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Economics Might Be Very Wrong About Growth

Economics Might Be Very Wrong About Growth thumbnail

Has the world entered a period in which economies simply won’t grow at the rate they once did? Radical as the thought may seem, it might not be radical enough.

A few years ago, the economist Larry Summers stirred much debate when he suggested that the anemic growth of recent years might not be just a temporary affliction, and might have little to do with the 2008 financial crisis. Instead, he surmised, it could reflect secular stagnation — a new normal of low consumption and lagging growth stemming from accumulated household debts and rising inequality, among other factors. In different terms, considering the impacts of technological innovations, economist Robert Gordon has been arguing for much the same conclusion.

For two decades now, a lesser-known group of mostly German economists has been making a more extreme argument: that the standard model of exponential growth — in which an economy can be expected to expand by a given percent every year, no matter how big it gets — is fundamentally flawed. Rather, these economists claim that while exponential growth fits some young economies, mature economies tend, as a rule, to grow much more slowly — in a linear way, meaning that the percentage growth rate would constantly decline.

The latter view has gained support from a new study, in which a team of European economists and statisticians looked at data on the economic development of 18 mature economies, including the U.S. and most major European nations, from 1960 to 2013 (they started at 1960 to avoid the effects of World War II). They found that the data on growth in gross domestic product per capita fit best, statistically speaking, with a linear model. For only two countries did the exponential work better, and then only barely. In other words, linear growth — in which mature economies add less new activity (in per capita, percentage terms) each year — is the empirical norm.

If the finding holds up, then today’s economics may stand in need of some serious conceptual change. As the authors of the new study note, an awful lot of conventional economic analysis rests on the unquestioned assumption of exponential growth. Governments, for example, rely on it when they decide how much money they need in their social security funds, or when summing up the costs and benefits of any proposed project, including measures to mitigate climate change. If growth isn’t exponential, the discounting procedures used habitually in such analyses make no sense at all, and standard economics systematically undervalues the future.

Moreover, the idea of exponential growth rests at the core of essentially all modern theories of growth – theories purporting to explain how capital, labor and technology combine to increase productivity. How valuable can such concepts be if they don’t even get the basic observed pattern of growth right?

Perhaps Summers and Gordon are correct that the fast growth seen over the past couple centuries was a unique, unparalleled episode, and that future growth will be much slower. Although the new study doesn’t get into the specific drivers of linear growth, it’s consistent with their conclusion.

Paradoxically, a slowing trend could actually be good news, even if humans will have difficulty getting used to it. Due to explosive growth, it will soon take nearly two planet Earths to support the world population sustainably at average resource-consumption levels. We don’t actually have two Earths, so growth should probably slow. If it’s already doing so, that may actually be a relief.


9 Comments on "Economics Might Be Very Wrong About Growth"

  1. Lawfish1964 on Thu, 28th Jan 2016 12:50 pm 

    “Governments, for example, rely on it when they decide how much money they need in their social security funds, or when summing up the costs and benefits of any proposed project, including measures to mitigate climate change.” Hahahaha!! LMAO! Governments actually decide how much the need in their social security funds? This author is utterly out of touch with reality.

    Even people who try to accept that exponential growth can’t happen can’t seem to grasp the concept that what we’re going to see in the future is not lower growth but contraction. People are so clueless.

  2. Apneaman on Thu, 28th Jan 2016 2:11 pm 

    Donald Trump Vs. Sea Level Rise
    The Republican presidential frontrunner dismisses climate change as a hoax. Here’s what rising sea levels could do to the buildings that bear his name.

    God I hope he wins. I’ll be thoroughly entertained to the last minute.

  3. bug on Thu, 28th Jan 2016 3:46 pm 

    Economists are wrong most of the time.
    Anyone, please tell me when they have been correct. Links, facts and all is required. Thanks

  4. makati1 on Thu, 28th Jan 2016 6:07 pm 

    Bloomberg propaganda…

  5. Davy on Thu, 28th Jan 2016 6:09 pm 

    “Paradoxically, a slowing trend could actually be good news, even if humans will have difficulty getting used to it. Due to explosive growth, it will soon take nearly two planet Earths to support the world population sustainably at average resource-consumption levels.” The issue is not that less growth may be good because we are at limits. That is a no-brainer with most thinkers who see the big picture. The issue is can we slow down without coming apart like a spacecraft entering orbit with a couple of silicone tiles missing.

