The mere fact that growth leads to increased satisfaction of consumer preference cannot serve as the conversation-stopper that it once did.
I would like to argue that an extended period of slow growth for the Canadian economy — by which I mean GDP growth that exceeds the rate of population growth by perhaps 1 percent per year — is to be welcomed. This conclusion is a consequence of two fairly simple propositions: first, that zero or negative growth is highly undesirable, and second, that more rapid growth would produce only meagre benefits in welfare and would likely be achieved at a cost that would exceed them.
The core principle that should inform any discussion of economic growth is what I refer to as Hirsch’s Law, from Fred Hirsch’s 1976 book The Social Limits to Growth. It holds that “as the level of average consumption rises… the satisfaction that individuals derive from goods and services depends in increasing measure not only on their own consumption but on consumption by others as well.”
This is another way of describing the shift that occurs, with increased affluence, away from a material toward a positional economy. In a very poor country, the central difference in standard of living between the rich and the poor is that the rich have a lot of stuff that the poor cannot afford. Thus as the society becomes wealthier, the condition of the poor is improved, because they gain access to many of the material goods that were formerly enjoyed only by the rich.
Once a society reaches a certain level of development, however, almost all classes of society have access to the same material goods. For example, while owning a bicycle or a refrigerator remains aspirational in many parts of rural China, in Canada these items can be purchased for less than $100 and $400 respectively, making them accessible to practically everyone. So in wealthy societies, the rich and poor tend to have a lot of the same stuff. It’s just that the rich have nicer versions of what the poor have (the least expensive Miele refrigerator sold in Canada costs over $8,000, more than 20 times the price of a budget model).
As a result, what people typically aspire to in wealthy societies are positional goods — goods that derive the preponderance of their value from a comparison with what others have. The problem is that broad-based economic growth does not help anyone satisfy these aspirations. All it does is move the goalposts. So if your desire is to have a nice refrigerator, you will find that what counts as nice gets ratcheted up over time. Just making more money may therefore bring you no closer to your goal. You must also move ahead of other people.
Hirsch’s Law is very closely related to another principle, which I am inclined to call Hirsch’s Corollary, from the same book by Fred Hirsch. “Just as there was a tendency in times of material poverty to exaggerate what redistribution of income could do to diffuse what was then the most sought-after prerogative of the contemporary rich, their material comfort, so there is a tendency in times of material affluence to exaggerate what growth can do for diffusion of the new distinctive powers of the rich, their positional prerogatives.”
Hirsch starts by identifying a classic mistake that people make when they see the terrible living conditions in poor countries, yet see local elites living in luxury. There is an impulse to say: “How unfair. What this country needs is less inequality, in order to improve the condition of the poor.”
This is wrong, because even if one were to redistribute the wealth, it would make almost no difference to the poor. The problem is that the whole country does not produce enough to meet the needs of its population. The only solution to overcome this is economic growth.
However, this insight can easily lead us to overestimate the value of growth, and assume that it has the same tonic properties in wealthy societies that it has in poor ones. Typically it does not, because in rich countries almost all of the gains are absorbed into a positional competition that leaves everyone’s relative standing unchanged.
Indeed, most of the benefits that we do experience from growth tend to be by-product effects, such as technological change. I think most people, forced to choose between the increase in standard of living experienced over the past several decades and the improvements in technology, would happily take the technology.
There is another respect in which growth is a victim of its own success. The consumption of private goods in general is subject to diminishing returns. This has a number of effects, but one of them is that the relative significance of negative externalities — where the cost to society is greater than the cost the consumer pays for what is produced — tends to increase.
People in China are willing to tolerate extraordinarily high levels of air pollution in order to achieve gains in their material standard of living. For us, the tradeoff they accept would be completely intolerable, even if it could bump our rate of growth up to Chinese levels. That’s because we have so many refrigerators and bicycles already that the value of producing a few more pales in comparison to the benefits of clean air, or safe food, or of a variety of other goods that tend not to show up in growth statistics.
