Neo-Malthusians/Steady Staters are forever attacking economists for absolutely no good reason, mostly because they misunderstand the terms that are used in economics. I tried to educate several of them recently and was met with attack after attack simply because they are so ill-informed about our profession.
FUNDAMENTAL ERROR #1: MISUNDERSTANDING ECONOMIC GROWTH
Let us begin with a very simple definition, that of economic growth. Well, economic growth is simply an increase over time in Gross Domestic Product. Gross Domestic Product is a constant-dollar measurement of the monetary value of all final goods and services produced within the borders of a country. But what does that mean?
Well, final goods and services are goods and services that are sold to firms, consumers, or the government for any reason other than as a part of another good or service. Thus, goods and services that you and I consume or that companies use to produce goods and services are final goods but goods or services that are part of another good or service are not. Thus, my book, Modern State Intervention in the Era of Globalization, is a final good but the paper that makes up the book is not. This distinction is necessary to avoid double counting.
So far, so good. But doesn't that mean that the total amount of stuff has to increase for us to have economic growth? Not at all. This is why ecologists are simply wrong about economists and wrong to argue against economic growth.
What is necessary is that the value of goods and services increases, not necessarily the quantity. Higher quality goods are an example of an increase in the value of goods and services without increasing the quantity.
So long as we can figure out a better way of doing things, we can do this forever, even with the same amount of inputs and this is even part of their own admission! From the website of the Center for the Advancement of the Steady State Economy (CASSE):
"Myth
Technology and progress will grind to a halt in a steady state economy.
Reality
A strong incentive for technological progress exists in a steady state economy because of the drive for better goods and services. With stabilized material and energy inputs (as would occur in a steady state economy), technological progress becomes the main source of higher quality outputs."
Okay, wait a minute. Read the definition of economic growth as given by economists. "Higher quality output" with the same amount of output is economic growth because it represents higher valued output. Remember, you get economic growth either by growing the amount of "stuff" or the quality of "stuff" or both. If their argument is simply that there is a limit on the physical amount of "stuff" that we have, they will have absolutely no argument from anyone in the economics profession because economic growth is not about the sum total of physical goods, it is about the value of those goods (and also our services, which the steady-staters tend to ignore).
Yet, we can also theoretically grow the amount of "stuff" too, which brings me to their next error:
FUNDAMENTAL ERROR #2: NOT UNDERSTANDING INFINITE GROWTH DOES NOT NEGATE A CEILING ON GROWTH
Zeno's paradox of motion states that we cannot move because to move from location A to location B would require us to pass through the midpoint (C) but to pass through the midpoint would require us to pass through the midpoint between A and C (which will we call D) and to pass through that midpoint would require us to pass through the midpoint between A and D, etc. ad infinitum. Since we would be crossing an infinite number of midpoints, we cannot move. But, we can. Thus, the paradox.
This is similar to what steady-staters argue. They cannot understand that infinite growth can have a finite sum. I will state that again: infinite growth can have a finite sum.
Let us illustate how this works: What is the sum of 1 + 1/2 + 1/4 + 1/8 + 1/16 + 1/32 + 1/64 + . . .?
The answer is 2.
Each time, we grow the sum closer and closer to the final point. Now if steady-staters want to argue that there is a theoretical limit, I have no issue with them. However, they are arguing for a practical limit to growth and that is just plain wrong.
Why they are wrong is instructive.
From the website of the Center for the Advancement of the Steady State Economy: "Some economists think that, because a particular production process can become more efficient (more output per unit of natural capital), there is no limit to economic growth."
No, we don't think that. We know that. However, bear with me for a second and we will see the steady-state error.
Let's continue with their argument: "These economists and 'technology optimists' are disregarding the second law of thermodynamics, the entropy law, which tells us that we cannot achieve 100% efficiency in the economic production process."
