Well, it seemed a good idea at the time
28 July 2017 00:42 (South Africa)
Opinionista Ivo Vegter

GDP growth is not dying, but if it were, it would be a tragedy

  • Ivo Vegter
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

In a widely republished opinion piece, a South African professor of political economy, Lorenzo Fioramonti, makes the astonishing claim that “growth is disappearing”. Worse, he considers this to be a good thing. Along the way, he makes many factual errors and falls for obvious fallacies.

“Growth is dying as the silver bullet for success. Why this may be a good thing,” reads the lengthy headline of an opinion piece penned by Lorenzo Fioramonti. He is a professor of political economy at the University of Pretoria, where he directs the Centre for the Study of Governance Innovation.

He wrote the piece to promote his new book, Wellbeing Economy: Success in a World Without Growth. His blog talks of “ideas for a post-GDP world”. The article contains some good points, but they are obscured by a patchwork of factual errors and downright terrible ideas.

Let’s start at the top. Is growth dying, or as he puts it in the article, is “the good news … that growth is disappearing, whether we like it or not”?

No, growth is not dying. According to the World Bank, GDP has grown in 54 of the last 55 years, and shows no signs of slowing down:

Using a different GDP measure, such as adjusting for purchasing power parity, does not change this in any way. Here’s a different source, and one for GDP growth alone, that both come to the same conclusion: other than in 2009, GDP growth has been positive in every year since 1961. Present growth of 2.7% has been stable for four years, and is not  exceptionally low. Growth has been lower for 16 years of the last 55, particularly during the slowdowns of 1975, 1982, 1991 and 2001.

So, from the outset, Professor Fioramonti is just plain wrong.

Growth might yet disappear, however, thanks to growing and corrupt governments worldwide. South Africa is an excellent example of a country where it has done so. But is the absence of growth “good news”, as he claims? It is well documented that economic contractions have dire consequences for almost everyone in a society. They lead to increased unemployment, lower birth rates, higher divorce rates, greater indebtedness, higher rates of child malnutrition, fewer opportunities to complete higher education, more political turmoil, reduction in retirement savings, longer working lives, and more business failures. Fioramonti might see a silver lining, but if he does he is blind to the fact that it lines a terribly dark cloud over society.

He argues that the notion of growth “has never been reasonably developed”. This is also not correct, but depends on what kind of growth you’re talking about. The most common measure of growth, GDP growth, is well-defined. It is simply the year-on-year change in GDP, which in turn is defined as: “The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.”

Fioramonti defines it as an increase in our overall wealth, or when we generate value that wasn’t there before. He then gives some examples of improvements in wealth of value that GDP growth does not account for, such as educating children, cooking for the community, improving health conditions, or the value of public parks and nature reserves.

It is, of course, true that GDP does not account for all activity in an economy. Notoriously, it does not account for leisure or unpaid housework, both of which certainly add value to lives It also does not include externalities such as pollution which are hard to value.

But that GDP does not (and cannot) count everything does not diminish its economic utility as an indicator of the general health of an economy. It is uniform from country to country, so we can assess comparative productivity, and adjusting for inflation from year to year enables us to gauge improvement or deterioration in an economy.

Saying that “growth” does not include every measure of human wellbeing states the obvious. It measures economic activity, no matter whether that activity is beneficial to society or not.

Yet in providing examples, Fioramonti quickly falls into fallacies:

“Wars, conflicts, crime and corruption are friends of growth in so far as they force societies to build and buy weapons, to install security locks and to push up the prices of what government pays for tenders.

“Keeping people healthy has no value. Making them sick does. ...

“Wars, conflicts, crime and corruption are friends of growth in so far as they force societies to build and buy weapons, to install security locks and to push up the prices of what government pays for tenders.

“The earthquake in Fukushima – like the Deep Water Horizon oil spill – were manna for growth, as they required immense expenditure to clean up the mess and rebuild what was destroyed.”

All this is patently wrong. The costs of conducting wars, rebuilding infrastructure, buying locks, cleaning up after disasters, or healing the sick consume resources that otherwise could have been used for other things. Incurring these costs might benefit certain sectors of the economy, but they come at a cost to others. In fact, without having to incur these costs, overall prosperity growth would have been higher.

That such expenditures are counted as economic growth is not a flaw of the indicator. That foregone growth is not counted, however, is the fault of many economists. They make the basic mistake of considering only the immediate impacts of destruction, and even then only one side of it. When assets are damaged (or people are made unproductive due to ill health), they don’t count that loss of value; they only count the economic activity that tries to remediate that loss of value. They also do not count as a loss the considerable opportunity cost of needing to spend resources on remediation.

