growth Archives

Rethinking Economic Growth: A Review of “The Growth Delusion” by David Pilling

By Raghunath Nageswaran.

If economic exchange determined by the market forces of demand and supply provided the right incentives for production, how should the exercise of measuring the economy and its performance be undertaken? When did the project of measuring the economy take off and why? Does Gross Domestic Product (GDP), the summary indicator of economic activity, reflect the significant facts of our economic life? And if it doesn’t, what can be done to ensure that it does, going forward?

David Pilling offers some thoughtful and interesting answers to such questions in his book The Growth Delusion: The Wealth and Well-Being of Nations. The book is not a tirade against economic growth; it is not an anti-growth or a de-growth manifesto. Pilling makes his intention to broaden the conversation on growth very clear by including the words “wealth” and “well-being” in the title, concepts that go beyond the narrow definition of economic growth as an expansion in the flow of goods and services measured in monetary terms.

That GDP growth has become a proxy not just for the economic success of a country as measured in material terms, but also for the well-being of its people is a stark reminder about our fixation with an indicator that was devised to measure physical production during the interwar period. The notion of “economy” as an entity to be managed and captured in quantitative/monetary terms by experts came into vogue less than a century ago during the Great Depression years after Simon Kuznets presented his survey of the economic performance of the United States in the report National Income, 1929-32. This effort marked the birth of systematic national income accounting. But Pilling reminds us that:

Kuznets was striving for a measure that would reflect welfare rather than what he considered a crude summation of all activity. He wanted to exclude illegal activities, socially harmful industries, and most government spending. On many of these issues he lost.

This must serve as a useful counterpoint while arguing with uncritical enthusiasts of GDP, who baulk at the idea of using a different set of measures for capturing social welfare in its truest sense—people possessing the agency and capabilities to do things they have reason to value, as Prof. Amartya Sen has persuasively argued in his writings. GDP is not reflective of such a holistic idea of welfare because that would entail an assessment of the distributional impact of growth on various sections of the society, which the GDP isn’t equipped to measure or capture.

One must remember that the measurement of GDP is not a value-free exercise. A whole range of value judgements and assumptions are involved in the demarcation of the production boundary, therefore it shouldn’t be regarded as an innocent measure of economic activity. It is a deeply moral and political affair. The starkest example is the exclusion of household activity undertaken mostly by women, which is considered “unproductive” by conventional national accounting norms. Several scholars have developed and applied tools that measure the amounts of unpaid work done by women using time-use data and by imputing values to an entire gamut of chores, from dish-washing through breast-feeding to child-rearing.

Regarding the efficacy of economic growth as a means of furthering human welfare, there is a view among well-meaning sceptics that developed economies must get over their obsession with unfettered growth enabled by the endless cycle of production and consumption. In the book Doughnut Economics, economist Kate Raworth uses the term “growth agnosticism” to drive home the point that developed countries should ensure that their people continue to thrive irrespective of the trends in economic growth.

While this is the outlook for the developed world, there seems to be a resounding faith in the indispensability of economic growth as a nostrum for developing countries. It rests on the belief that only faster growth can lift people out of poverty and generate more resources for creating a redistributive design. This is a contestable argument, given the inequality enhancing nature of economic growth we have seen in different parts of the world in the last three decades. It would be instructive to go beyond standard narratives to acknowledge the fact that growth doesn’t automatically translate into better living conditions for people, especially when the fruits of growth are mediated by the various fault-lines in the society, not to mention the very framework within which economic growth of a predatory variety takes place.

There are interesting and practicable proposals for ensuring that GDP is reflective of the “trade-offs” involved in our single-minded pursuit of economic growth in part three of the book. It is in this section that Pilling turns the spotlight on “the wealth and well-being of nations.” The chapter titled Wealth is a culmination of Pilling’s effort to indict us for our collective disregard for natural ecosystems from which we draw all our resources and inputs to undertake various economic activities. He draws our attention to the crassness and instrumentalism that characterize our ambition of maximizing current incomes. He says:

Recording today’s national income offers no help whatsoever when making intergenerational decisions. The signal it sends is to maximize growth today no matter what the impact tomorrow. At the extreme, one generation might use up all a nation’s forest cover and all its oil reserves in the interests of double-digit growth and in the expectation that future generations will somehow sort things out. Today a government pushing such policies would point to rapid growth as a justification for its actions.

