May 28, 2008 – Some thoughts on economic growth

According to many (for example, see the advertisement by Jeremy Leggett below) peak oil has arrived:

If true, then as Leggett says, “Profound economic dislocation will result. The challenge for human civilization will be how we rebuild post-peak.”. Economic depression and huge social changes could easily result within the next 10 years.

It is puzzling how such a massive problem could have either been overlooked by governments. Many oil people have been talking about peak oil for years – why has there apparently been no planning and preparation for it?

Economic growth increases per capita energy use and accelerates oil depletion. Growth also drives increases in greenhouse gas emissions, which in turn are causing climate change. Either of these problems on their own could be enough to cause economic collapse and ruin. A rational economic strategy would surely put risk reduction as a higher priority than economic growth?

So I’ve been puzzling about why politicians are so fixated on growth when there are so many reasons to pull back. I came across this interview of Dennis Meadows.
Meadows was one of the authors of Limits to Growth. I print an extract here. The question he was asked was why is it so difficult for people to switch from quantitative to qualitative growth:

“Decision makers who have been extremely successful at producing and managing quantitative growth are the ones who rose to positions of power through corporate and government organizations during the past decades. Now those dominant decision makers do not wish to consider that the situation has made their skills and knowledge less relevant. They deny the need for a shift to qualitative goals. Also we have developed a variety of economic data systems and decision support systems that implicitly take quantitative growth as a goal. So the numbers we focus on automatically lead us to physical expansion.”

I think this goes a long way to explaining why growth is still the number one economic goal, when it no longer makes any sense for so many reasons. It also might explain why peak oil has been ignored by the current generation of leaders. Peak oil doesn’t fit with their worldview, it’s an embarrassment, it puts economic growth into reverse and it renders their strategies ineffective. It’s as if you when driving on the motorway you saw a warning sign to slow down, then put your foot hard on the accelerator.

The book “Limits to Growth: The 30 Year Update” makes the case that exponential growth in a finite system must come to an end. We have reached and overshot the carrying capacity of planet Earth. Because the signal that we have reached the carrying capacity of the Earth is delayed, overshoot of the limits is likely. And because the limits are permanently eroded by the overshoot, collapse becomes likely – of both population and industrial production. So the conclusion is inevitable that continuing to try to grow the economy now is a very bad idea. Doesn’t self-preservation makes a managed retreat, even if only temporary, the only sensible strategy?

I think that working in the insurance industry has perhaps given me a different point of view than many others. Insurance is an area where growth is sometimes a very bad idea. Economic growth now feels about as sensible as growing premium volume when premium rates are going down. Of course people do it anyway even though it doesn’t make sense. There’s a whole fascinating area of psychology to explore there about risk perception, heuristics, decision making under uncertainty, the herd instinct etc.

There is another argument against growth in the Limits to Growth book. Economic growth doesn’t even make sense on narrow financial grounds above a certain level. This is because pollution abatement costs rise non-linearly with percentage abatement – each additional percentage of abatement costs more than the last, with the last few percentage points of abatement being extremely expensive. Climate science now tells us that CO2 cuts have to be extremely deep – at least 80% by 2050, but probably more. Economic growth drives increasing CO2 emissions. There comes a point above which the cost of abatement exceeds the additional wealth generated by the growth.

So I draw the following conclusions:
a) pursuing economic growth now makes no sense from a risk management point of view, a managed retreat is the best strategy
b) it’s no good saying that we must have growth because the economic system depends on it – whether we like it or not peak oil means that growth will stop and go into reverse very soon anyway
c) governments need to plan and manage the downturn
d) so far their risk management has appeared to be non-existent.

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