Nor do they consider the future payoff of present investments such as spending – whether it be private or public – on education or healthcare. Fioramonti says benefits such as a future healthy and educated workforce should be considered as growth, but are not, ignoring the obvious future economic growth this investment pays for.

This is not an uncommon mistake. For example, Nobel Prize-winning economist Paul Krugman, a dyed-in-the-wool Keynesian with a very large popular megaphone, also labours under the misconception that destruction is good for the economy.

Krugman believes World War II brought about the recovery from the Great Depression. This is a very common idea, and is even taught in schools. The reasoning, however, is based on the idea that a sword is as good as a ploughshare, for economic purposes. Producing both “creates jobs”. The misconception that World War II was good for the economy is expertly debunked by Richard W. Fulmer, writing for the Foundation for Economic Education.

Krugman is so enamoured with the idea that destruction and unnecessary production are awesome that he started fantasising about alien invasions. He told CNN in an interview: “It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and inflation and budget consideration took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops we made a mistake … There was a Twilight Zone episode like this in which scientists faked an alien threat in order to produce world peace. This time we need to ignore it to get some fiscal stimulus.”

Both Fioramonti and Krugman surely know the 1850 essay by Frédéric Bastiat, entitled That Which is Seen, and That Which is Not Seen, but perhaps they’d benefit from a re-reading. Bastiat argues that the direct impact of an act or law is easily seen. The subsequent series of effects, however, are routinely overlooked.

He devised an example which has become famous as the “broken window fallacy”. The original is worth reading; it is charmingly and eloquently written. But I’ll paraphrase.

If a shopkeeper has a window broken, there are some that say glaziers would go out of business if glass were never broken. They see the money he spends on a new window, and consider this to be a net economic benefit. What they do not see, however, is that the shopkeeper, if he did not have to pay the glazier, could have bought himself a new pair of shoes. Still, some would argue that whether the money goes to the glazier or the shoemaker makes no difference to the overall economy. But they do not see the consequence for the shopkeeper: having a new window, he is now no better off than before, other than that he has lost the price of that window. Instead, he could have been a pair of shoes to the good. So there is a definite economic loss to breaking a window.

“Destruction is not profit,” wrote Bastiat. And in a passage that hits home after the fires in Knysna, he added: “What will you say, Monsieur Industriel – what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?”

Fioramonti goes on to say that “consumption has reached its limits, at least in the so-called developed world”. According to OECD stats, US consumption growth has averaged 3.8% per year since 2010, and European consumption growth has been 2% over the same period. Consumption continues to grow in these countries despite half a century worth of warnings that the world was reaching the limits to growth. Energy is running out, he declares, with no explanation why the oil price remains at 1974 levels today.

Among the apparent purposes of his article is to advance the idea that climate change mitigation will require constraints on economic activity, so we will have to learn to live without growth. But this contradicts his earlier theory that destruction and pollution are great for economic growth. It also contradicts reams of propaganda that says acting to combat climate change has economic benefits and is a good investment.

Another purpose appears to be to advocate for an economy in which “wellbeing” is the key indicator. This is the premise of his book, but it is hardly original. A similar idea dates back to the 1970s, when the tiny country of Bhutan incorporated Gross National Happiness into its constitution. The concept has four pillars, which sound exactly like what Fioramonti proposes: “sustainable and equitable socio-economic development; environmental conservation; preservation and promotion of culture; and good governance.”

Surprisingly, considering all the errors and fallacies in his argument, Fioramonti does reach a reasonable conclusion: “[T]he quest for wellbeing is ultimately a personal one. Only you can decide what it is. This is precisely why I believe that an economic system should empower people to choose for themselves. Contrary to the growth mantra, which has standardised development across the world, I believe an economy that aspires to achieve wellbeing should be designed but those who live it, in accordance with their values and motives.”

Again, this states the obvious, however. What we value is subjective. There is no objective way to describe and record all the perceived benefits and costs to an individual of their choices and actions. That is why economists are so often wrong, and governments are so bad at providing centrally-planned services.

Ironically, after denouncing economic growth, what Fioramonti ultimately appears to advocate is simply a free-market economy, in which individuals make choices according to subjective values and motives. And in such an economy, economic growth is a desirable (but not the only desirable) feature for a healthy society.

Growth is not dying, and if it did, it would be a tragedy. That a political economy professor argues otherwise is beyond me. Pity his poor students. DM

  • Ivo Vegter
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

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