This short-sighted approach to resource use and management has its origins in the theory that defines efficiency in most primitive terms: make the most of existing resources by allocating those to the profitable areas of production, which is determined by the existing pattern of income distribution. We need to recognize that the humane way of managing natural resources is to augment them and not depleting them for current consumption purposes. That way, both efficiency and equity concerns can be addressed as we allow resources to regenerate themselves and leave behind enough resources for posterity. Pilling’s conversation with the sagacious environmental economist Partha Dasgupta is by far the most illuminating section of this book. After positing that we need to take a balance-sheet view of economic progress to get a big-picture view of the state of our resources, Pilling shares nuggets of wisdom offered by Dasgupta. Dasgupta takes the broadest possible view of wealth/assets and says that:

Contemporary models of economic growth and development regard nature to be fixed, an indestructible factor of production. The problem with that assumption is that it is wrong. Nature is a mosaic of degradable assets. Agricultural land, forests, wetlands, the atmosphere—more generally, ecosystems—are assets that are self-regenerative, but can suffer from deterioration or depletion through human use.

The enduring impact of Jeremy Bentham’s utilitarianism can be evidenced by the fact that individual utility, expressed in terms of market price, is still considered to be the best proxy for the subjective well-being of human beings, and it forms the bedrock of the measurement of social welfare in many theoretical exercises. The utilitarian way of looking at happiness and well-being has been the dominant principle for justifying all kinds of economic decisions and actions. While the standard interpretation of utilitarianism is the maximization of overall welfare, achieved when competing economic individuals are left alone to make “rational” decisions, a more creative and humane interpretation of the principle can focus on cooperation instead of competition and solidarity as against selfishness to maximize welfare.

It is certainly nobody’s argument that alternative measures such as Bhutan’s Gross Happiness Index (GHI) and composite indices such as the Human Development Index (HDI) are necessarily fail-safe. As Pilling says in the opening paragraph of the last chapter, “if the beauty of GDP is aggregation, that is also its biggest flaw. No single number can capture all that is worth knowing in life”. The way forward is to use a dashboard of indicators that will reflect the variegated aspects of human life and the state of resources in the economy.

It is also imperative to seriously rethink the nature, composition, and distribution of economic growth in order to make growth, and its GDP measure, humane. Economic thinkers belonging to the “classical school” of economic thought believed that the question of distribution of surplus couldn’t be separated from production, as the contribution of different economic classes to social production was dictated by the prior distribution of endowments among them. To turn the focus back to ‘distribution’ we can draw inspiration and insights from the classical school.

The Growth Delusion is a highly readable and insightful book. It covers a lot of ground and the examples offered are wide-ranging. Pilling’s journalistic fervour and sharp wit make the narrative engaging. As the old Chinese proverb goes, a thousand mile journey begins with a single step. This book promises to be one such step in a long journey towards our realization that growth is a useful tool but an intolerable tyranny.

Raghunath Nageswaran has an M.A. in Economics from Madras Christian College, Chennai (India). He is a student of Indian democracy and political economy.

Brazil Suffers Under a Leader that Believes in Fairies

Brazil’s current economic policy follows the logic of a fairytale. And unless President Temer wakes up to reality, the Brazilian people will continue to suffer the consequences.

In conservative circles, the solution advocated for economic recovery is a reduction in government spending. The argument behind it is that a large government deficit lowers the market’s confidence in its ability to repay. This lower confidence then drives private investment away.

By the same logic, if the government cuts down the deficit, markets are reassured of its commitment to be a good payer. This newly gained confidence drives up private sector investment and the economy grows.

While this may sound like a great way to boost a struggling economy, it’s not. To expect that a reduction in public spending will lead to an increase in private spending in the middle of a recession is like believing in an economic “confidence fairy.” Picture a creature dressed in dollar bills, fluttering eyelashes at private investors while the government takes a step back. With enough fairy dust, investors regain confidence, and the economy turns into a sparkly paradise. It sounds nice, but it’s not real.

The idea of expansionary austerity is a dangerous one. While most of the arguments against government deficit rest upon flawed economic theory, the confidence fairy has its backbone solely on psychological factors that play into private investment decisions. However, what a depressed economy needs is a boost in aggregate demand, many times driven by public investment. Even fairy-enthusiasts, as the IMF, have expressed increasing skepticism towards the ability of austerity to expand an economy.