Can't any of these steady-staters see the inherent contradiction in their position? Economists are not disregarding the second law of thermodynamics -- steady-staters are! Of course, we cannot achieve 100% efficiency in the economic production process. We can only get closer and closer to it. The irony is that we are dealing with the infinite sum problem. We approach the limit of growth but we do not reach it. Thus, by definition, we are still growing, even though they think we are in a steady state.
Yet, steady-staters persist in not understanding this basic concept. Here is their error in focus (from the CASSE website): "Thermodynamic laws also tell us that we cannot reach 100% efficiency. When the limits to efficiency have been reached, the only remaining way to grow the economy is by using more natural capital (including energy), which is limited in quantity." How exactly will we reach "the limits to efficiency"? I maintain that we cannot because efficiency will naturally not be reached due to human imperfection. Instead, what we can do is systematically keep reducing the waste that is due to human imperfection but we can only approach the limit, never actually reach it. There is always some more efficient way of doing everything. Indeed, not a single day goes by that I have not been able to find ways to reduce the amount of time that it takes for me to do various tasks. This increase in efficiency is a technical sort of efficient that can continue forever simply because there is no way for me to eliminate my imperfections. The problem that steady staters do not understand is that these imperfections are what is standing in the way of their nirvana of a limit to efficiency.
The error is that we economists are like Zeno in that we are talking about the movement from location to another, while the steady staters are arguing that we have already arrived. While that works fine with the motion paradox, it doesn't work with infinite sums. You see, the dirty little secret is that you do not reach the infinite sum until . . . infinity. You approach the limit but never reach it and, therefore, you can always have growth.
This brings us to the third error of the Steady-Staters:
FUNDAMENTAL ERROR #3: THE PROBLEM OF SERVICES
Goods, obviously, have physical limits. There is a physical limit that is countable on the number of iPads. However, services cannot be counted in that manner. Of course, one could use "man-hours" (or the more politically correct "person-hours") but that doesn't really get at what services are. Economic growth is mostly found in the service sector, which does not have resource issues that steady-staters rail against.
Total energy use in 2009, according to Lawrence Livermore Laboratories was lower than it was in 1997, yet economic activity was 30% greater. What is the cause? The answer is, of course, better energy usage but also a shift to services. More than 60% of GDP is simply services. What are services? Well, my teaching is a service. My fitness coach provides a service. My doctor when he sees me provides a service. If my doctor improves the speed at which he makes a diagnosis (and assuming that his quality of diagnosis does not go down), he gets paid the same amount but his hourly compensation increases since he is seeing more patients (if the quality of diagnosis declines, however, he might make less because fewer patients will want him for a doctor). If my fitness coach can get me to my wait loss goal quicker, I am willing to pay more per hour for that service. These are increases in the value of the service and thus represent real economic growth and yet they have absolutely nothing to do with energy consumption or other resource factors. Simply figuring out how to do things better generates economic growth. Indeed, if my doctor can see twice as many patients and cuts back his hours by 25%, the "physical input" (man-hours) actually declines while growth occurs. This type of economic growth can be sustained ad infinitum by the mere fact that we will never reach 100% efficiency but can only approach it (and we will always continue to approach it because we are constantly improving our techniques).
Finally, we have their fourth error, which serves as a misapplication of economic theory:
FUNDAMENTAL ERROR #4: MISUSE OF JEVONS' PARADOX
Jevons' paradox is used by steady-staters as an argument for why economic growth is unsustainable. It is a fundamental misuse of the paradox. The paradox states that technological improvements in efficiency tend to increase consumption by more than the technological improvement in efficiency. This is completely true for all normal goods and it really isn't a paradox. Instead, it is simple application of price theory. As price drops, revenue increases for all normal goods (those with a price elasticity greater than 1). From economic theory, we know that cutting the price in half will more than double consumption (thus insuring that revenue increases) for all normal goods and a technical improvement in efficiency is equivalent to a price cut because it represents a reduction in the overall input cost. That increase in consumption means that we will have greater demand for the input than we had before. So increasing energy efficiency fuels increased demand which can overrides the efficiency. I say can override because the increase in demand for fuel depends crucially on the percentage of the overall input cost that is represented by energy. Thus, if energy is 5% of the overall cost and energy consumption is cut by 50%, this represents only a 2.5% reduction in costs and it is unlikely to spur increases in consumption that would ultimately increase energy usage.