One can see this dynamic at work in the numbers produced by happiness researchers. Granted, much of this data needs to be taken with a grain of salt; happiness research is very far from being an exact science. Nevertheless, there are a couple of large effects that show up quite clearly. Labour-market insecurity, for example, is a source of enormous unhappiness. And apart from large-scale externality problems like climate change, there are also more local issues like congestion (as seen in, for example, commute time), which are becoming important quality-of-life issues for many people.
Maximizing growth is no longer a defensible ambition.
There may be some temptation to take the analysis too far and conclude the growth is of no value at all. This is not true. Indeed, when we turn to the issue of redistribution and social inequality we can begin to see the most powerful argument for maintaining a positive rate of growth per capita. The central problem with growth rates of zero or less, I would maintain, is that they dramatically exacerbate distributive conflict.
One of the great discoveries of the 20th century was that it is possible to octuple the wealth of a society without decreasing at all the average level of possessiveness. The affluent in our society resist any attempt to “share the wealth” just as ferociously as people in a similar class position did over a century ago — despite the fact that we enjoy a lifestyle that they would have described as rich beyond the dreams of avarice. (Our avarice, it turns out, is capable of dreaming much more than anyone had thought possible.) Thus combating social inequality is always a very difficult struggle, because it generates undiminished resistance among the most powerful members of society.
Growth, however, can have the effect of diminishing this resistance. Redistribution, by necessity, generates both winners and losers, and will therefore always be controversial. The social tensions that it generates are exacerbated by a quirk of human psychology known as loss aversion, whereby people become much more unhappy about losses from their present state than they do about foregone gains of the same magnitude. For example, a person who finds that she has $500 more in tax owing than she expected at the end of the fiscal year, will typically be much more upset about this than she would be if she found out that her tax refund was $500 less than anticipated.
Growth makes things easier, because it creates just a bit of wiggle room, making it possible to implement policies that are progressive with respect to income, without having to take actual money out of anyone’s pocket (only hypothetical money). In this respect, having a moderate rate of growth is a lot like having a moderate rate of inflation. The latter allows us to make small downward adjustments in wages without actually lowering anyone’s nominal wage — and thus do so without triggering loss aversion. Growth allows us to do the same with respect to redistribution. This may seem like something of a minor consideration, but one need only look at how ugly politics can become with the onset of a recession to appreciate its significance.
Thus my view on the value of slow growth is framed by these two interrelated propositions. There was a time when both would have seemed rather unorthodox. Over the past 20 years, however, they have become increasingly mainstream.
Consider, for instance, Benjamin Friedman, a respected economist and former chair of the Department of Economics at Harvard University, who wrote a very large and well-received book called The Moral Consequences of Economic Growth. What is perhaps most remarkable about the book is that he makes no appeal whatsoever to the traditional economist’s argument in support of growth, namely, that increased satisfaction of consumer demand constitutes a gain in welfare and is therefore valuable in and of itself.
On the contrary, he dismisses this argument on the first page of the introduction, with the observation that “the tangible improvements in the basics of life that make economic growth so important whenever living standards are low…have mostly played out long before a country’s per capita income reaches the levels enjoyed in today’s advanced industrialized economies.” He therefore spends the entire book talking about other, essentially non-economic, benefits of growth. And one of these arguments is that it creates the policy space for measures aimed at reducing inequality.
I take this as an indication of increased maturity in the debate over economic growth. The mere fact that growth leads to increased satisfaction of consumer preference cannot serve as the conversation-stopper that it once did. Given the very real possibility that consumers are stuck in a collective action problem — of competing for positional advantage — we want to look at the total picture and take seriously the broader social and environmental consequences of the policies that we pursue.
I believe that it is still possible to make a strong case for economic growth, taking all of this into consideration. Maximizing the rate of growth, on the other hand, is in my view no longer a defensible ambition.