There are plenty of recent examples that cast doubt on the confidence theory. Take the low growth trap of the world economy, for instance. Several countries struggled with low growth for almost a decade despite their efforts to reduce their budget deficit. As monetary policy played an excessive role, fiscal policy ― and by effect aggregate demand ― was ostracized. New investments do not take place in a depressed economy regardless of the interest rates level or the government debt; in Minsky’s words, investment does not take place as long as the demand price of capital is lower than the supply price of capital.

Nevertheless, Brazil’s Michel Temer continues to be captivated by the fairytale. Amid continuous involvements in the corruption scandals, Temer introduced ambitious austerity measures to cut government spending and reduce the fiscal deficit. Placing his faith in the confidence fairy, he portrays his policies as the only path to recovery and growth ― as if there were a certain magic debt number to achieve.

But thus far, Temer’s policies have failed miserably. Expecting to see the fairy do wonders, 2016’s 3.6% decline in GDP was “unexpected” to Temer’s team. That’s a harsh reality to wake up to, especially since 2015 showed a similar decline in growth. For 2017, the economy is expected to grow 0.5 percent; but growth projections keep getting adjusted downward, and a third year of recession is only half a percentage point away.

Brazil’s collapse in domestic demand is visible in the economy’s capacity utilization. Averaging 73.5 percent in 2016, it’s reached the lowest level since the early 1990s, when the country was plagued by hyperinflation. At this rate, Brazil will have to get through a long period of idle capacity until new private investments can foster demand. Furthermore, the efforts to reduce the government deficit seem to have been futile. The budget deficit has actually surged due to the reduction in tax revenues and the increasing burden of interest rate payments.

Despite everything, Temer isn’t giving up on the confidence fairy yet. Earlier last month, he announced a cut of $42.1 billion reais (approx. US $13.5) in the government budget, nearly a fourth of which on the Growth Acceleration Program for social, urban, and energy infrastructure investment. Other significant cuts were made to the ministries of defense ($5.7 billion reais), transportation ($5.1 billion reais), and education ($4.3 billion reais).

As you may expect, none of this helps to create jobs. On April 28, it became known that the unemployment rate reached a record-high 13.7% for this year’s first quarter. Since the last quarter of 2016, 2 million more people lost their jobs. The number of unemployed now adds to 14.2 million, and that’s more than double the record-low rate of 6.2% in 2013.

Unlike the President, the people of Brazil know they can’t count on fairy dust. Last week, workers went on a general strike, during which millions of Brazilians protested against the austerity agenda. As much as 72 percent of the population opposes the reforms that are being discussed today, and government approval rates are as low as 10%.

But Temer ignores all cries of concern and keeps going steady. Two of his the structural reforms have already been initiated. Real government spending is frozen for the next 20 years, and labor market is under flexibilization. A third, more complex one is the pension reform, whose main proposal is to increase the minimum retirement age and time of contribution. Although the subject is too extensive to be covered in here, it’s worth mentioning that the pension reform disregards some of the social inequalities in the country (e.g. conditions of rural and poor workers) and it solely focus on curbing the long-term system’s expenditure instead of dealing with the falling revenues that collapsed in recent years due to tax breaks and the crisis.

Together, these reforms dismantle any efforts at building a social welfare system in Brazil. Crucial areas for public investment such as education and health will suffer.

Right now, it’s more clear than ever that Brazil’s story is not a fairytale, but a living nightmare. And there’s no confidence fairy that can fix it. As Skidelsky puts it, “confidence cannot cause a bad policy to have good results, and a lack of it cannot cause a good policy to have bad results, any more than jumping out of a window in the mistaken belief that humans can fly can offset the effect of gravity.”

The Automation Grift: From Flying Cars to Ordering Cat Food on the Internet – Part 2

It’s conventional wisdom among pundits that automation will cause mass unemployment in the near future, fundamentally changing work and the social relations that underpin it. Part 1 of this series contrasted this extreme rhetoric with the data that should support the inevitable robot apocalypse, and found that these predictions are likely motivated by politics or outlandish assessments of technology, not data. Part 2 assesses the technology behind these predictions, and follows a thread from the mid-20th century onwards. Subsequent parts will examine the political economy of automation in both general and specific ways, and will also discuss what the future should look like — with or without the robots.

The Automation Grift: From Flying Cars to Ordering Cat Food
on the Internet – Part 2
By Kevin Cashman

Part 1 of this article made a case that macroeconomic data does not suggest that there is rapid automation occurring broadly in the economy nor in large industries or sectors. Other indicators, like slack in the labor market, support that assertion. It pointed to periods of rapid automation in the past as well, and found these were times with generally low unemployment and healthy job growth.

