"We are at the beginning of a mass extinction," said Greta Thunberg to world leaders at the United Nations in 2019, "and all you can talk about is money and fairytales of eternal economic growth."
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Few have brought more attention to the dangers of climate change than Greta Thunberg. She's been right on the science, she's been right on the political strategy, and she's been right that young people will shoulder the burden of inaction.
But is she right on the economics? Is eternal economic growth really a fairy tale?
It sounds correct. When most people think of economic growth, they think of smokestacks, mining, manufacturing, and endless production lines of plastic and fabric. Smoggy skies, empty forests, and plastic-filled oceans quickly come to mind.
The fact that carbon emissions fall when economies shrink only adds more weight to the intuition that growth is bad for the environment. After all, global carbon emissions fell 7 per cent when the world's major economies went into recession with the onset of COVID-19.
Thunberg's not alone, either. "Anyone who thinks that you can have infinite growth in a finite environment is either a madman or an economist," said Sir David Attenborough.
French philosopher Andre Gorz sparked the initial idea of "degrowth" in the 1970s. He questioned whether "the Earth's balance, for which no growth - or even degrowth - of material production is a necessary condition, is compatible with the survival of the capitalist system".
Dennis Meadows advocated an economic and demographic "equilibrium state" in 1972, to avoid civilisation's collapse when our need for resources exceeded the Earth's capacity. Similar arguments have been made by Fairfield Osborn, William Vogt, and Paul Elrich, among many others.
The most famous of them was Thomas Malthus. He argued way back in 1789 that famine and economic collapse were inevitable unless birth rates decreased. His argument was that population growth was exponential, while environmental growth - specifically the food we eat - was linear. When population growth eventually outstripped food growth, he argued, the population will be brought back down to earth through war, famine, and pestilence.
Luckily, these doomsday predictions have not eventuated, and it's important to understand why. The main reason they haven't eventuated is that their analysis forgot to include a critical variable - the same variable that Thunberg is overlooking in her argument that eternal growth is a fairytale. That variable is productivity.
Productivity means doing more with less. Turns out, it's great for the environment. Nobel Prize-winner Robert Solow demonstrated that economic growth comes from three sources: labour growth, capital growth and technology growth (commonly known as total factor productivity). The first two are intuitive: an economy needs assets like equipment and factories (capital) to make goods and services and a workforce to use those capital assets (labour). Total factor productivity, however, is more complex.
This factor captures everything that is not labour growth or capital accumulation. It's a residual. If growth goes up despite us having no additional capital or people to use it, then we must have figured out a way to do more with less. This is the concept of productivity, and it has important implications when it comes to the environment.
If economic growth comes from capital accumulation - which includes the exploitation of natural capital like forests, rivers, lakes and oceans - then it is more likely to be environmentally unsustainable. But if economic growth comes from productivity, however, it is much more likely to be either neutral or even beneficial when it comes to the environment, if it means using less capital than we did before.
So, which is it? How much of our economic growth is due to capital accumulation versus productivity and labour growth?
Solow found that productivity accounted for over 85 per cent of growth in the US from 1909 to 1949. More modern studies that use Solow-inspired models, such as Peter Klenow and Andrews Rodriguez-Clare (1997) and William Easterly and Ross Levine (2001) reach a similar result.
Kenow and Rodriguez-Clare found that differences in TFP growth account for about 90 per cent of the variation in growth rates of output per worker for a sample of 98 countries from 1960 to 1995. Easterly and Levine are so sure about the dominance of TFP in growth that it is the first of their five stylised facts: "Factor accumulation does not account for the bulk of cross-country differences in the level or growth rate of GDP per capita; something else - TFP - does."
Does this mean Thunberg is wrong? It's not that simple. The extent to which growth comes from productivity varies widely between countries. Analysis from Robert Hall and Charles Jones and by Nazrul Islam shows that productivity represents a far larger share of growth for developed countries like Australia than for developing countries like Indonesia. Developing countries rely much more on capital accumulation for their growth than productivity.
READ MORE:
This is not surprising. Developed countries are at the forefront of innovation, they tend to have better-educated populations, and get most of their jobs and output from services rather than manufacturing. Developing countries, on the other hand, are usually behind the technology frontier, have less-educated populations, and are focused on resources or manufacturing industries which require lots of capital accumulation.
If developing countries could grow more like developed countries - through productivity and technology advancements rather than capital accumulation - economic growth could occur without (or at the very least with far less) natural resource depletion.
This is not to say that developing countries are to blame for climate change. They're not. Capital accumulation is an important stage in the development of an economy. Indeed, the vast bulk of the damage done to the environment and the climate today was caused by developed countries back when we went through this stage of development. The poor countries of today are developing much more cleanly than their predecessors.
It follows that one of the best things we can do to protect the environment is to help developing countries boost productivity as fast as possible; to get them further up the development ladder.
There are lots of ways to do this. Technology transfer, financial support, financial integration and, above all else, boosting foreign investment and trade are at the top of the list. The push from many politicians to reduce technology transfer to other countries, reduce financial integration, cut aid, block foreign investment, and be more self-reliant moves us in exactly the opposite direction.
None of this is to say that Greta Thunberg is wrong. Too much of our growth today is environmentally unsustainable. But solving this problem requires a more nuanced discussion than simply labelling growth as being either good or bad. Growth is not the problem. It's the quality of growth that matters, and there are practical things we can do to improve it. If you agree that children should always enjoy a standard of living that exceeds that of their parents, then you are in favour of eternal economic growth. This is morally right and, if we're smart about it, economically achievable and environmentally sustainable.
- Alex Rouse is alumni of the ANU's Crawford School of Public Policy. Adam Triggs is a director within Accenture Strategy, a visiting fellow at the ANU's Crawford School of Public Policy, and a non-resident fellow at the Brookings Institution. He writes fortnightly for ACM.