Ignore the belt-tighteners: growth is good
Want to boost people's wellbeing? Then create more wealth.
The following is an edited extract from Selfishness, Greed and Capitalism: Debunking Myths About the Free Market, a new book by Christopher Snowdon.
In her best-selling book No Logo, published in 2000, Naomi Klein asserts that ‘the economic trends that have so accelerated in the past decade have all been about massive redistribution and stratification of the world’s resources: of jobs, goods and money. Everyone except those in the very highest tier of the corporate elite is getting less.’ This is simply untrue. A study of 138 countries, representing 93 per cent of the world’s population, found a ‘spectacular reduction of worldwide poverty’ in the last decades of the twentieth century as economies were deregulated and trade was opened up. Between 1970 and 2000, ‘poverty rates declined for all conceivable poverty lines’ and ‘after remaining constant during the 1970s, [global] inequality declined substantially’ (1). In 2010, despite the biggest financial crisis since the Great Depression, the United Nations announced that its target of halving extreme poverty between 1990 and 2015 had been met five years early.
This extraordinary success story has not killed off the economic pessimism John Maynard Keynes once exemplified, but today it takes a different form. The modern variety of Malthusian dread is based on the premise that the ‘limits of growth’ have been reached and that further growth is, at best, unnecessary and, at worst, undesirable. Prosperity itself is portrayed as the problem – the cause of ‘diseases of affluence’, a source of existential angst and a plague on the environment.
No one denies that economic growth has been of great benefit in the past, nor do they deny that poor countries need greater wealth today, but there are some who argue that growth should no longer be a priority because it has, as the authors of The Spirit Level put it, ‘largely finished its work’. There is nothing original about this gloomy strand of anti-capitalism. When JK Galbraith made a similar argument in his 1958 book The Affluent Society, some described it as ‘old hat’ and accused Galbraith of regurgitating the ‘musty myth of the inter-war years which proclaimed that the problem of production had been solved and that all that remained was to distribute the superabundance’.
The rise of environmentalism and the emergence of the New Left in the 1960s and 1970s saw a resurgence of ‘growth sceptic’ beliefs which were intertwined with concerns about population growth and inequality. When William Nordhaus and James Tobin wrote their influential article ‘Is Growth Obsolete?’ in 1972, their answer was ‘not yet’, but the Club of Rome’s The Limits of Growth, published in the same year, heralded the return of Malthusian pessimism. When the New Zealand Values Party, which later became the Green Party, contested the 1972 election, it did so on a ticket of ‘zero economic growth and zero population growth’.
They were not alone. Writing in 1980, Milton and Rose Friedman noted that ‘whatever the announced objectives, all of the movements in the past two decades – the consumer movement, the ecology movement, the back-to-the-land movement, the hippie movement, the organic-food movement, the protect-the-wilderness movement, the zero-population-growth movement – have had one thing in common. All have been anti-growth.’
In defence of growth
The first mistake that critics of growth make is to regard the pursuit of money as a narrow goal. It is not. Whether we talk in terms of GDP, wealth or income, the pursuit of money is as broad a goal as one could wish to see. Money is, after all, only a token with which we can pursue our real goals. One might as well criticise people for ‘narrowly’ pursuing food, drink, shelter, education, healthcare, travel, entertainment and comfort. ‘The ultimate ends of the activities of reasonable human beings are never economic’, wrote Friedrich Hayek in The Road to Serfdom. ‘Strictly speaking there is no “economic motive” but only economic factors conditioning our striving for other ends. What in ordinary language is misleadingly called the “economic motive” means merely the desire for general opportunity, the desire for power to achieve unspecified ends. If we strive for money it is because it offers us the widest choice in enjoying the fruits of our efforts.’
The second mistake is to see economic growth as a tap that can be turned on and off. Growth sceptics imagine that prosperity exists because some central power has willed it. It is true that the government can do many things to help or hinder economic progress, but growth is not the result of some grand design. It does not require any specific intent; rather it is the natural consequence of human ingenuity and ambition leading to new innovations and greater efficiency.
Few consider what it means to ‘abandon the pursuit of growth’, as one pundit put it, or ‘‘‘dethrone growth” as our objective for society’, as another put it. It would require a conscious decision to obstruct human behaviour and throw sand in the gears of the economy. To be clear, a ‘steady-state’ economy is one of permanently stagnant wages. Attaining greater wealth in such a society really is a zero-sum game – you can only get richer by making someone else poorer. Adam Smith observed in The Wealth of Nations that wages only increase when national income increases and it is true that earnings are closely tied to GDP.
What would have happened if we had brought economic growth to a halt in the 1970s when The Limits of Growth was published and people were asking whether growth was ‘obsolete’? To answer that, we must remind ourselves of what life was like 40 years ago. Average incomes were far lower than they are today. Half of all British households did not have a telephone, half did not have central heating and a third did not have a washing machine. Many parts of the UK were even less affluent, as the historian Dominic Sandbrook recounts: ‘In Sunderland, nine out of 10 families in privately owned houses had no indoor toilet, three-quarters had no bath, and half did not even have cold running water. As late as 1973, more than 2million people in England and Wales lived without either an inside toilet, a bathtub or hot running water.’
Few would wish to return to this standard of living, but such conditions nevertheless represented unprecedented prosperity at the time and were a vast improvement on the conditions of the 1950s (when Britons had ‘never had it so good’, as Harold Macmillan famously – and correctly – said). Then, as now, there were those who said that we were rich enough and all that remained was to redistribute the wealth that existed.