    There is no way to know the answer to this question because we have never done a degrowth at this population and consumption level. We do not know how a forced degrowth will take place. We don’t know where, when, and how this process with potentially catastrophic events will unfold. Decay is random with dysfunctional and irrational elements. There is little hope we can as a global people degrowth with a plan. Even if we had a plan the consequences would be mostly uncontrollable. There are too many variables for any kind of control.

    The central banks can’t even control the financial markets now how can a divided global society manage a global degrowth effort? We are likely in the midst of destructive change that will lead us to an existential crisis that will revolve around food, water, and energy. Once a minimum operating level has been breached the dominoes will fall.

    The problem is we have no navigation system to negotiate this dangerous passage. I see the Chinese economy unwinding and with it the rest of the globe. This is not the Chinese fault rather it is a global problem. Oil markets are directly part of this economic unwind. The combination of an economy and our foundational commodity in disequilibrium will likely leave us with a cycle of demand destruction. This demand destruction will destroy supply potential of commodities and industries. This is not the nice slowing this article concludes with. This is a potentially dangerous stall speed for a high performance aircraft. We could easily fall out of the sky.

    What can be done? Not much but what is done now that are good decisions will pay off significantly latter when we do not have the economic abilities. We can avoid bad decisions that will compound latter. Most of all we can honestly acknowledge we are in deep trouble. That is unlikely at the top but hopefully many of us at the bottom will network and spread the word. Crisis are survived by level headed people making good decisions. To make good decisions we need education. That is what we are doing here.

  6. Davy on Thu, 28th Jan 2016 7:16 pm 

    “Here Is The Reason For January’s Selloff: Chinese Capital Outflows Soar To Second Highest Ever”

    “While China’s currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and turbulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation.”

    “Of all the global “quantitative tighteners”, the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.”

    “For the Beijing politburo, halting capital outflows is becoming a matter of life or death, because there are only so many liquid reserves China can liquidate before it enters dangerous territory; worse, the less the reserves, the greater the desire will be on behalf of the local population to take their money and run.”

    “Of course, China’s rabid defense of further capital outflows means that its original intent, to devalue the Yuan to a degree that boosts its economy via exports, has been put on hiatus, or in other words China is trapped, and instead of an external rebalancing it is forced to boost its economy in the one way it knows best: by issuing ever more debt. However, with China’s total debt now estimated at 350% of GDP, it only has a finite amount of time before the debt bubble finally pops as well.”

  7. Apneaman on Fri, 29th Jan 2016 12:29 am 

    marmi-noon, here’s your old TOD buddy, Nate Hagens, with his latest lecture embedded.

    A Birds Eye View of the Future

    “Here is a recent talk (Jan 13 at University of Hawaii) which is 1/2 a summary of big picture and 1/2 a list of suggestions on ‘what to do’ for non-sociopaths somewhat aware of what’s happening. I think Hawaii, (especially the Big Island) have a unique opportunity given the low population density, little need for heating/AC, lower barriers for political change and probably more willingness to visualize trajectories related to end of oil/credit fueled growth, being they are near end of supply chains.”

  8. markisha on Fri, 29th Jan 2016 12:47 am 

    apneamen do you think he cares? he will make more money and he will be wealthier. He doesnt think to much he goes for the money, think later.
    He will print few more trillions .

  9. theedrich on Fri, 29th Jan 2016 2:51 am 

    What?  Wrong about growth?  Well, we’ll just have to import more subhumans from World Three.  That’ll overcome the idea of diminishing returns.  And when all the Whites are gone, the paranthropoids can slurp up everything in the global petri dish and then expand into outer space.  After all, for some time now our demigods have been talking about terraforming Mars.  Never mind the forthcoming collapse of primate intelligence due to differential reproduction;  magic will transport the microcephalics to their heavenly destination, courtesy of the thaumaturges who are working on annihilating those evil Caucasians.

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