Growth May No Longer Be Enough

October 04, 2010 4 min read

Several years ago, I wrote a proposal for a book challenging the long-held notion that economic growth should be the main determinant of business and governmental success. My premise was simple: We live in a finite world. Sooner or later we will run out of sources of growth.

Publishers were enthusiastically uninterested. That was in 2004: the world’s economies were recovering from the dot-com bust, China was becoming a growth engine for the world and in developed nations, property prices were rising at unprecedented rates. Optimism abounded. The last thing readers or publishers wanted was pessimistic commentary about growth.

Growth is after all a natural metric. It is psychologically appealing. And there are clear, incontrovertible proofs that as economies grow, people’s lives get better.

The scientific underpinning for this was provided by Keynesian economics, according to which good government policy means generating real economic growth. Two theories of this school that developed around 1960 – the Phillips Curve and Okun’s Law – described relationships between employment, inflation and output. Both theories have since been called into question, yet we continue to measure economic success with economic growth data.

Japan’s experience with growth and recession challenges this faith, however. During Japan’s so-called “lost decade” of low to no economic growth in the 1990s and early 2000s, Japanese seemed to be thriving: they were working less, enjoying life more, with better homes, better stores, shorter commutes and longer lives.

What this suggests is that economic growth may not be the only path to economic progress, which is important because Japan’s predicament may someday soon be shared by other nations – even China – as their economies develop and their populations mature and stop growing.

The major constraint on growth in developing economies is access to supplies. In mature economies, however, it is demand. They generally have an oversupply of industrial capacity, capital, raw materials and labour. For growth, they rely on consumption.

Growth in consumption is dictated by what I call the Five Mores: More People. We all enter this world as screaming balls of want: we want food, clothing, and to be taken care of. Put a human population and global economic growth chart side by side, and there is an almost perfect correlation between them. More Space. More land, bigger houses, and even bigger waistlines all mean more room for consumption. The housing boom of the last ten years was the perfect antidote to slowing population growth. More, bigger homes meant more, bigger stuff to go in them.

More Time. Time is particularly important driver of growth in developed countries. If we have extra time (because we’ve become so efficient that we don’t need to work all the time), we usually want to fill those extra hours with entertainment – which costs money.

More Technology. Periods of high growth in any society have relied on improvements in technology that raised efficiency and productivity, convenience or luxury. Horse drawn carts gave way to cars, washing boards to washing machines, etc. But eventually, technology improvements fall victim to the law of diminishing returns – the more money you invest in improving something, the lower the increase in value you get in return.

More Price. Consumers are often willing to pay more for the same product if it is perceived to be better, whether thanks to better technology or just better marketing. A shopper may be willing to pay more for a bar of soap if it advertises a more luxurious scrub and a beautiful, high-brow odour. It’s still a bar of soap. It serves the same function. It just sells for a higher price.

In the wake of the current economic crisis, the Five Mores of consumption growth have to some extent broken down, particularly in developed economies.

More People? Judging from birth rates, Japan and the US have probably come to the end of their More People ropes. Developed economies have also run out of room to generate demand based on More Space. Growth from More Technology also appears to be threatened unless the green movement can drive a replacement of more than just energy sources. Substituting solar panels for oil is probably a good thing to do, but is potentially a net zero-sum gain for the global economy.

More Time seems to work in reverse during the downturn. The unemployed have time, but little money. The employed are too worried about their job prospects to pay for better products, meaning less demand from More Price. Instead, consumers save their money and the economy suffers (what economists call the paradox of thrift).

What we may need, then, is something that breaks our growth habit by emphasising a sixth More, More Pleasure. Many of us, at some point in our lives, shift our emphasis away from more wealth to things like “fun” or “health” – we pay a lot of money for medical care; we take vacations from work; we quit high-paying jobs that are causing undue amounts of stress. We do something enjoyable instead. Why can’t we develop a metric of corporate – and especially national – economic success that is about “health,” or “pleasure,” or “happiness,” instead of purely about “wealth”?

My notion of challenging the goodness of economic growth, once far-fetched, now enjoys many adherents. Publishers are overwhelmed with articles questioning the validity of growth. Companies are asking whether their stock price is the ultimate measure of corporate success. Toyota, which blamed part of its recent safety lapses on an overemphasis on profitability, has been refocusing instead on the longevity of the corporation.

Western companies may find Toyota’s route hard to explain to shareholders, but for governments the choice may be less complicated. Small nations like Bhutan and Costa Rica have already managed to shift their emphasis from economic growth to measures of overall well-being. Governments that achieve peace and stability have traditionally turned to providing growth. Perhaps they need to sharpen their focus on making citizens happier, not just richer.

Link to Lee Kuan Yew School article