There is a big discussion on whether the economy of the world can keep growing forever or if it will come to an abrupt hold at one point in time. This article discusses arguments for both sides.
What is economic growth?
Economic growth is the value of all goods and services of an economy. Growth is, when the value increased compared to an earlier period. There are different ways to measure growth. The most common one is the gross domestic product (GDP). GDP is the sum of consumer, business, and government spending, adding total exports and substracting total imports. The nominal GDP takes the actual numbers calculated from that equation. The real GDP takes inflation into account.
For instance, consider an economy that produced 100 exact same cars in one year and 100 in the year after. Both GDP measures would show 0% growth. However, imagine that the price of the cars increased by 10% while everything else stayed the same. The nominal GDP would show +10%, while the real GDP would still show 0% growth, as it factors out the inflation. If the economy produced 105 cars in the year after, the real GDP would be 5%. The nominal GDP would be higher if there was inflation in addition.
The Club of Rome triggered this discussion
In 1972, the Club of Rome published a report called “The Limits to Growth”. As this was a much-discussed milestone to our question today, let´s take a look at it. Its purpose was to show that the exponential growth of the world economy cannot go on forever, as the resources in our world are limited. This theory was backed by a computer simulation suggesting that there would be a major disruption to our world economy within the next 100 years. Conclusions from the report included:
- If the major parameters that the equation takes into account develop as forecasted, the limits to growth will be reached at one point in time. This will most likely result in a sudden and uncontrolled drop in economic output, and with it, in wealth and world population overall. Parameters considered included the world population, industrialization, pollution, food production, and resource exploitation.
- A long-term stable and sustainable economy could be possible by targeting a growth rate of 0%.
- The earlier mankind starts to strive for a stable economy without endless growth, the higher would be the chance to successfully avoid the predicted catastrophee.
Different Feedbacks and Criticism on “The Limits to Growth”
Since the report has been published, many researchers and economists paid a lot of attention to it. Early reactions were mainly critisizing the report to be too simplistic and not taking into account the role of new technologies and innovations. Other critisicm stated that the computer simulation outcome was very sensitive to a few key assumptions and that they were set quite pessimistic.
In more recent reviews, the report got more positive reactions. In summary, researchers acknowledge that the broad assumptions, direction, and ideas of the report were right. Looking at it 40 years later, it also turned out to be quite an accurate forecast.
Christian Parenti drew a comparison between the report and today´s climate change discussions. Both were broadly ignored at the time of their publications, because they contradict powerful economic interests.
Why the World Economy will Stop to Grow at one Point in Time
Let´s summarize the arguments to why there might be a limit to growth:
- The world has limited resources.
- One person cannot increase consumption every year. There is a physical consumption capacity limit. If you possess three cars, one house, drink ten take-away coffees per day, and fly twice a week around the world, you might realize that the limit of possible consumption is close.
- (Almost) nothing exists that has the ability to grow forever. Every living thing will stop growing at one point in time and die. (except the economy is not a alive, the universe is expanding forever, and some fish actually do grow on and on until they die).
- The world is destroyed by humans. More profit is possible in the short term, but it will lead to devastation (e.g., the rain forest).
- Capital is always looking for good investments worldwide. However, it is getting harder to find good investment opportunities.
Looking for a real-life example, the Japanese market might be a good example of an economy that is saturated and stopped growing.
Reasons why the World Economy will Grow for Eternity
Let´s also consider counter arguments that suggest that the world economy will keep on growing:
- The world economy grew for at least the last 5,000 years or so and this is quite a track record.
- Growth does not only come from physical products, but also from services. Services can be much more resource-efficient.
- Growth from digital services requires only a fraction of resources (e.g., compute power, storage), than growth from tangible products. (Although Netflix servers need quite some electricity and cooling)
- A primary source for growth is innovation. There does not seem to be a limit to innovation. Hence, also growth should be boundaryless.
- Combining services and innovation, there are huge growth opportunities in the area of sustainability. With such, there is a great opportunity to use existing resources more efficient and keep on growing.
- Some resources are (almost) limitless, for instance sun power and wind. Theoretically, there is an indefinite amount of outputs that you could get from that.
During his TEDxUCL talk, Paul Ekins, provided a good example that contradicts the limit to growth due to constraints in resources. He pointed out that the GDP of the UK grew since 1970, while at the same time, it showed a decline in waste (including air and water pollution etc.) He suggests that a government should guide with policies so that resources are used more efficiently. Given that, growth can still go on, while overall usage of resources is reduced.
Concluding, I believe that future growth will be based on innovations and new technologies around sustainable energies, more efficient usage of resources, and exploration of newly identified resources. While there are good arguments for both sides, I am in favor of the theory that suggests that growth is always, somehow, possible.
What do you think? Happy to read your comments below!