Equal redistribution of the wealth of the 1970s would have made a trivial difference to the lives of the poor compared to the rise in incomes that came from the economic growth that followed. And yet, in every decade since, there have been those who condemned the affluence of the age and called for an end to growth. It is over 30 years since the Friedmans made their observation about the common anti-growth thread which ran through the movements of the two previous decades. To their list, we might now add climate-change activism, ‘steady-state economics’ and ‘the new science of happiness’. Organisations with names such as the New Economics Foundation and the Institute for New Economic Thinking explicitly reject what they call ‘conventional’ or ‘mainstream’ economics and call for it to be replaced by a discipline that puts much less emphasis on self-interest and individualism, and much more emphasis on altruism and collective action. All espouse the replacement of economic growth as a societal target with non-financial goals. But which ones? Other indicators of wellbeing and progress already exist, such as life expectancy, adult literacy, infant mortality, disposable income and crime rates. These measures figure heavily when political decisions are made – often more heavily than concerns about GDP. Composite indicators such as the United Nations’ Human Development Index and the OECD’s Better Life Index also exist, but it is notable that the countries which perform best in these league tables are those with high GDP and free markets. The same is true when subjective feelings of happiness, life satisfaction and trust are measured. Any number of objective and subjective measures confirm the crucial role of economic growth in improving a whole range of outcomes.
Alternative attempts at measuring the success of a society have produced results which defy credibility. Using their own ‘Measure of Domestic Progress’ in 2004, the New Economics Foundation concluded that Britain’s happiest year was 1976, a year in which inflation ran at 20 per cent, real wages fell and the nation’s economy had to be bailed out by the International Monetary Fund. Dire economic circumstances may not guarantee unhappiness but, as Sandbrook notes, the New Economics Foundation ‘must have been using a very peculiar index of national progress, for even at the time most people regarded 1976 as a dreadful year’. The same think tank’s attempt to compare countries using a ‘Happy Planet Index’ also produced results that can most charitably be described as counterintuitive. Billed as the ‘leading global measure of sustainable wellbeing’, the index placed Costa Rica, Vietnam and Colombia at the top of the table while Denmark, Luxembourg and the United States were ranked below Haiti, Albania, Malawi and Afghanistan. The fact remains that GDP is the only economic indicator that predicts health, wellbeing, living standards and literacy to any reliable degree. Even modest economic growth radically improves living standards within a generation. Johan Norberg notes that a steady rise in GDP of three per cent each year will make ‘the economy, our capital, and our incomes double every 23 years.’ During the economic slump of 2008–12, it became clear that nobody really wished to return to the living standards of 10 years earlier, let alone to those of the 1970s. Nobody enjoyed the ‘steady-state’ economy which those years of zero growth brought about. Why, if nobody is prepared to go backwards, should there be such fear of moving forward?
For most of recent history, the political left and right were united in seeing prosperity and plenty as desirable. The original promise of socialism was that a planned economy would produce goods and services more efficiently and in greater numbers than the free market. The Soviet leader Krushchev claimed in 1956 that communism would ‘bury’ capitalism by the year 2000, but by the time the Berlin Wall fell in 1989, this rosy view of collective action was impossible to maintain. It is now undeniable that free-market economies produce prosperity while centrally planned economies produce shortages. Those who still oppose free markets are therefore required to be half-hearted, if not actively antagonistic, towards growth. The anti-growth movement is a remnant of the anti-capitalist left which failed to fulfil the original promise of Marxist growth and, rather than concede defeat, rubbishes the game by portraying growth as something that is not worth striving for. Their suspicion of affluence has grown stronger since it became clear that a more prosperous proletariat is less inclined to support socialist radicals, a point noted by Galbraith in the 1950s when he wrote that the ‘individual whose own income is going up has no real reason to incur the opprobrium of this discussion. Why should he identify himself, even remotely, with soapbox orators, malcontents, agitators, communists, and other undesirables?’
The truth is that every country is a developing country and there are sound reasons for the political left to shake off its Malthusian fringe and support economic growth throughout the world. Aside from the importance of creating jobs and boosting wages, it is only through growth that the state will be able to afford an increasingly burdensome welfare state and the other cherished projects of social democracy. To this we might add the need for vast sums of money to pay for an ageing society and deal with climate change.
The benefits of economic growth in the past two centuries are so astounding that capitalism’s greatest critics no longer deny them. Even those who would bring about a ‘steady-state economy’ accept that low-income countries would benefit from more growth today, even if they are loathe to acknowledge that such growth is largely contingent on richer countries trading with them. The only question is whether further economic growth would be beneficial in wealthy countries here and now. Can the very richest countries benefit from more economic growth? By its nature, a prediction can never be made with utter certainty, but we can say that the anti-growth lobby has always been wrong in the past and there is little to suggest that they are correct today. Economist Bryan Caplan gives us a fair assessment when he writes that: ‘Past progress does not guarantee future progress, but it creates a strong presumption.’
Christopher Snowdon is director of lifestyle economics at the Institute of Economic Affairs.
Selfishness, Greed and Capitalism, by Christopher Snowdon, is published by the Institute of Economic Affairs. Download a copy here.
(1) ‘The world distribution of income: falling poverty and… convergence, period’, by Xavier Sala-i-Martin, in Quarterly Journal of Economics, Vol CXXI, 2006: pp 389–92.
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