive and (most) negative externalities; and they take no account of the running down of natural assets. They also take no account of non-monetized work.

A few years ago I wrote a book—The Locust and the Bee—which set out a lot more detail on the theory and implications of these ideas. These arguments have become more mainstream recently, helped by books like Takers and Makers by Rana Foroohar and The Value of Everything by Mariana Mazzucato.

Three books

But the level of debate is still too low, and most of the writings that criticize the flawed approaches to value in GDP and business don’t get to the heart of the issue.

Here’s the simplest version: I would hate to live in an economy with zero growth. Presumably that would mean no new knowledge; no innovation; no ingenuity; just freezing us at the level of economic development we happen to have reached. Equally I would hate to live in an economy that carried on being remorsely hungry to use up physical resources of all kinds, wrecking the climate and much more as we drown in a sea of discarded electronics, plastics and metals. Both of these positions are ethically, intellectually and politically untenable. But put a bunch of highly educated commentators together and this is still where the debate ends. Surely it’s time to move on?

Author

Geoff Mulgan

Geoff Mulgan

Geoff Mulgan

Chief Executive Officer

Geoff Mulgan has been Chief Executive of Nesta since 2011. Nesta is the UK's innovation foundation and runs a wide range of activities in investment, practical innovation and research.

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