On the other hand, if energy is 50% of the overall cost and energy consumption is cut by 50%, that represents a 25% reduction in costs and that very well might cause increases in energy usage that exceed the original levels.
It should also be noted that Jevons Paradox may appear to be present when it is not. After all, suppose that we did not conserve energy at all but we still had an increase in demand for energy because of a growing population. That would be an increase in usage that had nothing to do with the Paradox. Now combine the two and you will see that we might get an increase in demand for energy due to a growing population rather than because of price reductions triggered by technical efficiency improvements.
But what happens when we limit the input absolutely? The answer is that you cannot surpass the limit! For example, suppose that I am making widgets and that each widget requires 1 gallon of fuel. I figure out a way to cut my fuel use in half and thus drive down the cost of producing widgets but suppose that I face an absolute limit on the amount of fuel that I can acquire. At that point, technical barriers limit growth and there is nothing I can do about it. Thus, if there is only 100 gallons of fuel in the market, I can never exceed the 100 gallons of fuel no matter how efficient I become in terms of reducing its use in my widgets. Indeed, at that point, Jevons Paradox cannot apply and increases in technical efficiency automatically translate into increases in output with no increases in inputs. Voila! The steady-state economy produces economic growth!
Now that I have conclusively demonstrated the errors of steady-staters, I now turn to the big error of the economics profession:
FUNDAMENTAL ERROR #5: ECONOMISTS ARE SLOPPY
Instead of listening to our definitions and attempting to take us on in our world, steady-staters want to have their own world with their own definitions. That is fine but they cannot have it both ways. They cannot argue that we are wrong in our analysis but then use their definitions for their debating points. According to the Center for the Study of the Steady State Economy, economic growth is: "an increase in the production and consumption of goods and services." That simply is an incorrect definition. Economic growth is the increase in GDP and, as we have seen already, GDP is the constant-dollar monetary value of goods and services, which could imply simply that goods and services are increasing in quality or that we are approach the limit, the two cases that I have already shown are consistent with steady-state economics and which are also completely consistent with neoclassical growth theory.
The problem is that too often economists use the term "an increase in the production and consumption of goods and services" as well. The sloppiness is that economists are not necessarily referring to the physical amount of goods and services when they state this. Indeed, they really mean the value of goods and services but simply omit those terms.
There is an additional issue in that economists oftentimes refer to economic growth as being "per capita economic growth" and, of course, with a rising population, that does mean more "stuff" in most cases. Yet, we have reached the demographic transition in many countries and population is actually falling in some. As population falls, we can have increases in per capita economic growth while maintaining the same overall amount of goods and services or even cutting those goods and services.
It is important to have these discussion and for both economists and steady-staters to be open-minded in their approaches. We can reach out across the aisle if steady-staters give up their inaccurate portrayals of economics and actually listen to us instead of merely trying to score debating points through straw-man arguments. Unless they understand economics, they should stop with their silly attacks and come to understand why economic growth can occur even in their steady states.
Indeed, if they would focus on exclusively limiting inputs instead of attempting to limit outputs, steady-staters would find that economists have no quarrels with them. It is their focus on output rather than input that has earned them the universal scorn and disdain of the economics profession and for good reason. Their preoccupation with the output belies their political and economic liberal orientation and their disdain for capitalism.
Zagros Madjd-Sadjadi, Ph.D.
Associate Professor of Economics &
Chair, Department of Economics and Finance
Winston-Salem State University
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