Oct 25, 2012

The Economy Can’t Grow Forever

It is election season. America is suffering from a deep recession. Both Barack Obama and Mitt Romney not only talk about the importance of economic recovery; they both have plans outlined on how to get the economy growing again. What no one seems (or dares) to realize is that perpetual economic growth is impossible.

Over the last 50 years the U.S. economy has grown by about 441 percent (GDP 2012 was 4.4 times larger than GDP 1962**). I willingly admit that today’s standard of living and material welfare would not have been possible to reach without this growth. It is also true that an economic system that constantly grows provides incentives for investments that in turn can grow companies and finally create jobs. Economic growth is not bad per se. However, growth or decline in global GDP strongly correlates with increased or decreased global emissions of carbon dioxide, making economic growth a very precise indicator of global warming. Furthermore, critics from various fields argue that growth has gone from being a mean to increase welfare and happiness to an end in itself; an end that no longer provide Americans* with a lasting prosperity. They argue that when an economy grows past its optimal size, costs surpass the benefits and the marginal returns for each additional dollar of GDP decrease. Consequently there is an ongoing debate on whether or not economic growth is desirable. However, the physical constraints imposed to mankind by the law of physics and the fact that we reside on an earth with finite resources makes the question of whether or not perpetual economic growth is possible a no-brainer. Tom Murphy, an associate professor of physics at the University of California, San Diego, explains why in his blog “Do The Math”.

The growth paradigm presupposes abundant resources, among which the most important one is energy. The predicted and observed negative effects of global warming and climate change have therefore pushed humanity to search for alternatives to sustain our energy needs from sources other than fossil fuels. Solar, wind, and other renewable energy sources are constantly improved and developed further, and this progress is indeed necessary. The idea of an abundant, clean, and renewable source of energy that would enable perpetual growth in energy consumption is tempting. However, even if we did have an energy source like that, the laws of thermodynamics limit the amount of energy we can produce. Why? Because any source of energy radiates heat. Murphy “does the math” and provides us with an example that put things into perspective: U.S. energy consumption currently grows with an annual rate of 2.9 percent but Murphy assumes that it slows down to 2.3 percent annually (corresponding to an increase by a factor 10 every 100 years). As long as the source that produces this energy follows the law of thermodynamics the excess radiation of heat from this process would bring the earth to boiling temperature in about 400 years. And if we somehow manage to survive that and keep on growing for another 1000 years we would have to produce as much energy as the sun generates to meet our demand. Given the fact that the earth’s surface is smaller than the sun’s, the earth’s temperature would have to be hotter than the sun’s! Talk about global warming…

Hold on a second! A growth rate of 2.3 percent - that is not going to be the case right? What about improved energy efficiency and new technologies, aren’t they going to enable continuous growth in monetary terms while energy usage stays on a steady level? Well, first of all we should not place too much hope in technology and innovation. A study by the UK Government’s independent advisor on sustainable development shows that technological improvements to increase energy efficiency need to be developed in a rate ten times as fast as they are today to meet the global limits on greenhouse gas emissions set for 2050. Moreover, the assumption that while the economy is growing, resource use decrease (so called absolute decoupling) is bizarre. If the economy grows, but energy consumption remains the same or even declines, we will eventually end up in a situation where basic services such as transportation, heating and cooling of buildings, and electricity become arbitrarily cheap - because energy is so cheap compared to everything else! No one would want to invest in energy and material intensive activities such as food production since the returns from selling the food would be only a fraction of the cost of other services in our economy. I can’t imagine a functioning economy that looks like that, can you?

We can now conclude that for the U.S. and most developed economies the growth paradigm has lost its relevance. As I stated earlier, growth per se is not bad, and there are several regions in the world that indeed need economic growth in order to develop and increase their standards of living. But if we are going to let them grow, we need to slow down. Luckily, there is an alternative path for our economy. Renowned economists Adam Smith and John Maynard Keynes both predicted that the economy would eventually stop growing and reach a steady-state; a state in which the size of the economy is mildly fluctuating but stays within ecological limits. Research on steady-state economics and degrowth has been carried out for decades, and it is about time our policymakers take a serious look at the solutions it proposes. Global and domestic economic recovery is slow and it is not predicted to get much better. This indicates that the limits of growth have been reached and that we should begin the transition to a sustainable economic system now.

* or any other developed country that has reached a certain level of material welfare.

** a previous version of this post stated that the economy had grown by about 2800 percent, which is true if you don’t correct for inflation. The factor 4.4 is based on Real GDP.

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Design thinker and improvisor determined to find alternatives to perpetual growth and economic inequality. Currently a Teaching Fellow at the Stanford d.school. You should follow me on Twitter, Pinterest and Facebook or simply Subscribe via RSS.