Regardless of the data past or present, there are still claims that society is on a precipice, facing mass unemployment due to wide-scale automation. Many say that the technology in the near future is different than developments that occurred in the past, and that instead of slow or moderate change that the economy can adapt to, the rate of change will be so profound that suddenly millions will be out-of-work.

There are good reasons to be suspicious of this narrative. First, it is very difficult to predict how technology will develop and affect the world, and if it will be viable or even necessary in the first place. Second, adopting new technology — for example, automating a process and replacing workers — and more importantly, the threat of adopting new technology, gives power to employers and capital instead of workers. This weaponization of technology needs to be credible in order to be taken seriously; hence, it relies on the broader narrative that rapid automation is happening. The first point will be considered now; the second, in Part 3.

The (False) Promises of Technology

Predicting how technology affect the future is a difficult endeavor. The flying cars, spaceships, and moon bases that many were sure would arrive by the year 2000 never materialized. Anthropologist David Graeber posits that technological progress did not keep up with imaginations because capitalism “systematically prioritize[s] political imperatives over economic ones.” In a capitalist system like that in the U.S., if political threats do not align with technological advancement like they did during part of the Cold War, flying cars will stay in science fiction books, he says. As the perceived threat from the Soviet Union fell away, neoliberalism’s project shifted to cementing itself as the only viable political system, at the “end of history.”

More recent predictions have remained as bold as they were in the past, but reflect this change in focus. Audrey Watters, an education technology writer, details many in her excellent presentation, “The Best Way to Predict the Future is to Issue a Press Release.” She makes the case that narratives are spun about technology for mostly political reasons or for self-interest, rather than around higher, collective ideals. Bold predictions today are about the destruction and privatization of educational institutions, technology as consumption, or mass unemployment as human labor fades into obsolescence. Pointing to the dismal track record of those who analyze technological trends — based on methods that include opaque and ill-suited taxonomies and graphs, like the one-way hype cycle — she suggests that we are actually in a period of technological stagnation. “[T]he best way to resist this future,” she says, “is to recognize that, once you poke at the methodology and the ideology that underpins it, a press release is all that it is.”

Recent evidence from the dot-com bubble lends itself to these observations. Over-enthusiastic predictions of how the Internet would fundamentally change nature of shopping — not quite a lofty aspiration to begin with — led in large part to the bubble, which popped when it became clear that these companies’ business models did not work. (For example, individually shipping very heavy bags of pet food is expensive, a fact lost on the “innovative” owners of, and “savvy” investors in, Pets.com.) As neoliberalism was busy fashioning itself as the only ideology left standing, it served as the basis for allocating capital in unproductive ways. Whereas the ballooning of the finance sector over the last forty years is sustainable inasmuch as bankers are able to make money by creating and protecting the illusion of their usefulness, the dot-com era was a hard landing for companies that tried the same approach but ultimately could not drum up enough business to survive.

But even if past predictions are incorrect and past technological advances were limited (or had an economic potential that was much less than anticipated), the technology that is developing today could still could be extraordinary and kick off a period of very rapid automation, right? Before going further it is important to define what sort of technological developments could lead to these sorts of changes in the labor market. Often general advances in technology, or things like Moore’s law or speculation about the singularity, are used as evidence that the conditions that underlie the economy are shifting today. Here it is worth quoting directly from Economic Policy Institute’s State of Working America:

“We are often told that the pace of change in the workplace is accelerating, and technological advances in communications, entertainment, Internet, and other technologies are widely visible. Thus it is not surprising that many people believe that technology is transforming the wage structure. But technological advances in consumer products do not in and of themselves change labor market outcomes. Rather, changes in the way goods and services are produced influence relative demand for different types of workers, and it is this that affects wage trends. Since many high-tech products are made with low-tech methods, there is no close correspondence between advanced consumer products and an increased need for skilled workers. Similarly, ordering a book online rather than at a bookstore may change the type of jobs in an industry — we might have fewer retail workers in bookselling and more truckers and warehouse workers — but it does not necessarily change the skill mix.”

The takeaway from this should be that some technological advances that seem significant are not necessarily things that threaten jobs, change their pay or working conditions, or point to a jobless future. Technology can create new consumer products — let’s say smartphones — that seem like they fundamentally change the foundation of the economy. But they actually only shift jobs to the companies making smartphones, and don’t mean that workers making consumer products are somehow unnecessary. More significant developments like the technology behind the car or airplane can make entire industries obsolete but also can create an entire ecosystem of industries that generate wealth. Still other advancements can reduce the costs of products to a large degree so that they are increasingly used as inputs in other industries, benefiting both supplier and buyer.

These sorts of technological development are usually conflated with each other, and with the kind that is supposed to lead to mass automation and job loss. That kind of development is when very expensive robots or software replace humans completely, without spawning new industries and jobs. Two commonly cited examples are self-driving cars and delivery services. Delivery robots and drones might capture imaginations (and make for good PR) but that doesn’t mean that the economics behind them lead to a situation where workers will be replaced anytime soon.¹ Self-driving car technology is massively hyped, but many think they won’t arrive in even a lifetime. Labor platforms, like TaskRabbit, a marketplace to find help with errands or odd jobs, or Uber, the taxi app, are other Silicon Valley “innovations” often lumped in with this discussion. But they don’t threaten to reduce the total number of jobs at all: they shift jobs to their platforms.

This doesn’t mean that more original uses for technology couldn’t significant impact specific sectors. However, it’s likely that, in general, technology that does affect jobs will complement those positions, replacing or changing the specific tasks that workers do, but not going as far as replacing them in all cases. For jobs that are replaced wholesale, it shouldn’t be assumed that they will disappear overnight. There still need to be decisions, investment, and planning involved in replacing workers with (usually expensive) alternatives, which are all things that take time. This has certainly been the case in manufacturing. One interesting table from the Bureau of Labor Statistics that supports this point details the fastest declining occupations. Even extrapolating out ten years, the BLS assumes that there will be significant employment in these occupations. And any changes will vary by specific industry and occupation. Even then, many “low-skill” or low-paying jobs, especially in the service sector, are not conducive to automation very much at all. (And the robots must have forgotten that those were their targets, since many of the fastest growing jobs require no formal education or only a high school degree.)

There’s really no definitive way to tell either way if the robot apocalypse is upon us. But the precedence for wildly inaccurate predictions; the history of technology companies being unable to deliver on extravagant promises; the fact that the technology that would threaten jobs today is more suited toward slow, incremental changes like in the past; and that the orientation of our political system is toward prioritizing political, rather than economic imperatives, strongly suggests that the robots are probably much farther off than is conventionally accepted.

Is the recent deluge of talk of disruptive technological change, ubiquitous automation, and mass unemployment a continuation of the trends and mistakes that Graeber and Watters have highlighted? It seems so, and might even be approaching the lunacy of the dot-com era. Venture capitalists pour billions of dollars into unprofitable companies with questionable business models, which are in turn valued at billions of dollars. Many of the most popular and “innovative” businesses are simply delivery services, transportation companies, or in the consumer goods industry. How many different delivery services does society need? How many different taxi apps does it need? Does anyone really need a $700 juicer, especially if it isn’t even necessary? How are these ways of doing business adding value to the economy, let alone the beginning of a jobless future? More ambitious technology has proven to been a bust, especially in biotechnology.² One also has to question the value of recent technological assessments and predictions when many of the economic and political commentators that are doing that prognosticating couldn’t see the dot-com bubble or even the massive housing bubble that preceded the Great Recession.

The reality is that companies that are seen as the forebearers of mass automation are often unoriginal, repackaging old ideas and existing technology and using political power, venture capital money, and a lot of press releases to survive. Like Graeber said, these “innovations” seem to be more in line with boosting the prevailing economic and political ideology. Old, obsolete ideas³ like flying cars have been resurrected; for example, as part of a public relations and investment strategy to distract from Uber’s myriad scandals and disastrous finances.

If anything, the novelty of this new era of technology seems to come from the lessons business have learned from the survivors of the dot-com bubble, like eBay, Google, and Amazon:⁴ mainly, that business models don’t need to make sense as long as a company is able to take over a big slice of the market and change the terms of that market. In this way, vague ideas about technology and the usefulness of Silicon Valley — promoted by neoliberal icons like Elon Musk, Steve Jobs, and Mark Zuckerberg — are used as a smokescreen for anti-competitive and anti-worker practices that seek to change the economic landscape.

Part 3 will explore an underexamined consequence of this debate: how it affects the social relations between employers, workers, and the government that are a foundation of the economy.

About the Author
Kevin Cashman lives in Washington, DC, and researches issues related to domestic and international policy at the Center for Economic and Policy Research. Follow him on Twitter: @kevinmcashman.